Creative Financing: It’s not Just for McMansionites Anymore

I am sick and tired of all the media hand-wringing about the evils that creative mortgage financing have wrought upon we unsuspecting good citizens.

We tend to overlook the beneficial economic impacts of the cash that our recent easier-than-Paris-Hilton credit market has bestowed upon We The People. You need look no further than Elk Grove, CA, a horrid overgrown suburb south of Sacramento. Thanks to easy finance for home mortgages, Elk Grove’s economy has benefited from an economic boom in the home grown (f’real, dude) marijuana industry. Honestly, I am not making this up. Elk Grove has seen several raids similar to this one reported by the Sacramento Bee.

At first, this seemed insane to me. I thought there must be a cheaper way to grow weed than buying a costly suburban house and filling it with dirt and grow lights. Then I remembered how mortgage financing worked in Sacramento. It all fits together.

For most for the last four years, mortgages for up to 110% of a house’s purchases price were available to Elk Grove homeowners. Further, homeowners could arrange for monthly payments less than the accrued interest on a loan. This led ingenious marijuana entrepreneurs to do something like this example.

1. Purchase a $400,000 house.
2. Take out a mortgage for $440,000 to fund the purchase and start-up costs. This would require monthly payments during the teaser period of around $2,500, including taxes. The grower walks away from the closing with the title and $40,000 cash-in-hand.
3. Set aside about $10,000 for the first four months of mortgage payments. Use the remaining $30,000 to fund start-up costs. I imagine that by 4 months there’d be product to sell.
4. It gets even better! Before the clichéd bubble burst, after 6 months the house’s value (as determined by the lenders) would have increased, allowing the entrepreneur to take a home equity loan for an additional $50,000 or so to buy a boat, or expand into meth.

So, next time you light up, don’t forget to thank your nearest bankrupt mortgage loan company, and thank God for capitalism!

That’s my story and I’m sticking to it.