A strong start in Q1 was brought to an abrupt halt due to the COVID-19 pandemic. Traditional lending as we knew it was put on pause, and lenders that were able to adapt quickly to the new normal of operating in the middle of a nationwide shutdown leapt to the front of the lending scene. 2021 is sure to be a year of change and new market development in light of the way 2020 unfolded.
Quarter 1: Commoditization of Private Loans
Early 2020 looked to launch a hugely successful year. Many lenders were making more loans than ever, and service providers everywhere were also doing better than before. Capital markets viewed business purpose loans similar to consumer residential mortgage loans and allowed many lenders to create standard “buy boxes” of loans to sell. This also meant lenders endeavored to the standardization of documentation to be able to quickly turnaround and sell closed loan packages.
In particular, the rental market was becoming the new business purpose loan of choice – these long-term loans were easy to package and securitize, leading to a stable offering to many loan purchasers. These loan purchasers had typically stayed in the consumer world previously, but with the development of the rental loan product they jumped into business purpose waters with a voracious appetite. The ability for business purpose private lenders to quickly sell loans and receive lines of credit meant that loans could quickly close and be sold, with loan originators back on the market immediately for another deal. Those with such capital sources were pushing out the competition – traditional mortgage funds who retained loans on their books – and early 2020 saw a change in the type of lender in the business purpose space.
March 2020 was a shock to the system. With a nationwide shutdown due to the pandemic and many major metro areas simply closed for business, many lenders – and their note buyers – stopped in their tracks. Deal flow slowed and halted, and many played a game of “wait and see” in the middle of uncertainty. Many speculated about an influx of non-performing loans, foreclosures, and litigation.
Quarter 2: Dislocation and Disorganization
Almost immediately, state and federal governments jumped into action. The CARES Act was passed and, along with it, PPP loans and other federal monetary assistance helped individuals and businesses stay afloat. Many believed a short-term pause in market activity would be all that happened, with businesses (and employees) back to work in a few short weeks or months. This temporary assistance federally along with state and local shut down orders made most people feel like the end was right around the corner.
State and federal governments also tried to help by passing various laws and orders about forbearances and foreclosures. Government-backed loans had mandatory forbearances put into place, and AAPL and Geraci Law Firm recommended that borrowers on certain business purpose loans receive the same treatment. A standard forbearance request form was created to help guide the industry through processing an influx of requests. In addition, foreclosures were either banned outright or impossible to complete due to the nature of shutdown orders and how foreclosure sales need to occur. In California, business purpose loans were never prohibited from proceeding, but as a “public sale” is necessary to complete a foreclosure, and the public cannot gather, then even foreclosure sales on loans unaffected by the pandemic (prior defaults and previously scheduled sales) had to pause while orders were in place.
Private lenders scrambled to find new capital partners as their lines of credit were shut down and note purchasers closed their doors. Some major players sat out this quarter due to nervous investors amid the uncertainty. Traditional balance sheet lenders were competitive again and were able to immediately fill the gap created, and with it able to charge a premium on rates and points as they closed more loans. Many lenders had to get creative as lockdown orders made it difficult if not impossible to complete basic functions of lending. Appraisals were difficult to obtain, escrows were wary of in-person signings, recorder’s offices were closed or open on reduced hours. Relationships and connections with service providers were more important than ever to get a loan closed. Many companies looked internally at this time – building processes and procedures, restructuring, and educating team members took the forefront as typical day-to-day operations slowed down.
Quarter 3: The Market Surprisingly Rebounds
By the third quarter of 2020, many realized that remote work would be in place for much longer than expected. Even if companies decide to operate in an office in the future, many companies and employees have figured out how to rely on a fully remote workforce. This led to an exodus from small, expensive urban housing to larger, suburban homes. Single family homes sold at higher values than expected, and interest rates were at an all-time low for consumers. Some markets have never been more competitive with sales on residential properties. Private lenders are a beneficiary of a strong residential real estate market, and the booming rental loan market from Q1 started picking up again.
Many lenders were back to pre-COVID lending criteria, with interest rates normalizing and underwriting requirements loosening again. Some lenders that required payment reserves or larger deposits during Q2 removed those requirements or provided modifications for those requirements on deals going forward. A general consensus felt around the industry was that most were “at 80%” of pre-pandemic deal flow and revenue. The hardest hit area was the commercial space, as commercial lenders faced varying success with their loans based on tenant makeup and how affected those tenants were by the pandemic and restrictions on gathering, dining, and shopping.
Federal protections under the CARES Act also started to expire, so many state legislatures jumped in to try to bridge the gap created. AAPL, Geraci, and other organizations jumped in to contest overly burdensome proposals in favor of more reasonable restrictions placed into effect. Oregon passed a law affecting commercial loans that required mandatory forbearances prior to commencing a foreclosure action. California passed numerous bills affecting foreclosure but that were ultimately watered-down versions of previously proposed bills (SB 1079, AB 3088). At the end of it all, the temporary relief provided by state legislatures was rushed and misplaced, creating more hurdles in the process while not helping the demographic they aimed to protect.
Quarter 4: Status Quo – For Now
As 2020 came to a close, a new status quo emerged. On the positive side, rental loans continued to receive attention and more lenders looked to the product as they rejoined the market. Vaccines were approved and started to be disbursed among the population, leading to hopes that a re-opening of society would occur. On the negative side, the national election landscape forced many to wait and see the outcome and potential impact the results will have on their businesses. Many people visited family and friends over the holidays, leading to a resurgence in cases and new shutdown orders at state, city, and county levels.
Overall, there is continued uncertainty as to the impact of COVID-19 as a whole, but the residential market appears to be resilient. People have found ways to adapt to the new status quo, which will likely continue on as we continue to adapt to the changes the pandemic has brought to our daily lives.
2021: Looking Ahead
It seems that much of the current status quo will continue in the early days of 2021. Businesses are reopening and adapting, and people are coming up with new ways to live and work remotely. Hopefully, as vaccines are more widely distributed and case numbers drop, the world will go “back to normal” and we will see more of life happening as it did pre-COVID. A safe bet is that single family investments will remain strong in the short-term future, as well as multifamily in the right areas.
The biggest question mark 2021 will bring is: What happens to commercial spaces? Some lenders and owners have pivoted and converted commercial space into cannabis or storage facilities. It remains to be seen how widespread this pivot will be, and whether other new uses for commercial space will emerge. As we have seen during this pandemic and in previous economic recessions, those who are able to quickly adapt to change and embrace new challenges are likely to thrive during this time.
About the Authors
Nema Daghbandan is a Partner with Geraci LLP. His practice encompasses all facets of real estate transactions, primarily representing lenders, brokers, and loan servicers. His practice revolves around the preparation of documents and providing compliance advice to mortgage professionals related to nationwide commercial, residential, construction, and multi-family loan transactions. He also provides advice on documentation related to loan transactions, including servicing agreements, spread agreements, secondary market documents, leases, lien releases, procurement agreements, intercreditor agreements, and subordination agreements. Mr. Daghbandan also possesses a deep expertise in loss mitigation and advises mortgage professionals in the management of defaulted loans and the remedies available to creditors. Reach out to Nema here.
Melissa Martorella is a Partner and Department Head of Geraci LLP’s Banking and Finance practice group. Ms. Martorella manages a large team of attorneys and loan processors in the preparation of loan documents and related transactional documents. Her practice primarily revolves around the representation of nationwide mortgage professionals and providing for their transactional documentation needs. She also provides the compliance advice necessary to navigate mortgage lending transactions in all fifty states. Ms. Martorella also leads the firm’s non-judicial foreclosure practice and advises clients on all default related matters. Reach out to Melissa here.