An informal survey of numerous loan officers around the country shows that the belt is indeed getting tighter. There is money available, but it appears that the money is staying on the sidelines. With Fannie Mae and Freddie Mac’s reported losses (see the following AP article by Alan Zibel “Freddie seeks gov’t aid after $25.3 B loss”
), the tightening of lending will most likely continue and may worsen. Loans insured by the above-mentioned companies and the Federal Housing Authority (FHA) will see increased scrutiny. Both property owners and borrowers will continue to be under the microscope.
At all levels, the demand for alternative financing is increasing, which makes approving and funding hard money loans more difficult to some extent. Today, hard money lenders see borrowers with 700 FICO scores or higher. These borrowers have properties with strong values and lower LTVs. The typical hard money borrower, who, a few months ago, was able to get any money needed, will find getting a loan funded today much more of a challenge.
Getting a loan today from a hard money lender will depend not just on the property but also on the overall picture of the borrower. An important component to successful funding will be the exit strategy - how a loan will be repaid. Borrowers, loan officers, and account executive need to be willing to work closely together in order to make financing happen. Once you have a loan approved, move forward quickly to close the loan, as it may not be available tomorrow.
Wednesday, November 26, 2008
Wednesday, November 19, 2008
There Is Money, but the Loan Don’t Close
The interesting contradiction to think about is that there is money available to lend, with hard money lenders especially wanting to make loans, but loan don’t close. Everyday, I am surprised by this situation. In a tight lending environment, you would think that when lenders want to lend and borrowers want to borrow, a match would happen. More often than not, it does not.
One of the major reasons I see for loans not closing is that borrowers do not have the right expectations. Borrowers think that if they have a decent credit and property profile, loans will be funded. That is not good enough in today’s environment.
In addition, borrowers don’t understand why private loans are so expensive. The primary factor is that the capital used to fund a loan is not insured by any federal agencies and not resold to other investors. If a loan is not repaid and the value of the property goes down, the lender assumes all of the losses. The interest rate charged to the borrower reflects the combination of this estimated risk and the availability of funds. Once the right balance between these two components has been found, the pricing will be determined. The number of points charged by the lender is a reflection of origination costs, loan management costs, an amount to cover the estimated risk anticipation of potentially having to foreclose on a property, and maximum the APR allowed by law.
Borrowers and real estate professionals should understand these different aspects of pricing a hard money loan. This will allow them to be better prepared (i) to get a loan approved, and (ii) to provide the best application possible to get better pricing. In addition to the two components mentioned above, other issues that will be considered are Loan to Value (LTV), property location, and property type. Each factor will have a potentially large influence on final pricing. If a borrower expects a first quote to be definitive, then this most likely will kill the deal because, with hard money lending, every detail counts and will influence the final price. Moreover, today more than in recent years, lenders are able to dictate what a loan looks, and borrowers and real estate professionals need to adjust their expectations to this major new reality or else like their loan won’t close.
One of the major reasons I see for loans not closing is that borrowers do not have the right expectations. Borrowers think that if they have a decent credit and property profile, loans will be funded. That is not good enough in today’s environment.
In addition, borrowers don’t understand why private loans are so expensive. The primary factor is that the capital used to fund a loan is not insured by any federal agencies and not resold to other investors. If a loan is not repaid and the value of the property goes down, the lender assumes all of the losses. The interest rate charged to the borrower reflects the combination of this estimated risk and the availability of funds. Once the right balance between these two components has been found, the pricing will be determined. The number of points charged by the lender is a reflection of origination costs, loan management costs, an amount to cover the estimated risk anticipation of potentially having to foreclose on a property, and maximum the APR allowed by law.
Borrowers and real estate professionals should understand these different aspects of pricing a hard money loan. This will allow them to be better prepared (i) to get a loan approved, and (ii) to provide the best application possible to get better pricing. In addition to the two components mentioned above, other issues that will be considered are Loan to Value (LTV), property location, and property type. Each factor will have a potentially large influence on final pricing. If a borrower expects a first quote to be definitive, then this most likely will kill the deal because, with hard money lending, every detail counts and will influence the final price. Moreover, today more than in recent years, lenders are able to dictate what a loan looks, and borrowers and real estate professionals need to adjust their expectations to this major new reality or else like their loan won’t close.
Tuesday, November 11, 2008
Good Loan, Think Again!
A friend of mine who has great credit, great assets and money in the bank can not get a loan today because she has to go stated. My friend a self employed person who has a track record of over 10 years with a national bank does not meet the guideline anymore. Instead, this person has to find a local bank that will be willing to make an exception. That exception is going to cost a lot of money.
A loan described above once was considered an A++ loan, today it can only be funded with a lot of difficulties. This situation applies to all the areas of real estate lending. When meeting your borrowers and after taking an application you may think that you have a loan even if it is a hard money one, just think again. In today’s lending world there is a limited number of funding sources for in regard to the demand. When there is limited product availability in relationship to the demand normally prices increase. In today’s lending world prices are not increasing, per se, a lot of people are just not going to get funded.
Until recently, if you thought that you had hard money loan and that you had done your homework, the likelihood that the loan would get funded was high. The same loan today may or may not get funded because investors, lenders, funds can pick and choose the deal they want. What 6 months ago was considered a decent hard money loan will not get funded today or with difficulty. The cost of a hard money loan is the same in reality as before but the type of loans that are getting funded are not. Today loans that are getting funded with hard money were until few months ago financed by banks under their standard programs. Today hard money lenders can fund loans where borrowers have 700 plus credit, money in the bank, but for a reason or another can not get a bank loan. Other loans well get second priority.
My recommendation to all of you borrowers, loan officers and real estate agents get to know few hard money lenders. Understand their strength, how they go about underwriting the type of property they look at then you will be successful. A hard money lender is interested in working with people who have a good understanding of their files. Shopping in most cases is counter productive to having a loan close.
A loan described above once was considered an A++ loan, today it can only be funded with a lot of difficulties. This situation applies to all the areas of real estate lending. When meeting your borrowers and after taking an application you may think that you have a loan even if it is a hard money one, just think again. In today’s lending world there is a limited number of funding sources for in regard to the demand. When there is limited product availability in relationship to the demand normally prices increase. In today’s lending world prices are not increasing, per se, a lot of people are just not going to get funded.
Until recently, if you thought that you had hard money loan and that you had done your homework, the likelihood that the loan would get funded was high. The same loan today may or may not get funded because investors, lenders, funds can pick and choose the deal they want. What 6 months ago was considered a decent hard money loan will not get funded today or with difficulty. The cost of a hard money loan is the same in reality as before but the type of loans that are getting funded are not. Today loans that are getting funded with hard money were until few months ago financed by banks under their standard programs. Today hard money lenders can fund loans where borrowers have 700 plus credit, money in the bank, but for a reason or another can not get a bank loan. Other loans well get second priority.
My recommendation to all of you borrowers, loan officers and real estate agents get to know few hard money lenders. Understand their strength, how they go about underwriting the type of property they look at then you will be successful. A hard money lender is interested in working with people who have a good understanding of their files. Shopping in most cases is counter productive to having a loan close.
Sunday, November 9, 2008
Cristal Ball – The Future Of Credit
It is interesting to take at this time a quick inventory of where we are today in term of lending and the real estate market. In terms of banks and funds only the ones with conservative underwriting have been able to survive the turmoil. In regard to the market it seems that it is starting to price real estate portfolios values from banks and how much they have lost and will loose. With 12 months of data analysts are starting to be able to anticipate what can happen. In regard to real estate while we are going to continue see value to go down and a soft market as discussed previously Investors are making moves. Personally, I believe that we may see more problems but we may have seen the worst.
Today most of loans approved are FHA or agency loans secured by the Federal Government. In term of residential real estate very slowly lending is going to open up. However, I anticipate that next year is going to be a tight year. In regard to commercial real estate lending, while it is still happening, I also anticipate that its going to continue to be slow. Hard money and private funds that are able to take more risks will be an important source of financing for numerous borrowers.
Credit is going to continue to be very tight for 2009. Concretely this means that underwriting guidelines are going to be more specific with limited exceptions. This will apply across all the different lending categories. The most affected areas are going to be the stated programs and in particular self employed people are going to pay more for credit. Overall, while credit is going to be available its going to be more costly and more difficult to get. Working with lenders that are able to be flexible is going to be important. When working with hard money lenders loan officers and their client will benefit from their ability to be flexible.
Today most of loans approved are FHA or agency loans secured by the Federal Government. In term of residential real estate very slowly lending is going to open up. However, I anticipate that next year is going to be a tight year. In regard to commercial real estate lending, while it is still happening, I also anticipate that its going to continue to be slow. Hard money and private funds that are able to take more risks will be an important source of financing for numerous borrowers.
Credit is going to continue to be very tight for 2009. Concretely this means that underwriting guidelines are going to be more specific with limited exceptions. This will apply across all the different lending categories. The most affected areas are going to be the stated programs and in particular self employed people are going to pay more for credit. Overall, while credit is going to be available its going to be more costly and more difficult to get. Working with lenders that are able to be flexible is going to be important. When working with hard money lenders loan officers and their client will benefit from their ability to be flexible.
Tuesday, November 4, 2008
Reality OR Fiction – Is Lending Happening?
Everyday I am still surprised even astounded by borrowers. Recently, I received a request for a second position loan on a commercial property from two different brokers within couple of days of each other. I thought, I had the deal figured out with the first broker, but in reality the borrower was shopping. I am always struggling in such cases deciding if I should approve the financing or not. Brokers know that there are limited loan options today and that once they have a lender interested, they should stick with it. However, it seems that borrowers are still in a state of denial, they are acting as if money was flowing in freely. Borrowers do not appreciate that interest rates are now starting to reflect a combination of risk and availability of capital.
In the following article from the New York Times “Bank Survey Shows Credit Is Growing Even Tighter” going over a survey by the Federal Reserve, it clearly indicates that there is less credit / capital available. On a more anecdotal note, loan that are not insured by government institutions are significantly more expensive. As an example the residential jumbo loan 30 years fixed from Wells Fargo, full doc, was around 9% plus or minus recently. These are loans that will not be bought by either Fannie Mae or Freddie Mac. In the capital market for commercial properties, investors are limiting the number of loans they purchase by increasing significantly interest rates.
As a result while the federal government is supporting banks and financial markets there is still very limited liquidity and access to capital is restricted. I believe that this situation is going to go on for another year or so. For Private / Hard Money lenders this means that there will be a continued increase in demand for the capital that we have available. Because we have a limited amount of capital we will choose the “best” deals. It also means that both on the commercial and residential side of lending capital will be in short supply. For borrowers it implies that if they need financing and that they get an interest from a lender that is acceptable, not great, they should take it. Most likely, also borrowers and real estate professionals should get use to the idea that getting loans done is going to be more complicated and more expensive. Today lenders are in the driver seat not borrowers anymore, a NEW Reality.
In the following article from the New York Times “Bank Survey Shows Credit Is Growing Even Tighter” going over a survey by the Federal Reserve, it clearly indicates that there is less credit / capital available. On a more anecdotal note, loan that are not insured by government institutions are significantly more expensive. As an example the residential jumbo loan 30 years fixed from Wells Fargo, full doc, was around 9% plus or minus recently. These are loans that will not be bought by either Fannie Mae or Freddie Mac. In the capital market for commercial properties, investors are limiting the number of loans they purchase by increasing significantly interest rates.
As a result while the federal government is supporting banks and financial markets there is still very limited liquidity and access to capital is restricted. I believe that this situation is going to go on for another year or so. For Private / Hard Money lenders this means that there will be a continued increase in demand for the capital that we have available. Because we have a limited amount of capital we will choose the “best” deals. It also means that both on the commercial and residential side of lending capital will be in short supply. For borrowers it implies that if they need financing and that they get an interest from a lender that is acceptable, not great, they should take it. Most likely, also borrowers and real estate professionals should get use to the idea that getting loans done is going to be more complicated and more expensive. Today lenders are in the driver seat not borrowers anymore, a NEW Reality.
Best Investment: Residential Real Estate Part – 3
In our previous 2 posts we discussed what are the markets where to buy properties and why these markets are great. Here I will go over a number of reasons why I think they are going to become some of the best investments ever. If you are able to become an investor at this time it can be very exciting.
Appreciation:
Today, as discussed earlier, banks do not provide loans to most borrowers that were and are interested in buying in these markets. In addition, banks do not provide investment loans anymore, or stated income loans, or more than 4 loans per borrowers etc.. the pool of available buyers as dried up severely. We could argue that banks are over reacting in the other direction before they were over lending, now they are under lending. By not lending they by default depreciate price even further allowing investors to buy at price that are arguably undervalued. Once lending restart at more “normal” level, values will by default increase providing investors some appreciation.
Lender:
Borrowers who once where qualified to have bank loans will not be able to qualify for a number of years. As the owner of a property, investors will be able to become lenders by selling the property at a new market value and holding the note doing an owner financing. It is clear that owner financing is going to become very popular. Here are the math:
- Investors: bought property for $100 with $30 down and having a loan for $70
- 2 years Later: Investor sells property for $130, asking for 20% Down Payment and carrying a note for $104. Doing so investor recoup initial investment and now is a lender.
Income:
This is a great solution as well. Investors buying at low price are able to rent properties and get positive cash flow which was much more difficult few years ago. As financial conditions improve investors will be able to get new financing on their property at lower costs increasing their cash flow per property. Properties define as Single family residence, condos etc.. are becoming stable and good source of revenues.
These reasons and other make hard money lenders interested in working with investors. Trust deed investors will see their capital more protected than before.
Appreciation:
Today, as discussed earlier, banks do not provide loans to most borrowers that were and are interested in buying in these markets. In addition, banks do not provide investment loans anymore, or stated income loans, or more than 4 loans per borrowers etc.. the pool of available buyers as dried up severely. We could argue that banks are over reacting in the other direction before they were over lending, now they are under lending. By not lending they by default depreciate price even further allowing investors to buy at price that are arguably undervalued. Once lending restart at more “normal” level, values will by default increase providing investors some appreciation.
Lender:
Borrowers who once where qualified to have bank loans will not be able to qualify for a number of years. As the owner of a property, investors will be able to become lenders by selling the property at a new market value and holding the note doing an owner financing. It is clear that owner financing is going to become very popular. Here are the math:
- Investors: bought property for $100 with $30 down and having a loan for $70
- 2 years Later: Investor sells property for $130, asking for 20% Down Payment and carrying a note for $104. Doing so investor recoup initial investment and now is a lender.
Income:
This is a great solution as well. Investors buying at low price are able to rent properties and get positive cash flow which was much more difficult few years ago. As financial conditions improve investors will be able to get new financing on their property at lower costs increasing their cash flow per property. Properties define as Single family residence, condos etc.. are becoming stable and good source of revenues.
These reasons and other make hard money lenders interested in working with investors. Trust deed investors will see their capital more protected than before.
Sunday, November 2, 2008
Best Investment: Residential Real Estate Part - 2
From a hard money perspective, we have established that some markets are now becoming very attractive for investors. Buying properties in such areas, may be one of the best investments investors will be able to make in a life time. Identifying these markets and the properties that make sense to buy is going to be a factor of success. Here are some pointers:
- Markets first touched by the foreclosure wave
- Markets with a lot of foreclosure currently
- Property rent can cover mortgage payments
These markets are at or close to the bottom. They were the first market touched because the primary home owners had limited or bad credit history and limited or no down payments. Home owners bought properties they could not afford speculating on property value increasing. These past home owners can not today qualify for any type of financing and are becoming renters. Some of these markets have lost 50% of their values or more.
Today investors are buying in these markets at rock bottom prices and some time at below value. In this case the “value” would be defined as costs to build even if you had the land for free. As hard money lenders we like to work with investors in these areas as we know our loans are better protected. In these markets, we would be lending in general up to 70% of purchase price.
- Markets first touched by the foreclosure wave
- Markets with a lot of foreclosure currently
- Property rent can cover mortgage payments
These markets are at or close to the bottom. They were the first market touched because the primary home owners had limited or bad credit history and limited or no down payments. Home owners bought properties they could not afford speculating on property value increasing. These past home owners can not today qualify for any type of financing and are becoming renters. Some of these markets have lost 50% of their values or more.
Today investors are buying in these markets at rock bottom prices and some time at below value. In this case the “value” would be defined as costs to build even if you had the land for free. As hard money lenders we like to work with investors in these areas as we know our loans are better protected. In these markets, we would be lending in general up to 70% of purchase price.
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