09/18/2024
From Rocky Butani: The private lending industry has experienced some major challenges and changes in 2023. In this guide, I’ll provide an update on what’s happening in private mortgage lending, including loan volume, interest rates, capital markets, and much more. The information I’ll share was gathered from talking to many of our lender clients and from attending the American Association of Private Lenders Conference this month. While private lending mostly relates to residential investment properties, it also includes small balance commercial real estate lending. It’s also known as hard money or bridge lending.
Private Lending Industry Overview
Overall, it’s been a tough year for private lending, mainly because loan volume continues to be much lower than most lenders anticipated. After a record year in 2021, most lenders have adjusted to the new normal and are surviving with lower profit margins. Some lenders have told me that their volume was similar to 2022, and for most lenders, it’s been much lower. Most lenders are rejecting a higher percentage of loan requests than ever before. I said this in my 1st quarter update, but it’s gotten worse.
It’s not due to a lack of capital. There is still a lot of capital available in private lending, but most deals don’t make sense. It’s either because borrowers don’t have enough equity, or because values are dropping in various markets, or if the borrower’s exit strategy is to refinance, the numbers don’t pencil due to the higher interest rates. Even more than the beginning of the year, lenders are continuing to be conservative in this environment, while many real estate investors are still requesting high leverage. And since many real estate investors are facing liquidity issues, lenders are being extra cautious with their underwriting. A few lenders have told me they are seeing a lot of fraud with loan applications and documentation.
Some private lending companies have gone out of business this year, and a few have been acquired by larger lenders. This has caused a mass migration of people in our industry. It’s mostly loan officers, but it also includes executives and operations staff. Several people have reached out to me that are looking to switch companies due to lack of growth, while several private lending companies are in growth mode and actively seeking talent for various roles.
Private Lending Interest Rates in 2023 Q4
The interest rates for short-term loans are still ranging from 10% to 13%, with the national average being 11.50%. This is the same for all asset classes – residential, multifamily, and even commercial real estate loans up to $20,000,000. There are only a few lenders in our network still funding loans at under 10%, and they are all in California. From what I’m seeing, 12% plus 3 points (origination fee) is quite normal for a lot of deals these days.
The interest rates for DSCR long-term rental loans are currently averaging around 8% to 9%, so the volume for these loans has dropped significantly. Many of these loans were still being funded in the 1st and 2nd quarters, but as the rates have continued to increase, many of these deals don’t make sense, even at a 70% loan-to-value.
Loan Maturity Defaults
One of the most common loan scenarios we’ve seen this year is the bridge-to-bridge loan. This is when a short-term loan has matured, and the lender is not willing to provide an extension, so the borrower has to seek another bridge loan to buy time to either sell the property, complete a rehab, finish ground-up construction, or lease up the property to qualify for a long-term loan. Only a small percentage of private lending companies will consider refinancing a bridge loan, but only if there is lots of equity in the deal and if the borrower hasn’t defaulted on the payments.
I’m starting to hear about a lot of loan defaults in private lending. It’s not only related to maturity defaults. In a lot of cases, it’s a payment default. Many real estate investors are struggling and don’t have enough cash reserves. A large percentage of private lending companies are not capable of handling defaults and the foreclosure process and will have to sell these loans at a steep discount. There are lots of companies out there that are looking to buy non-performing loans, and one of our lender clients, Gelt Financial, is starting a servicing company to help lenders service defaulted loans and complete the foreclosure process.
Private Lending Capital Markets in Q4 2023
While there is still a lot of capital available in private lending, the cost of that capital is the big challenge. Lenders that use warehouse lines may have done quite well if the interest rate for their line was locked over the past 1 to 2 years, but renewing or getting a new warehouse line could be painful.
For lenders that manage a debt fund, I’m hearing a mix of scenarios. Some have tons of capital, some are aggressively looking to raise capital, and a few are not currently raising capital because there are not enough good deals for them to fund. Even with the low loan volume, balance sheet lenders and debt fund managers seem to be doing fine in this environment.
Institutional private lending companies that rely solely on securitizations to recycle their capital have been extremely constrained this year and haven’t been able to fund enough loans. The securitization market has been essentially shut down since late 2022. A few large lenders in our space have been able to close private securitizations. For those of you not familiar with securitizations, it’s when hundreds of short-term real estate loans are bundled and sold to large investments firms as a bond. This is where most of the capital in private lending comes from, and it’s helped our industry thrive over the past decade.
There is some good news as it relates to institutional capital markets for private lending. In the past, all the private lending securitizations have been unrated and only catered to a small group of hedge funds or private equity investment firms. But our industry is anticipating the first rated securitization to happen early next year. When a securitization is rated by a major rating agency, it means that many more investment firms will be allowed to invest in our space. This will be a huge win for our industry, but it will likely lead to stricter underwriting and more documentation requirements with every loan that gets sold to loan aggregators.
Optimism for Private Lending in 2024
One of the big surprises from the AAPL Conference this month was the massive amount of people that attended. With the current state of the market, everyone was shocked by the record attendance, which I believe was in the range of 600-700 people. The sentiment was positive and bullish. Many lenders feel there are lots of opportunities to grow in 2024. I met a lot of small regional lenders that are looking to expand, and there are lots of brand new private lending companies which have recently launched.
So the good news is many private lenders have sufficient capital and are actively lending on high quality deals. If you’re seeking private financing, use our website PrivateLenderLink.com to find direct lenders throughout the country. 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 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.
Lender Link is a resource for property investors & brokers to find private lending companies (aka hard money lender) for investment properties in the USA.
