FUNDAMENTALS
LENDING
Talking Loudly: Listen to the Lenders STAY CONSERVATIVE BUT JUMP ON OPPORTUNITIES
by Nathan Trunfio
So, how has this impacted lenders and investors? Well, many lenders are structurally tied to other capital sources. Traditionally, lenders originate loans and sell those loans to Wall Street at a 2-3 percent premium. During the pandemic, Wall Street wouldn’t pay that premium due to market uncertainty. As a result, many lenders have reduced their loan programs or stopped funding loans to real estate investors. We do anticipate capital markets to continue to come back with tighter pricing and looser guidelines, but this will happen over time. Moreover, pricing from the secondary and capital markets will likely not be at the same levels as pre- COVID for quite some time, if ever. When the pandemic peaked, only those self-reliant, balance sheet lenders were active. Now that the capital markets have re-emerged, more types of lenders have begun providing financing again. Direct Lending Partners, for example, doesn’t rely on institutional investors. We raise money through a fund structure and balance sheet all our loans. This has enabled us to still provide loans directly to real estate investors throughout the Coronavirus pandemic. Even for lenders who haven’t been
It is undeniable that COVID-19 heavily impacted the real estate industry, creating a high degree of fear and uncertainty. The pandemic and accompanying shutdown hit the lending market hard, with mortgage delinquencies surging by 1.6 million in April to peak at 6.45 percent. While it now seems like we are on the path to recovery, we cannot forget that uncertainty remains. The worst may be behind us, but we’ve yet to see everything from COVID-19 and the residual fallout within real estate and lending. As we continue our return to normalcy, there’s one thing that is certain in real estate investing and lending: a cautious and conservative approach will help mitigate the risk of uncertainty and pave the way for a stable, steady recovery and a healthy market in the future. HOUSINGTRENDS INTHE COVID-19 ERA While we’re not out of the woods yet, we have reasons for optimism. As the economy further recovers, it’s expected retail sales will climb and commercial real estate will improve. We saw increases in mortgage applications near the end of the second quarter, which is a good sign for residential and multi-family.
Still, uncertainty remains. The after-effects of the Great Shutdown make it tough to predict the future housing landscape. Additionally, there is always the threat of re-emergence of the virus until we have a vaccine. For example, many health experts have predicted a surge in cases in the fall, with a peak in December. HOWLENDERSHAVE REACTED TOTHE EVER-CHANGING LANDSCAPE The economic shifts stemming from COVID-19 have been strong and swift. In response, lenders have become more conservative to mitigate risk. First, many large institutional banks and REITs basically stopped deploying capital once the pandemic hit American shores. As Douglas M. Weill, founder of a global real estate capital advisory firm, notes, “Institutional investors are defensively looking at their own portfolios.” During the pandemic, lenders and institutional banks mainly focused on their asset management and loan portfolio servicing. They tightened the purse strings because of changes in financial markets, declines in other asset values, and uncertainty surrounding the market.
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