Guide Category: Capital for Lenders

There are several types of private lending companies in the United States, each with different business models and capital sources. Some focus on commercial real estate. Some only fund residential fix and flip projects. Others only do multifamily value-add projects. Many now offer long-term loans for rental properties.

Regardless of the loan programs, there are two characteristics of the lenders that are getting acquired:

1. Fund loans secured by residential investment properties
2. Primary capital model is to sell loans to the institutional secondary market:
   1. Private equity firms
   2. Hedge funds
   3. Real estate investment trusts
   4. Commercial banks

These institutional loan buyers are the firms which are acquiring private lending companies.

Why are private lenders getting acquired?

The reason for the acquisitions is that private mortgages have performed so well over the past few years with high returns and relatively low risk. Once the institutional loan buyers have experienced a lot of success buying from a private lending firm, an acquisition makes sense because they can have all the loans being originated by the lender, and not have to compete with other secondary market players who also want those loans.

Recent Private Lending Company Acquisitions

The majority of lenders that are being acquired are large operations with loan volumes greater than $500 million. Here are a few examples.

• January 2018: Genesis Capital acquired by Goldman Sachs
• February 2019: 5 Arch Funding acquired by Redwood Trust for $50M
• November 2019: Corevest acquired by Redwood Trust for $490M
• February 2021: Civic Financial Service acquired by Pacific Western Bank
• July 2021: Lima One Capital acquired by MFA Financial
• November 2021: Anchor Loans acquired by Pretium Partners for $1.5B
• April 2022: Riverbend Lending acquired by Redwood Trust

Acquisitions of Small to Mid-Size Private Lenders

It’s not only the large private lending shops that are getting bought out. A mid-size lender in New Jersey was recently acquired by a private equity firm which is not an institutional loan buyer. They want to acquire several more lenders that have a solid operation and annual loan volumes between $50 million and $500 million. Their plan is to efficiently manage multiple lending shops under one roof and eventually obtain the best pricing on loan sales to the secondary market.

We have a relationship with a national private lending firm that is looking to acquire loan originators with a minimum annual loan volume of just $30 million. Their strategy is to leverage smaller origination shops to build up their own volume. And the company being acquired doesn’t have to be a direct lender with a large balance sheet. It could be a brokerage firm that would continue to operate with access to growth capital, warehouse lines, technology, back-office support and more.

How Mergers & Acquisitions Affect the Private Lending Industry

If you’re a real estate investor or a mortgage broker, the acquisitions by large institutional capital firms means you’ll continue to have lots of competitive options for financing real estate deals. Institutional capital is the main reason that private mortgage rates started to drop in 2016, and the acquisitions indicate that much more capital is committed to the space.

If you’re a private lender that doesn’t sell loans to the institutional secondary market, the acquisitions may not affect your business. You’ve likely already felt the competition from the national private lenders over the past several years, and perhaps your business is still prospering regardless.

When the capital markets put a pause on purchasing private mortgages in 2020, many non-institutional lenders were cheering the demise of the Wall Street-backed lenders. However, the recent acquisitions means that your competitors now have much more capital to grow and will likely continue to thrive.

 

Reach out to us if you operate a private mortgage origination business and have interest in an acquisition of your company.

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While attending the IMN Single Family Rental Conference, we interviewed Alex Offutt, Managing Director of Constructive Loans, and asked him to make the argument for choosing a wholesale partnership. Constructive is one of the largest private lending companies in the country for funding and servicing long-term rental loans.

Almost all 30-year DSCR loans end up in a securitization. Therefore, the guidelines are strict and standardized. There is only one company in our network that keeps these rental loans in their portfolio. That company is backed by insurance company capital which likes to hold on to loans for long terms.

DSCR Loan Origination Model #1 – Fund and Sell

Loan originators that have a substantial balance sheet and/or warehouse lines can fund DSCR loans in-house and then sell to the secondary market. The majority of DSCR loans are sold to an aggregator that securitizes pools of notes, and the aggregator services the loans. Some of the larger originators in our space that fund a huge volume of these rental loans will securitize directly and retain the servicing. Direct securitization enables the highest profit margin for originators.

There are a few downsides to this model:

• Additional overhead expenses
  • Processing and underwriting
  • Post-closing requirements
• Balance sheet risk of not being able to sell
• Better execution
• Slightly better pricing

DSCR Loan Origination Model #2 – Wholesale

Loan originators can partner with a larger lending firm to fund their DSCR loans while still earning origination fees and yield spread. There are a few companies in our space that have the infrastructure and capital to fund DSCR loans in large volumes and offer a wholesale program to originators. The main benefit is not needing a large balance sheet to fund these loans. Plus the wholesale lender handles much of the underwriting and post-closing tasks.

• There are a few downsides to this model:
• Most wholesale lenders charge origination fees (not all)
• Less control of the underwriting and closing
• Lower yield spread

Some private lending companies will always opt to fund loans using their balance sheet, even if it requires additional costs and resources. And many lenders in our network have no interest in originating DSCR rental loans because it’s so different from short-term lending, and they don’t want to deal with institutional capital providers. However, a wholesale partnership could be a great way to earn additional revenue while these loans are in high demand.

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Find Private Mortgage Wholesale Lenders

If you’re a loan originator seeking table funding sources, use our website as a resource. Our Capital Provider Directory has a Wholesale sub-section.

Some companies use other terms used to describe wholesale lending, so go through these other categories:

• Correspondent Program
• Table Funding
• White Label Program

The companies listed pay us a monthly advertising fee, so there is no cost to make contact through our website. Please remind each company that you found them on PrivateLenderLink.com.

Visit the Capital Directory

This topic is mainly applicable to loan originators, including private lending firms and mortgage brokers who want to become a lender. If you’re a real estate investor, you may not find this information to be useful, unless you’re planning to start a private lending business. Some real estate investors are curious about the capital side of private lending since it may affect the pricing for their loans. We’ll cover pricing later on. First, we’ll explain some of the basics.

What is Table Funding?

Table Funding in private and hard money mortgage lending is the use of another person’s or company’s capital to fund a loan at closing. So the lender underwrites and processes the loan, but they don’t need to use their own money to fund the loan. When the loan is ready to close, the capital provider wires the funds into escrow or settlement.

Some feel this is essentially loan brokering, but one of the key differentiators with table funding is the loan originator maintains the relationship and communication with the borrower throughout the loan term. Other terms used to describe table funding include “correspondent lending” and “wholesale lending.”

In most cases, the borrower or broker does not know where the money is coming from. The entity that funds the loan will likely have a generic name which hides the identity of the capital provider. Some loan originators will name themselves as the lender on the loan documents, but they’ll immediately assign the note to the capital provider at closing. This practice is not acceptable to some capital providers, and in some states, it’s prohibited.

California Regulations for Table Funding

In California, loan originators using a Department of Real Estate license must disclose who is actually funding the loan and who will hold the deed of trust. The disclosure forms refer to the loan originator as a “broker” arranging the loan, and the lender is the person or company providing the funds. Therefore, the term “table funding” is not widely used in California. Most loan originators just explain that they have a “trust deed investor” who is funding the loan, but they are still a direct lender. Loan originators who only have a California Finance Lender license, and not a DRE license, must fund the loan using their own balance sheet and they are not permitted to use trust deed investors or other capital providers.

4 Types of Table Funders

There are 4 types of capital providers that table fund private mortgages.

1) Big National Lenders

These companies are very well established with a large retail operation, and they have a huge balance sheet to fund loans in many states throughout the country. Although they originate loans themselves, they partner with smaller lending firms and mortgage brokers to table fund loans through a separate entity. There are not many requirements for these partnerships.

2) Institutional Capital Providers

The second type of table funder is an Institutional Capital Provider backed by Wall Street investment banks or Insurance money. The key difference between the Institutional Capital and the Big National Lenders is these companies only partner with loan originators, and they don’t originate loans themselves or deal directly with borrowers, except when servicing the loan. These firms may also purchase loans after closing, but table funding could be an easier process for all parties involved.

3) High Net Worth Investors (HNWI)

The third type of table funder is an individual investor, also known as a high net worth investor, who lends out their own retirement funds.

4) Family Offices

And finally, the fourth type of table funder is a family office. They tend to be a bit more sophisticated than HNWI’s and may have a loan committee made up of multiple people who manage the family wealth.

How Table Funding is Structured

There are many different ways to structure and price table funded private mortgages. The first consideration is the originator’s cash contribution to the loan. In most cases, the table funder will provide 100% of the loan amount, and the originator does not need to contribute any of their own funds. However, some originators want to invest their money in the loan, say 10%, 20% or even 50%. When a loan originator always invests some of their own funds and does a lot of volume with a table funder, the two parties may form a special purpose vehicle to fund loans together.

The next consideration is the origination fee. In most cases, the originator gets all the origination fees. However, some table funders will charge their own origination fee ranging from one to one and a half points, and others will want to split the total points charged to the borrower 50/50. Some may just charge a flat fee for underwriting and processing.

In addition to origination fees, the loan originator can earn some of the yield spread, anywhere from 50 to 200 basis points. For example, if the borrower pays an interest rate of 9 percent, the originator may get 1% and the table funder gets 8%.

Servicing for Table Funded Loans

The last thing to determine when structuring table funding is who will service the loan. Servicing includes collecting payments, and managing the loan from closing until payoff. The Big National Lenders almost always service the loans they table fund. With the Institutional Capital Providers, most of them want to control the servicing, but we know many that are fine with the originator handling it. Individual investors and family offices don’t typically service their own loans, but they may want it outsourced to a third party servicer.

With all the available capital in the market, the loan originator typically gets to dictate the servicing. If they really want to service the loans themselves, they will only do business with the capital providers that abide by their terms. But the reality is most loan originators have no interest in servicing themselves, so a third party servicer is the most popular solution.

How Does Table Funding Affect the Borrower’s Pricing?

In most cases, the overall pricing for a table funded deal will be the same as if the lender funded the loan using their own balance sheet. Three is so much competition out there for private lending, the loan originators and their capital partners will figure out a structure which will be competitive so they don’t lose deals due to pricing. Table Funding enables loan originators to maintain relationships with their borrowers for a variety of private mortgage needs. For example, if a fix & flip investor has worked exclusively with one local lender and they eventually have a need for a long-term rental loan, a table funding relationship would enable the local lender to close that loan, and the property investor won’t need to seek another lender for the rental financing.

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How to Find Table Funding Providers

Private Lender Link offers a service to connect private mortgage loan originators with capital sources. If you’re a loan originator, reach out to tell us about your capital needs and preferences. We’ll introduce you to capital providers that may be a fit. The capital providers pay us a fee.

Zero Point Table Funder
Most companies that offer table funding charge points, but we have a relationship with an investment firm (backed by insurance money) that offers table funding to originators and doesn’t charge any points for loans under $1.5M. They offer bridge, rehab and ground-up construction loans secured by residential investment properties in 13 states: AZ, CA, CO, DC, GA, FL, MA, MO, NC, NJ, SC, TX, VA.

We have relationships with other table funding providers that do charge points and still may be good options for many originators.

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This topic is mainly applicable to loan originators, including private lending firms and mortgage brokers who want to become a lender. If you’re a real estate investor, you probably won’t find this information to be useful, unless you’re planning to start a private lending company.

For loan originators who operate with a business model of funding loans and selling to the secondary market, bank warehouse lines are typically the ultimate capital source because they are the cheapest cost of capital available. If you’re charging borrowers an average of 9% interest for your short-term loans, and your warehouse line interest rate is 4%, that’s a huge profit to be made.

The challenge for most lenders is being able to qualify for these warehouse lines. You typically need to pledge an existing portfolio of loans worth several million dollars in order to get the line. Another downside to warehouse lines is the risk of the line being pulled if there is a major economic event. While the likelihood of this happening is very slim, if it does happen, it could kill your entire lending business.

Many local community banks offer warehouse lines, but they typically restrict the geographical areas where you can lend. For example, a community bank in Texas typically won’t accept notes in which the collateral is located outside of Texas. Or a bank based in New York may not accept collateral outside of the Northeast. So you can’t use community bank warehouse lines to lend nationally, and the line amount you’d get from smaller local banks may not be enough to support your growth.

If you are unable to get a bank warehouse line to capitalize your private lending business, there are 2 alternatives you might consider.

Explore Other Capital Structures

If you’ve given up on the idea of getting a warehouse line, but you want to be a portfolio lender, the primary alternative capital structure most lenders use is a mortgage fund. Although it takes years to build up, a portfolio mortgage fund offers more control and stability. But the two alternatives we want to cover are not for portfolio lending. They serve the business model of funding loans and selling to the secondary market.

Alternative #1 – Pre-Takeout Warehouse Line

The first alternative is what we call a “Pre-Takeout Warehouse Line”. This is a very unique product offered by only a few companies in our industry. These capital providers have relationships with multiple institutional loan buyers, also known as aggregators.

So long as the loan you’re originating will be sold to one of those approved institutional loan buyers, the capital provider will allocate a certain amount of money to you based on your average loan volume. At closing, they will fund 80 to 90 percent of the loan amount, and you contribute the difference. The cost for this short-term capital will likely be in the range of 50 to 100 basis points, and the key to this program is the loan must be sold to the institutional loan buyer within 15 days.

Alternative #2 – Liquid Mortgage Fund

The second alternative to bank warehouse lines is a “Liquid Mortgage Fund.” So you’d form a mortgage fund just for the purpose of funding loans that will be sold to the secondary market. The fund won’t hold any loans for more than 30 days.

The key selling point to potential fund investors is no lockup period or long-term commitment would be enforced. Because you’d be cycling the funds once or twice a month, you can allow the fund investors to pull out with a 30-day notice, and that low commitment could make it easier to raise capital.

When compared to the pre-takeout warehouse line alternative, the main benefit of the Liquid Mortgage Fund is you’re not limited to a small number of institutional loan buyers. You can sell loans to other types of capital providers such as insurance companies, family offices, and even individual note investors. They likely won’t be as efficient as the institutional aggregators, but at least you’d have more control and flexibility.

Resources for Lenders

Many private lending firms use multiple capital structures. It’s possible you may have a bank warehouse line, manage a fund, sell loans to institutional aggregators, get some loans table funded by individuals, and also use a wholesale partner for unique loans that are outside of your wheelhouse. It’s a good idea to explore all of your options, and you can use our website as a resource to find capital providers and law firms that specialize in setting up mortgage funds.

• Visit the Services Provider Directory
• For the Pre-Takeout product, select Capital
  • Browse the main list, or filter by category
• To find attorneys that can help you create a new mortgage fund, click Legal on the main Services page
  • Select the Fund Advisory category from the filters section
• Click on each company’s profile to learn about their program, then click the green contact button to find their phone number, an email form, and a link to their website.

The companies listed pay us a monthly advertising fee, so there is no cost to make contact through our website.

View Service Providers

This topic is primarily for mortgage professionals, including mortgage brokers, private lenders, hard money lenders, and private mortgage capital providers. Real estate investors who use private lending to fund their deals may not care about how lenders get their capital. But if you’re curious, keep reading, and we’ll touch on how wholesale private lending affects the borrower later.

Wholesale Lending for Private Mortgages Explained

Wholesale Lending in private and hard money loans is essentially a loan originator using capital from another lender to fund the loan. The loan originator could be a mortgage broker who never uses their own capital, or it could be a private lending company that does have their own capital for most loans, but they use wholesale lending for some of their loan programs.

For the rest of this article we’ll refer to the loan originator as the “retail lender” since they are public facing and have a relationship with the borrower. They take the borrower through the entire loan process, and when the loan is ready to close, the money is wired into settlement by another company – the wholesale lender.

Although the wholesale lender doesn’t communicate with the borrower directly, they are typically involved in the loan process so they can underwrite the loan alongside the retail lender. Even after the loan is funded, the communication typically goes through the retail lender since they want to maintain and control the relationship with the borrower. The wholesale lender always services the loan, meaning they collect the payments, send notices and manage the payoff.

Terminology for Wholesale Lending

In the private mortgage industry, there are a few different terms used for wholesale lending:

• Correspondent Lending
• White Label Program
• Table Funding.

In the conventional mortgage world, the terms “wholesale” and “correspondent” mean that the retail lender funds the loan with their own balance sheet and immediately sells to the secondary market. In the private hard money world, a number of companies call their wholesale lending a Correspondent Program.

You’ll also hear the term “White Label” to describe a wholesale program. This term means that the wholesale lender’s identity is hidden, so the borrower may not know that the retail lender is not using their own money to fund the loan.

Many companies prefer the term “Table Funding”, although this term is avoided by lenders in California, and we’ll explain why in a separate article.

Some people consider wholesale lending to be the same as brokering because the lender is not putting any of their own money into the loan. However, some would argue that a wholesale funded loan carries a lot more involvement and responsibility than a brokered loan.

Types of Wholesale Lenders

There are 2 types of wholesale lenders in private lending. The first is purely a capital provider that has no interest in originating loans themselves. The second type is a hybrid lender that offers both retail and wholesale lending. These are national lenders with a very large operation set up for retail lending, but they have so much capital that they start a wholesale program to generate more business. They typically create a separate entity for their wholesale division so when the loan closes, their common name is not exposed to the borrower. In addition to capital, these wholesale lenders offer technology, legal docs, processing, infrastructure and expertise which the retail lender may not have.

Pricing for Wholesale Lending

There are a few different pricing structures for wholesale private lending deals. We’ll provide 4 possible structures and will use an example of a loan priced at 10% interest plus 2 points.

• Structure #1: The retail lender earns all the points, and the wholesale lender earns all the interest during the loan term.
  • Retail Lender: 2 points
  • Wholesale Lender: 10% interest
• Structure #2: The retail lender earns all the points and also earns a portion of the interest payments during the loan term.
  • Retail Lender: 2 points + 1% interest
  • Wholesale Lender: 9% interest
• Structure #3: Both the retail and wholesale lenders earn points, but the wholesale lender earns all the interest.
  • Retail Lender: 1 point
  • Wholesale Lender: 1 point + 10% interest
• Structure #4: The retail lender splits the points and also earns some interest.
  • Retail Lender: 1 point + 1% interest
  • Wholesale Lender: 1 point + 9% interest

For those of you who are not familiar with the word “points”, it’s formally known as an origination fee. It’s the lender’s profit on the loan, charged as a percentage of the loan amount. 1 point is equal to 1 percent.

Additional Fees Besides Origination

In addition to the points, the borrower may also have to pay a separate fee for underwriting, processing and loan docs. We’ve seen this range from $500 to $3000, depending on the size and complexity of the loan. It could be one multi-purpose fee, or it could be itemized. Many times these additional fees are charged only by the wholesale lender, especially when the wholesale lender is not earning any points. This fee covers a lot of the expenses to underwrite and process a loan, which requires a number of man hours. In some cases, these fees are split with the retail lender.

How Wholesale Affects the Borrower

So how does wholesale private lending affect the borrower? Overall, wholesale lending is good for the borrower because it provides additional capital in the market, which results in more competitive pricing. Most private hard money lenders have multiple capital sources, and wholesale partnerships are one of those sources. Real estate investors may not need to be concerned about where the money is coming from, so long as they get competitive pricing and the loan is funded on schedule.

Having a loan funded with wholesale doesn’t mean the pricing will be higher than if the lender funded from their balance sheet. The wholesale lender knows their pricing has to be competitive in the market to attract both borrowers and the loan originators they partner with. And for real estate investors who think about circumventing their retail lender to get to the wholesale lender directly, it’s not worth the effort. Even if the wholesale lender offers retail lending, the pricing would not likely be lower.

Why Originators Should Use Wholesale Partnerships

There are many private hard money wholesale lending programs available to loan originators, and many of them are very easy to qualify for. The loan originator must be a mortgage professional and show a track record of loans they’ve brokered or funded. Almost all wholesale lending programs these days don’t require the originator to contribute any of their own capital to the deal, and there is no requirement in terms of loan volume. So it’s available to mortgage brokers and direct lenders.

Wholesale lending can be a great way for private hard money lenders to close more deals. Even for direct lenders who fund from their own balance sheet, wholesale partnerships can help with client retention. For example, let’s say you’re a direct lender only offering fix & flip projects in your local market, and all of these loans are funded from your own balance sheet. One of your long-time clients wants to start flipping houses in another state that you’re not willing to lend in. Instead of referring the client to another lender, you can originate those out-of-state using a wholesale program and still maintain the relationship.

A more common scenario is a real estate investor decides to hold the property as a long-term rental instead of flipping it. You can partner with a wholesale lender that offers 30-year rental loans and earn points on that deal. You can even find wholesale lending for ground-up construction loans.

How to Find Wholesale Lenders

If you’re a loan originator seeking wholesale capital sources, use our website as a resource. Our Capital Provider Directory has a Wholesale Lending sub-section.

As mentioned earlier, there are other terms used to describe Wholesale, so go through the other categories:

• Correspondent Program
• Table Funding
• White Label Program

The capital providers pay us a monthly advertising fee to be listed, so there is no cost to make contact through our website.

Visit the Capital Directory