Prediction #1: Interest Rates Will Rise
This one should come as no surprise as many sources including MBA, Fannie Mae, and others predict that interest rates will increase over the coming year. How high rates will rise has sparked debate, with most predictions between 25-75 bps. However, everyone seems aligned that rates will increase – not so high to be shocking, but higher than we have seen over the past year.
What does this mean for the mortgage lending market?
On the traditional bridge/fix and flip side of the business, as rates rise, we should see a corresponding slowdown in pricing increases, which means deals may become more competitive among mortgage lenders. For DSCR rental, the rate increase amount could dramatically affect total volumes as many borrowers have already obtained long-term financing at four percent or less.
Prediction #2: Housing Inventory Should Increase
Right now, many believe there is an undersupply of housing in the United States. With low interest rates throughout the pandemic, many bought homes for the first time and investors snapped up rental properties at lightning speed. The housing market has been extremely competitive, and it has had its effect on related industries – construction in particular – leading to slower turnaround times on rehab or improvement projects. This has led to cities changing zoning laws, developers building more multifamily units, and other attempts at creating more housing supply throughout the country.
As rates increase and purchasing slows down, we should see an increase in inventory available for sale. Expect housing prices to remain high, in turn which may prompt investors holding rental properties to take advantage and sell. The housing shortage will certainly exist for time to come, but it should slowly recover over 2022 with a gradual increase in inventory.
Prediction #3: Rental Loans Will Continue to Have a Foothold in Mortgage Lending
One of the newer trends we saw take off in 2021 was the demand for long term rental loans at lower interest rates. These loans are competitive with traditional financing sources, particularly agency financing, but with the convenience of working with private mortgage lenders. Lenders have also created a portfolio rental loan product which, with its higher loan size, tends to be a profitable and safe investment. Over a third of the country rents their home, meaning this is likely a strong area for continued growth over 2022. As housing inventory increases, we may also see more investors with a portfolio of rental homes they wish to finance through this long-term product.
Prediction #4: Build-to-Rent Continues to Be the Standard
In years’ past, many real estate investors were fix and flip specialists – they would purchase a home, rehab it, and sell it within a short time. Now that rents are sky high and proving to be a profitable source of long-term income for investors, we are seeing more and more purchase and rehab homes to hold in their rental portfolio rather than sell. This trend appears to only escalate going into 2022.
Prediction #5: And for Private Lenders, Bridge to Term Loans Will Become More Popular
Many lenders have already pivoted their loan offerings to real estate investors who are doing build-to-rent. This provides a one-stop-solution for a short-term bridge loan to help finance the acquisition and rehab of a property, to then be either financed out or automatically converted into a long-term rental loan once the property is stabilized. By keeping these options under one roof, mortgage lenders can continue to build their borrower relationships as they grow their portfolios.
Prediction #6: Long Term Multifamily Loans Will Enter as a Product Offering
In 2021, as lenders expanded their loan offerings with long term rental loans, the collateral stayed fairly consistent and stuck to 1-4 family properties. As lenders are more comfortable with the loan product, we expect to see an expansion to multifamily collateral and a similar loan product offered.
Prediction #7: Securitizations
2021 saw several rated and unrated securitizations of bridge and construction loan products with significant success. We believe these will continue, but the concentration of securitizations for the industry will start to shift towards term rental for SFR and multifamily.
In addition, many believe that life insurance companies and pension plans will begin increasing their allocation into the bridge and construction loan sector of private lending, shifting concentration away from securitization strategies to a levered balance sheet strategy. This is arguably a better fit for the asset class in the long run and follows its analogues in the commercial real estate sector.
Prediction #8: Loan Aggregator and Correspondent Relationships in Private Lending Will Expand
The development of correspondent relationships and “white labeling” has taken off over the last year. Instead of pursuing lines of credit or raising money in a mortgage fund, we have seen an increase in lenders originating loans alongside correspondent lenders who immediately purchase or fund the loans. This relationship is beneficial to smaller lenders who have strong deal flow as they are able to retain any interest spread or origination points rather than refer away deals they can’t cover themselves.
For correspondents, the opportunity to become the major sources of funding for deals across the country means it is easier to package loans and sell them on the secondary market. Furthermore, these relationships allow private lenders with business models built around bridge lending to expand the range of loan products offered to include long term loans that are desirable to many aggregators and purchasers.
Prediction #9: Institutional Capital Sources Will Continue to Drive Down Yield
Over the past year, we have seen many institutional home buyers pivoting to the traditional private lending space. Many have bought out existing mortgage funds or are simply entering the arena and offering loans to an industry at lower rates. As they catch up to the speed of private lending transactions, mortgage lenders will need to adapt their own practices to match the internal speed and process of institutional lenders.
In addition, REITs have traditionally offered an opportunity for retail investors to purchase an interest in professionally managed commercial real estate. These REITs are now creating vertical real estate opportunity by permitting investors to also participate in private loans, both residential and commercial. Competition in the marketplace will continue to increase, so lenders will need to adapt to these new market entrants.
All in all, we expect to see some changes and stiff competition entering the lending marketplace as we enter 2022. However, we also expect many 2021 industry trends to grow.
As always, Geraci LLP is here to help our lending community. If you need assistance for your business as you plan for 2022, our experts would love to help.