Year after year, you look at our predictions for the coming year. We strive to be thought leaders and to provide our reflections on the industry. Right or wrong, we love that you turn to us for our thoughts for the year ahead. Without any further ado, here are our predictions for 2023:
1. The Recession is Here
Probably the least heralded, but the most accurate, prediction we will make is that there is very little question that we will have a recession in 2023. As of this writing, the Federal Reserve Board has hiked up rates by 300 basis points in 4 short months and anticipates continuing the trend at its November and December 2022 meetings. With a Prime Rate of approximately 7.5% to start the new year, things may not stop there. By way of reminder, the last time the Prime Rate hit 8% was in 2005, when the housing market was overheated. Some may argue we have the same trends now.
2. Sales Hides Any Number of Sins…
Businesses form during bad times. Businesses built on a house of cards will fall, while those built with sound financial principals will weather the storm. In good times, sloppy underwriting and subpar loans often pass through and are not given proper attention. When times are tough, loan buyers will pay a lot more attention to the deals passing their desks and will take a hard look at past purchased loans. We may see loan buyback provisions enforced if loan purchasers see too many problems.
3. Wall Street Will Still Be Uncertain and Difficult to Work with During the First Half of the Year
Wall Street will still be sitting on the fence for the first six months of 2023. By the time the recession takes hold, Wall Street will be able to predict pricing and other metrics that will give it more certainty to purchase again in Q3 or Q4 of 2023. Until then…
4. Private Lenders Will Bring Back the Funds En Masse
Private, independent, balance sheet lending will become the norm once again, which will result in more fund formation, a return to crowdfunding, and other forms of privately sourced capital formation. We will see quite a few funds started, both from a scratch and dent and from an origination standpoint. Private lenders will once again want complete control of their funds because they know “those with the gold make the rules”. Funds with allocations into opportunistic strategies like distressed notes will be typical. Debt Funds will also continue as REITs to ensure they maximize their tax discounts for investors. We will also see individual lenders, who have been quiet over the last year or so, come back in force. Their rates will be competitive again, and they are expected to re-enter the lending market.
5. Lending Finance Programs at Banks will Surge
We will likely see a surge of new credit facilities, warehouse lines, and other lender finance programs. Increased competition will lead to innovation and creative solutions to combat the rising rate environment.
6. Variable Rate Loans Will Become Commonplace
If the prospect of rate hikes by the Fed looms, lenders that rely on lines of credit, correspondent programs, and loan sales to provide funds to make loans will turn to variable-rate loans to mitigate the risk that their cost of funds exceeds revenue from making loans.
7. Private Lenders Will Get Creative with Loan Terms
With rates going up, values of real property stagnating, and Wall Street sitting on the fence, loan structures will become more creative. Lenders will require mixed collateral (real and personal property), multiple real properties taken as security, junior liens as additional collateral, use of holdbacks and reserves to control the flow of funds and mitigate risks, and greater demand on borrower contributions to ensure they have “skin in the game.”
8. Conventional Mortgage Companies Will Continue to Explore Private Lending
Conventional lenders built huge apparatus to support the refinance boom of 2021, and they will continue to look for ways to continue transacting and not go out of business. This is particularly true of Non-QM consumer mortgage originators who were already originating DSCR and see short term fix and flip as another alternative to continue to transact.
9. This is just the beginning
This recession is not the “we will be done quickly” recession. If you think about it, our last true recession was in 2007. We had 15 strong years of growth. This will be around for the next few years as the Feds attempt to put a stranglehold on inflation.
Our public debt ballooned to 31 trillion dollars as of the writing of this article. Leaving politics aside, the enormity of that debt can best be described as follows: our national debt is greater than the Gross Domestic Products (GDP) of Japan, Germany, the UK, India, France, Italy, Brazil, Canada, Argentina, Australia, and Belgium combined, or the world’s 3rd-14th largest economies, and our debt as a percentage of GDP grew from 34.68% in 1980 to 125.59% today. If we do not get a hold of inflation, the value of our dollar decreases and our borrowing power greatly diminishes. This will not be solved tomorrow, next month or even next year. We will have this for a while.
As always, thank you for listening to our predictions of what is to come. We look forward to partnering with you in 2023 and weathering this storm together. If you have thoughts, need advice, or want to discuss any of these issues, we are here for you.