Trust deed investors and hard money lenders alike have enjoyed a stable market over the past 10 years as the recovery has been gradual and slow without any significant changes in markets. Complacency has set in, and complacency leads to a false sense of security. Trust deed investors should consider adopting conservative practices now on Trust Deed Investing for the Next Recession.
The market is changing
The great recession recovery is almost 10 years old… It’s the second-longest economic expansion in American history (1961-1969). A recession is overdue. And although real estate values may be relatively insulated due to supply and demand dynamics, the next recession will trigger job losses that will eventually lead to defaults and foreclosures, increased inventory, a market slowdown, and finally a decline in real estate value.
Market dynamics are driving hard money rates and yields down. Technology, competition, abundance of capital in the market for all asset classes and low inventory are all contributing drivers.
- Financial Technology (FinTech) [web-based (Cloud) tools and platforms] enhances transactional, marketing, and financial/accounting tasks, and is changing the private-lending industry by creating efficiencies in capital formation and transparency in deal making and business relationships.
- Online competitors change the hard money landscape every day – attracting borrowers and investors — Increasing the amount of hard money lenders (Crowd Funding) competing in the hard money space.
- Yields in conventional investment vehicles and for those on fixed incomes have been painfully low for close to a decade now. Alternative investments have garnered their attention due to correspondingly higher yields. Subsequently, money has poured into this space at unprecedented levels.
- Housing inventory has declined for 34 straight months on a year-on-year basis, driving up home prices and limiting the pool of loan opportunities, thereby increasing its demand from lenders, who in-turn lower their fees and rates to earn the opportunity.
History repeats itself
Like the subprime lenders of past, their counterpart today – Non-Prime Lenders, are encroaching into Hard Money territory, siphoning market share from the hard money space. This is compressing margins of hard money lenders whose number have grown since the subprime-crisis, forcing them to compete for a shrinking pool of borrowers.
Subsequently, hard money lenders are loosening underwriting standards to maintain origination volume and are starting to grow more aggressive in their lending practices.
I see countless adverts from hard money companies promoting various hard money programs at higher loan-to-values, stated income, and virtually no documentation requirements:
• No Paystub
• No W2
• No Tax Return
• No P&L
• No Asset/Bank Statements
• No Credit Pulled
• No Background Checks
• No Appraisal
How is this responsible lending? I understand there is a balance between burden vs. convenience, but at who’s expense?
An increasing tolerance for looser underwriting has resulted in a continued movement from more conservative to more moderate underwriting practices. While this shift is consistent with past credit cycles, credit risk is expected to increase if the trends we see today continue.
Hanover trust deed vs trust deeds
Our scope of underwriting is unmatched in the industry, say many investors that have reviewed our due-diligence packages. We have a Due Diligence Punch List with 150+ task items performed on each file. Our loans are full documentation including Income, Asset, Credit and Appraisal documents.
We seek low LTV loans from borrowers with good credit, and multiple sources of income. This enables Hanover to market rates and terms that win loan opportunities with stable performance.
Considering how well the economy was doing prior to the last market collapse, perhaps there are lessons to be applied to the current market.