Private or hard money lenders can lend to a borrower who doesn’t have steady income, as long as the property securing the loan has sufficient equity, and the borrower has a busi- ness plan that is realistic and makes ense. Fix-and-flip investors — those who buy, renovate and resell single- family homes for a profit — are a perfect example of who nonbanks commonly lend to.
These borrowers may have a profitable business. The
owners of such businesses, however, often do not meet
all the criteria that conventional banks require in order
to extend a loan.
Mortgage brokers and borrowers should be aware of
what is likely to happen in the future of nonbank lending. These potential trends can be divided into three
segments: near term (the next 12 months), medium
term (one to five years) and long term (five to 10 years).
The next 12 months
First off, it is a fair bet that increasingly more capital will
flow into nonbank lending institutions over the next
year. Interest rates are rising, which makes bonds a risky
investment for income-oriented investors. Nonbank
loans offer investors high yields, compared with most
bonds, as well as short maturity periods (frequently
one or two years for bridge loans).
Short maturities mean less interest rate risk. In other
words, the value of the investment isn’t reduced much
by a rise in interest rates, in contrast to most bonds,
which often lose substantial value when rates rise. Also,
a number of nonbank real estate lending platforms
have been sold in recent years to strategic and financial investors intent on doubling or tripling origination
volume. Competition is likely to continue intensifying.
Second, the same forces that have increased competition also have reduced lending standards within the
nonbank industry. A second short-term prediction is
that the chickens will soon come home to roost, with
default rates rising in the coming year. Some lenders
have been attempting to “buy” a larger market share by
offering high-leverage loans. In the fix-and-flip lending
market, there are a number of lenders offering leverage
of 90 percent of the purchase price or 100 percent of the
renovation costs, subject to the after-repair value being
sufficient to support the loan.
Furthermore, brokers and borrowers should consider
that many of these lenders never see some of the properties they are lending on. Recall that many properties
dropped in value by 30 percent to 50 percent or more in
the wake of the Great Recession. If a lender offers 90 percent of the purchase price and the property later winds
up in foreclosure, the lender would be lucky to get all of
its money back even if the market stays flat, after taking
foreclosure costs and brokerage fees into account.
Today, there are many nonbanks offering loans for
commercial properties. In 2020 and beyond, we may
begin to see some of these platforms fail due to loan
defaults. Many of today’s lending platforms were built
for growth but, like Country wide Financial, lenders that
are too aggressive and lead the pack in growth are often the same ones that don’t make it when the going
Many of today’s nonbank lenders have never seen
or had to deal with a large wave of defaults. In the
small-balance arena in particular, many staffers are
younger professionals who were in college or high
school during the last financial crisis. Even a small number of defaults will test these platforms and, in many
cases, investors may lose confidence in senior management if they realize that growth was achieved at the
expense of loan-portfolio quality.
In the next few years, borrowers may wake up to the
importance of the quality of their lender. As lending
standards have loosened, some borrowers have been
feasting on high leverage and low rates. If something
seems too good to be true, however, it probably isn’t
sustainable. Recall that Corus Bank funded many condominium towers in South Florida prior to the financial
crisis. When Corus was taken over by federal regulators
in 2009, more than half of its $3.9 billion in condo-construction loans were in default.
The important point here is what happened to the
bank’s other borrowers who performed flawlessly.
Instead of dealing with a lender that would live up to
construction-loan agreements, they were left dealing
with regulators. Many projects that might otherwise
have survived were frozen in a half-built purgatory
because the lender could not fund construction draws
in a timely manner.
Lastly, financial technology (or fintech) in commercial real estate will likely shake out in the next few
years. Venture capitalists have been flush with money
and willing to bet big on all sorts of ideas, including
some real estate debt-related ventures. It remains to
be seen which companies have a strong fintech-related business model. In the meantime, non-fintech
lenders are likely to build the technology that is valued
by their clients. Expect to see a convergence of nonbank
lenders in this area, much like E-Trade and Charles
Schwab started in different places but ended up in similar
ones, offering multiple on-ramps to their services.
It appears likely that, in the coming decade, nonbank
lending will scale up. Banks are often poorly suited to
deal with today’s real estate investors. They move slowly and have many layers of requirements before they
can provide reliable solutions.
Jan B. Brzeski is managing director and chief investment officer of Arixa Capital Advisors LLC and Crosswind
Financial, both based in Los Angeles. He manages funds dedicated to making loans to real estate developers
on single-family homes and small urban multiunit residential and mixed-use developments. His business
was built from the ground up to meet the specific needs of these developers and their brokers.
Reach Brzeski at (310) 428-9109 or email@example.com.
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offer investors high
with most bonds,
as well as short