2021 Predictions Revisited in Q4 2022

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WHAT A YEAR! For those of us who are in the industry, 2022 has been a rollercoaster of highs and lows. In December 2021, the partners at Geraci Law Firm put their heads together and made 9 predictions for 2022. How did we fare? Read below to find out.

Prediction #1: Interest rates will rise

Ding Ding Ding.

I don’t think we need to say much more here. Although to be fair, we were predicting closer to 75 bps and Mr. Powell had different news in store for us.

Prediction #2: Housing inventory should increase

Correct.

We were also correct in our prediction here and for the reasons we identified, a rising interest rate environment would chill demand greater than it would diminish supply which has proven to be true.

Prediction #3: Rental loans will continue to have a foothold in mortgage lending

Correct.

In the second quarter of this year, DSCR volumes started to decline because they immediately reacted to interest rate increases. However, DSCR has continued to be a highly performing asset class and has outperformed most expectations.

Prediction #4: Build-to-rent continues to be the standard

Mostly Correct.

Build to Rent continues to be a strategic choice as rents have been buoyed. The waters may be stormier ahead though.

Prediction #5: And for private lenders, bridge to term loans will become more popular

Not yet.

Many lenders continue to offer bridge and term loans but the industry has yet to produce a single loan bridge to term product.

Prediction #6: Long term multifamily loans will enter as a product offering

Not yet.

There are significant product offering available for multifamily loans, but we have yet to see term multifamily become a common product offering for private lenders.

Prediction #7: Securitizations

Mixed Bag.

Securitizations continue but the bond market has been rocked this year. Those reliant solely on securitizations have suffered particularly from the 2nd quarter on. We did make another prediction that life insurance companies would play a significant role and that has proven to be very true.

Prediction #8: Loan aggregator and correspondent relationships in private lending will expand

Probably Not.

In the first quarter of 2022 this was very true. However, with the securitization market proving to be unreliable, the business of holding paper for a month or more proved to be very dangerous which dramatically reduced aggregator entrants.

Prediction #9: Institutional capital sources will continue to drive down yield

True (for now).

Even with the bond market not firing on all cylinders, bridge rates and DSCR rates still prove to be ultracompetitive. As I write this synopsis bridge rates (~10%) are hovering around 300 bps above conventional mortgage rates (~7%) which is astonishing. DSCR rates are currently less than 100 bps above conventional mortgage rates which demonstrates that capital markets still has significant appetite in these products.

However, as rates continue to increase and institutional bond investors continue to drive up yield expectations, it is likely that traditional balance sheet mortgage funds will seize the opportunity to remain at lower interest rates which are acceptable to high-net-worth investors rather than chase yield. For now, rates remain surprisingly low given the historical expected spreads.

What’s Next?

Stay tuned as we begin our 2023 predictions. Here’s one hint though, those with the gold get to make the rules. Expect balance sheet to be the buzzword of 2023. Until then, buckle up and hang on tight.

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