1. Lenders have reduced leverage by 5 percent to 15 percent Reducing leverage lowers risk for lenders. That is because borrowers have more skin in the game when they are putting in more of their own money. Less leverage also insulates lenders from declining values. If an asset declines in value, they won’t be overleveraged. For example, if a lender gives an investor a loan with a 70 percent LTV, and then the market declines five percent, the lender won’t be overleveraged. The investor approach: Expect lower leverage. Prepare more cash out of pocket, but also stay conservative with your deals and give yourself options. 2. Lenders have increased rates by approximately 0.5 percent Lenders have done this for two reasons. One, higher rates offset heightened risk. And two, the cost of capital has increased, and that cost has been passed on to borrowers in the form of higher rates.
• How will valuations change? Housing prices are rising now because of pent-up demand and low supply, but that could change later in 2020. The last question about valuations is important. While the housing market has momentum now, what happens when stimulus support measures fade? The continued effects of unemployment could lead to a rise in distressed inventory at the end of 2020 and into the beginning of 2021. And that may force more home sales. Considering all the uncertainty, and potential for asset value declines, lenders have been forced to become more conservative. Investors should not expect the same conditions and terms as before COVID-19. And it is hard to tell when we will return to the way it was (if ever). Listed below are ways lenders have updated their funding process and parameters. If you are a real estate investor and entrepreneur, understand the new conservative approach from lenders. And embrace it as the new norm.
as impacted, uncertainty clouds the market. This has led to big changes in the way they structure the loans.
THENEWNORMFOR LENDERS POST-LOCKDOWN Uncertainty has necessitated that lenders mitigate risk with a more conservative approach. Some have chosen to fund loans more carefully by making changes to their credit box. Others have chosen to sit on the sidelines. Lenders also have greater concerns about borrowers’ ability to execute. They are more actively asking: • Given the current situation, can borrowers make payments? • Can investors continue with their projects? How quickly and efficiently can investors complete their renovation projects? Construction was deemed non- essential in many states, like New Jersey and Washington. Will there be continued delays in construction timelines due to the supply chain and labor force?
32 | think realty magazine :: august 2020
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