For the past few years, Geraci has been producing benchmarking reports that look at the health of the private lending industry. On the verge of preparing the next release, COVID-19 (Coronavirus) struck, rendering our data essentially meaningless.
As we rapidly grapple with a myriad of issues, we have gleaned some insight from talking with our clients and various stakeholders of our industry to get a pulse on where we’re at today, and more importantly, where we’re going.
Where We’re At Today with the Coronavirus
On March 19, 2020, California governor Gavin Newsom issued the stay-at-home order that bordered on shelter-in-place. Three weeks before that, the first coronavirus impacts started making national headlines, then rapidly grew from there. During this time, we saw what was prior to this a huge growth economy swiftly spiral into a recession. The growth of the private lending industry as we measured it in 2018 was from the supply of capital that came from the secondary markets. As of the writing of this article, the secondary markets have frozen in their tracks.
What’s important for you to take from this article is that we are not shut down. Rather, if I had to put a timetable on where the private lending industry is at right now, it is 2010. We are right in the middle of recession, and there is no secondary market to buy our loans.
The rise (again) of the private investor
I know a lot of you are new to this industry, but what predominated private lending before 2010 was the relationship with the private investor. Mortgage funds aggregated the private investor funds and lent their money out. Those who wanted to sell loans directly to the private investor chose to fractionalize loans to investors. Thus, those who still have a strong investor base will not only survive, but thrive in this industry.
A lot of our clients have priced their loans accordingly, knowing that they are once again some of the only game in town. What three weeks ago would be 7% interest is once again double digits. What was 95% after repaired value is now 75% purchase price.
With the secondary market vacating the capital flooding this industry, we once again turn to the pillars that created it: private investors. In my book, Earning Money While You Sleep, I teach private investors why this industry is so great.
Products to offer during this time
As the secondary market evaluates its next move, private lenders and mortgage funds can take advantage of this current market by pricing their deals up, and limiting the deals they take out. We saw this often in 2010, where deals that were amazing in 2008 were deals that were forgone in 2010.
Where We’re Going with the Coronavirus
That deal is dead… because 2020 isn’t 2010
Part of what we’re seeing can be traced historically back to 2007 through 2010. We’re seeing deals that would have been funded 3 weeks ago, but deals that would not have been funded in 2010.
What we saw in 2006 and what the market was 3 weeks ago, due to an oversupply of capital, was not only lower yields but higher risk compared to the private lending of 2010. Now that significant amounts of capital have vacated the space, back to basics is essential. Higher interest rates and lower LTVs should prevail during this time.
But what about the economy?
We are absolutely in a recession right now. Every economic indicator suggests so. During this time, we will see some lenders go out of business. That’s to be expected.
What would you do now, if you were me?
The critical aspect is to remember that we are in a whole new world right now. Even though this all started three weeks ago, that world is currently over. Focus on making great deals at low LTVs and selling these loans to private investors or mortgage funds. If you need connections, we’re here to help.
Assuming you’re recognizing that we’re in a brand new world, then everything around it makes sense. The world has changed, and your deals must as well.
