Not only has the way hard money loans are underwritten and funded changed but borrowers too. Until 18 months ago hard money borrowers were in situations so difficult that they could not get financing from banks. At the time, up to mid August 2007, subprime loans were available and only a limited numbers of borrowers needed access to hard money loans. These loans were mostly bail out loans or sometimes for “special” properties.
For the past 18 months hard money borrowers profiles have completely changed. Today bail out loans are not being approved anymore except in cases where there is so much equity that the lender cannot loose. Hard money borrowers, today, are investors with good credit or first time borrowers who need to go stated income and who are buying REO properties. Today if a borrower has a credit score below 590 the likelihood that their loan will be funded is low. However, such as everything in private lending there are always plenty of exceptions.
The typical borrower today will be most likely a buyer. In general this borrower will be open to put 30% to 35% down and in some markets up to 40%. The average Fico for current hard money borrower is 670 and up. We see numerous borrowers with Fico above 700 and sometimes above 750. Most borrowers have assets in excess of the down payment and closing costs. However, for first time home buyers there is less reserves than for investors. Finally most borrowers are employed or can show income. This apply primarily to residential borrowers. For hard money commercial borrowers the same apply.
Friday, March 27, 2009
Thursday, March 12, 2009
The Changing Nature of Hard Money Lending
Just this week a broker whom I work with regularly asked me why do we need some type of income documentation from her client? If we go back to what was Hard Money lending even a year ago this is a legitimate question. Remember when the only documentation that was needed to approve a loan was a breathing borrower, a 1003 and a property, today it’s a different world. Investors and lenders have learned that caution is the norm and that property can loose value. To illustrate theses changes here is an article from the AP, "When economy bottoms out, how will we know?" by Alan Zibel, Christopher Leonard and Tim Paradis, Business Writers
A different lending approach is being developed in the hard money world. Today you could define Hard /Private Money lending as flexible lending. Until mid August 2007, Hard Money lending was pretty much borrower’s bail out lending. When you could not get money from banks you were going to a hard money lender. Two primary reasons at that time either you were so desesparate as a borrower or the property was in such a bad shape that no conventional or subprime lenders could approve the financing. Here I am referring to residential lending as the commercial market was a little more reasonable.
The assumptions made by “most” private lenders at that time were that property values will continue to increase and that other sources of funds would be available to take out their loans. Since then the lending and financing world as radically changed. Values have collapsed and there is no capital available to do financing. Assumptions made are no more valid, thus private lending had to take a different approach.
Today private lending is more of flexible lending than bail out lending. Bailout loans are still being considered but at very low loan to values. Most of private lending today is done for investment properties and commercial properties that can not get bank loans. Banks do not approve loan for more than 4 residential properties. No more stated income loans, so self employed people are suffering, especially self employed investors. Hard money loans for borrower with low Fico (below 600) will be more complicated to get. In addition, more and more lender want to make sure that the borrower can make the mortgage payments.
In our next few posts we will continue to address these issues.
A different lending approach is being developed in the hard money world. Today you could define Hard /Private Money lending as flexible lending. Until mid August 2007, Hard Money lending was pretty much borrower’s bail out lending. When you could not get money from banks you were going to a hard money lender. Two primary reasons at that time either you were so desesparate as a borrower or the property was in such a bad shape that no conventional or subprime lenders could approve the financing. Here I am referring to residential lending as the commercial market was a little more reasonable.
The assumptions made by “most” private lenders at that time were that property values will continue to increase and that other sources of funds would be available to take out their loans. Since then the lending and financing world as radically changed. Values have collapsed and there is no capital available to do financing. Assumptions made are no more valid, thus private lending had to take a different approach.
Today private lending is more of flexible lending than bail out lending. Bailout loans are still being considered but at very low loan to values. Most of private lending today is done for investment properties and commercial properties that can not get bank loans. Banks do not approve loan for more than 4 residential properties. No more stated income loans, so self employed people are suffering, especially self employed investors. Hard money loans for borrower with low Fico (below 600) will be more complicated to get. In addition, more and more lender want to make sure that the borrower can make the mortgage payments.
In our next few posts we will continue to address these issues.
Sunday, March 1, 2009
Part 4 – Last Post on Property Values… For Now
As we continue to get reminded on a daily basis property value is about location. Availability of capital is the other major factor of value and valuation. To conclude this serie of posts on values lets take a final look at markets behaviors and numbers. One article from Forbes, was quite interesting this week "10 Best and Worst US Housing Markets". I will not give everything up, but based on Forbes analysis the best market was New York City and the worst one was Las Vegas, NV. If you want to know about other interesting markets such as Florida or Arizona, just check out the article.
While looking at number, let me encourage you to keep in mind that it is about capital and location. The New York City market is down year over year 10%, however, on Manhattan most neighborhoods are stable or even up. In the San Francisco market the most stable neighborhood is Russian Hill with a drop of 5% while the highest drop is in the Bay View Area. Continually we private money lenders are keeping tab on the state of the market as we are lending today but want to make sure that our capital will be returned when the note is due. The inference of these numbers is that the “best” neighborhoods have up to now managed to keep their values.
What about tomorrow is really the question? As we have continued to discuss we should anticipate a new vague of price decline. As an indication of the relationship between location and capital, I was looking at values, prices and sales in the greater Sacramento CA. 18 months ago the lower market crashed and for the past 6 months investors have been buying properties at $0.25 on the dollar. 12 months ago the middle classes neighborhood got hammered and for the past three months investors are picking up properties at $0.30 to $0.35 on the dollar. Sacramento is a vibrant real estate market at very reasonable prices.
Lets address the second components to this valuation review capital. Today the funds needed to invest into real estate do not come from “conventional” lending institutions. Most bank have stopped lending and they have continued to tighten their lending criteria. Even the Federal institutions are making it more difficult to borrow. Money comes today from private funds and sources that were not exposed to real estate. New private investors and equity group have raised capital to take advantage of the low values. One limitation to these sources of funds, they are not big enough thus driving up the borrowing costs.
The silver lining is that once markets have achieved the “right” pricing they stabilize. Capital will come back in. An argument can me made that the market approach to real estate works.
While looking at number, let me encourage you to keep in mind that it is about capital and location. The New York City market is down year over year 10%, however, on Manhattan most neighborhoods are stable or even up. In the San Francisco market the most stable neighborhood is Russian Hill with a drop of 5% while the highest drop is in the Bay View Area. Continually we private money lenders are keeping tab on the state of the market as we are lending today but want to make sure that our capital will be returned when the note is due. The inference of these numbers is that the “best” neighborhoods have up to now managed to keep their values.
What about tomorrow is really the question? As we have continued to discuss we should anticipate a new vague of price decline. As an indication of the relationship between location and capital, I was looking at values, prices and sales in the greater Sacramento CA. 18 months ago the lower market crashed and for the past 6 months investors have been buying properties at $0.25 on the dollar. 12 months ago the middle classes neighborhood got hammered and for the past three months investors are picking up properties at $0.30 to $0.35 on the dollar. Sacramento is a vibrant real estate market at very reasonable prices.
Lets address the second components to this valuation review capital. Today the funds needed to invest into real estate do not come from “conventional” lending institutions. Most bank have stopped lending and they have continued to tighten their lending criteria. Even the Federal institutions are making it more difficult to borrow. Money comes today from private funds and sources that were not exposed to real estate. New private investors and equity group have raised capital to take advantage of the low values. One limitation to these sources of funds, they are not big enough thus driving up the borrowing costs.
The silver lining is that once markets have achieved the “right” pricing they stabilize. Capital will come back in. An argument can me made that the market approach to real estate works.
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