STRATEGY
HARD MONEY
Talking Loudly: The History of Hard Money A LOOK AT HARD MONEY AND WHY IT’S THE LENDING INDUSTRY’S BLACK SHEEP.
by Nathan Trunfio
ypically, we think of credit as a relatively modern invention. However, “hard money” loans have been around since the earliest civilizations. The concept of hard money is one of the oldest kinds of credit financing. Many history experts believe that T
lenders of the time was to offer loans backed by real estate as collateral. But because of their risky nature, “hard loans” had much higher interest rates than what banks would charge. However, property owners desperate for cash couldn’t get loans from banks, so they didn’t have many options. Since the Great Depression, hard money lending has gone through its ups and downs. After World War II, private, short- term debt became vital to real estate development. As an example, in the 1950s, when the U.S. credit industry experienced dramatic changes, hard money developed as an alternative “last resort” for commercial property owners seeking capital against the equity in their holdings. Then, in the 1980s and early 1990s, a turn in the commercial real estate market caused an unprecedented number of banks to fail and experience substantial losses. This gave rise to private lenders as an alternative form of financing. And during the early 2000s, a lack of regulation and a rise in speculation created a real estate bubble. Eventually, it would all come crashing down: foreclosures spiked 225 percent from 2006–2008, and 3.1 million foreclosures were filed in 2008 alone. Today, hard money loans have developed a bad reputation for being predatory, in large part because they’re largely misunderstood or misused. In reality, hard money loans can serve a very functional purpose for real estate investors and borrowers, especially in times of national financial crisis.
Hammurabi, the ruler of Babylon during the 18th century B.C.E., implemented one of the first national lending systems. Over the centuries, other
civilizations — from the Roman Empire to the Tang Dynasty in China to the Spanish Empire — have all used hard money loans in some form.
Today, the term “hard money” is used almost exclusively in the United States and Canada, where these types of loans are the most common. A hard money loan is a short-term loan that comes from independent investors
(i.e., private lenders). Aside from being subject to some restrictions on interest rates, hard money has largely remained formally unregulated by state and federal laws. While modern banking systems have brought mortgages, credit cards, and other new forms of credit to the table, hard money has always been, and remains, vital to the real estate sector in particular. THE ORIGINS OFMODERN “HARDMONEY” The term “hard money” originated in the United States during the Great Depression. The collapse of the banking industry left individuals panicked — they took their money out of banks and kept it at home, reducing the amount of money in circulation. As a result, people during the Great Depression had a very hard time rustling up extra cash when they needed it. One of the most sensible solutions for
THE HARDMONEYLENDING RENAISSANCE During the 2010s, private lending more than doubled, according to Bank of America research. Private debt in
76 | think realty magazine :: march 2020
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