This guide was published in November 2022. Much of the information we’ll share was gathered from talking to many of our lender clients and attending 3 private lending conferences in the past 4 weeks: AAPL Annual Conference, California Mortgage Association Fall Conference, Pitbull Conference, and the National Private Lenders Association Meeting.
The sentiment regarding the current lending environment is very gloomy for the majority of lenders throughout the country. After most lenders had a record year in 2021, with the lowest interest rates in history, the recent rate hikes by the Federal Reserve are causing drastic cuts to lending activity and inflicting a lot of pain that many lenders were not prepared for. Most of the pain is the result of lenders not being able to sell their loans.
Secondary Market Challenges
The majority of residential private mortgages are sold to the institutional secondary market. Most private lenders originate a loan using their balance sheet or a warehouse line and then sell to an aggregator, which is essentially a company that buys loans from multiple lenders and then pools many loans to create a security that is then offered to large institutional investors. Over the past few months, there’s been a huge reduction in liquidity available for lenders to recycle their capital.
In the past few weeks, we’ve seen one prominent loan buyer shut down and go out of business. A few loan buyers have completely exited the private lending space for the time being, and the remaining ones are only buying loans from established lenders that have a long track record, multiple capital sources, and a large balance sheet. There are a couple of reasons for this:
- Loan buyers are expecting a sizable number of loan defaults in the next twelve months, and in many cases, the lenders are required to buy back those loans. The loan buyers will check the lenders’ financials to confirm they have the capital available to buy back loans if needed.
- Due to the reduced demand in the securitization market, loan buyers are not currently looking to expand and increase their loan volume.
The small to midsize lenders are getting cut off and left with nowhere to sell their loans. This dilemma is causing many private lending shops to downsize, pause their lending activity, or go out of business.
Defaults Coming Soon
While attending the Pitbull Conference in Las Vegas, Jon Beacham, the CEO of Toorak Capital Partners, one of the largest loan buyers in our space, said on stage that the short-term loans originated today and the past few months are the worst loans in the market, with the highest risk of default.
In the coming months, a lot of real estate investors who complete a rehab or ground-up construction project will struggle to exit their loans. A sale will be more challenging with declining values and a smaller pool of buyers. Investors that plan to hold their property as a rental may not be able to qualify for a long-term refinance due to the higher interest rates, which currently range from 7% to 9%. Unfortunately, many investors could end up defaulting on their loans and will be forced to sell their properties at a loss.
Private Lender Warehouse Line Challenges
More than the higher interest rates, the decline in property values is leading lenders into even more turmoil than they’ve faced in the past few months. Obviously, private lenders always prepare for a decline in values, and that’s why most private loans max out at 70% LTV. However, some lenders are getting into trouble because of their warehouse lines.
Many lenders use a warehouse facility to fund their loans before selling to the secondary market. Others use a warehouse facility or bank credit line to hold their loans throughout the loan term. These warehouse facilities typically come with requirements that can put major strain on lenders in a down market.
One common requirement for warehouse lines is related to the loan-to-value. For example, they may have a requirement that any loan on the warehouse line cannot exceed 65% LTV. When the value of the properties securing the loans drops, that increases the loan-to-value. And when a loan on a warehouse line exceeds the allowed LTV, the lender has to pay the difference in cash, typically within a few days. If they can’t make the payment, the lender is in default.
Aside from the maximum LTV, many warehouse lines don’t allow delinquent loans or aged loans. So if a real estate investor goes into default on a loan that sits on a warehouse line, or the loan can’t be paid off within the maximum allowed term, the lender may have to take the loan off the line within a few days. If they don’t have the capital, the warehouse line goes into default, and the lender could get wiped out.
Most warehouse lines have an expiration, typically one year or longer. And due to the current market conditions, some warehouse providers may not be willing to renew, which means lenders may lose their most vital capital source. The warehouse line dilemma is causing some private lending shops to halt lending activity or go out of business.
Private Lending Capital Markets Prediction
Property values only started to drop recently, and there may be a lot more price declines throughout the country. Until we see values bottom out, the private lending environment will be extremely challenging.
Many private lenders anticipate the institutional capital markets to return to normalcy in the fourth quarter of 2023. And many expect the FED to stop increasing interest rates in the next 6 months.
How to Find Private Lenders (companies) That Are Still Active
Although many lenders are pulling back, there are still some private lending shops that rely on institutional capital still actively lending. And some private lenders are completely unaffected by the capital markets, especially ones that manage a debt fund without any leverage, as well as lenders that get their capital from high-net-worth individual investors. Most of them are regional and limited to lending in one or a few states. Even though some lenders are well-capitalized and continuing to lend in the current environment, they are all being much more conservative and selective.
If you’re seeking private financing for a commercial or residential investment property deal, use our website as a resource to find direct lenders. All the private lending companies have a very detailed profile that shows their lending guidelines. There are two options for using our platform.
Option 1: Browse Lenders
Search on our site for direct lenders. All lenders have a very detailed profile with information about their lending guidelines, rates, fees and much more. Make contact with each out directly by email, phone call, or visit their websites. First select a loan type, then enter the state or metro area where the property is located.
Option 2: Create a Loan Request
Fill out a questionnaire with information about your financing needs. You can then browse lenders and invite a few of them to view your deal. Or ask us for recommendations; we’ll review it and invite a few select lenders that we feel may be a good fit.