Recessions come and go, and it has been several years since the last one. If you don’t count the COVID-19 pandemic, the most recent recession was 17 years ago. As a private lender, you are probably looking for signs in the federal funds rate, employment rates, CPI and PPI indices, and other tea leaves to determine whether a recession is coming. Perhaps you’ve also strengthened your underwriting guidelines and are continuing down the path of protecting your investor’s capital while weathering out the oncoming storm. While all those efforts make sense, here are some thoughts about why a recession may not be scary for you.
1.LTVs Are Conservative Compared to Last Recession
Unless you’ve gone crazy, you haven’t written a 100% LTV loan recently. As such, you should have a lot of equity even if there is a correction in this next downturn. That equity cushion is your protection against rainy days in a lot of respects. Here are a few ways:
The Equity Will Protect You from the Correction and Non-Payment from Your Borrower
The equity cushion you have created by conservative LTVs will protect you from both non-payment and a downturn in the economy. You should be able to withstand a borrower’s bankruptcy as well.
The Equity Will Cover Your Attorneys’ Fees
A common misconception from lenders is that any legal fees you advance to collect on your loan are recoverable per your loan documents. As such, you will be able to recover (likely with interest) the attorneys’ fees you pay. Think of your attorney as your partner as you navigate through the borrower’s uncertain waters and uncertain exit with your foreclosure.
2. NPL Buyers Are Prominently Hunting for Your Loan
Don’t want to go through the hassle of default collections? Several note buyers are out there that will buy your note at or near par. They are hungry for yield and ready to get your note in as good a price as you’re willing to sell it.
3. The Exit Is Worth the Squeeze?
Depending on how niche you lend, you may understand the exit as well or close to as well as your borrower. Do you have a team lined up to take the property back in foreclosure and reposition it? If so, and if you must take it back, you’ll be well-positioned to profit from this situation.
Do your homework and you will be set.
Conclusion
You did your job in keeping LTVs conservatively. You should feel confident then any recession that we may enter should not adversely affect the strong moat you built around your portfolio. By using your attorneys as advisors, instead of fearing their legal bill, know you’ll be able to recoup every dollar you pay them in your borrower’s foreclosure.
