Geraci partners Melissa Martorella, Kevin Kim, and Dennis Baranowski made some profound predictions last year, and many of them came true (see them here). How will the rest of 2022 shape up? Let’s discuss below:
1. Interest Rates Will Continue to Rise
What should come as no surprise to anyone reading this article in mid-2022 is interest rates will rise. Fed. Reserve Chairman Jerome Powell expects to raise the federal funds rate 50 bps each time the Feds meet, barring inflation coming under control. This means upward yield pressure on several sectors of the private lending industry, including Wall Street.
2. Interest Rates Will Finally Pass Through to the Private Lending Market
The upward pressure of interest rates rising has not been passed through due to the downward pressure of capital flooded in the space. However, you will see the upward pressure applied to Wall Street, driving more expensive securitizations, forcing the interest on loans to private lending borrowers to finally increase. You should also expect the yield to hover between 150-300 bps above traditional bank lending. Wall Street’s captive attention in our space is here to stay.
3. Return of the Funds!
While the world starts to settle in for a correction or recession, several Wall Street sectors may pull back their investments into different segments of the real estate lending world, including DSCR. This will have some savvy private lenders seek to control their own money with their own funds (or their investors’ funds). I expect to see an uptick in mortgage fund creation as a result.
4. Reduction Does Not Mean Goodbye – Wall Street is Here to Stay
Wall Street is here to stay in the private lending world. They recognize it, they know it, and even as the yields increase and the delta hovers close to the banking world, Wall Street has bought into and loves the private lending product our clients produce. This “alternative asset” is becoming more and more mainstream as a predictive yield generator for low-risk-adjusted returns.
5. Origination Shops Will Continue to Be Bought Up/Sought After
The aggregation of portfolio lenders and origination shops will continue to be bought up or attracted by aggregators/lenders. Just because some sectors (DSCR) may be reduced, others (SFR) will continue to thrive. Expect a continued effort to buy up originators by both savvy larger private lenders and attractive flow through agreements by aggregators to originators.
6. Return of Owner-Occupied / Non-QM
Outside of a few players, the Owner-Occupied SFR / Non-QM market has largely been ignored. With the low housing inventory and the flooding of money by the US government into the economy, expect homeowners with sizeable down payments and ability to repay the loans to go after the hot housing market. Since new construction is still a net 2 years behind, expect a steady housing market with a slight correction in Q4 2022 going into the rest of 2023. These are the perfect grounds for Non-QM lenders to make owner-occupied loans.
7. Record Volume of Private Lending Transactions Will Happen in 2022.
Despite the increase in yields, the volume we have seen in private lending in 2022 will surpass all other years. What was once a $500 million market ten years ago has passed $1 trillion, and I see that it will likely hit $2 trillion this year.
I expect that we will continue to see huge transactions and that even with a recession, the private lending market will continue full steam ahead. Certain segments will fall out of favor, but others will replace them, leading to a net increase of private lending for the remainder of the year and early 2023.
As always, Geraci LLP is here to help our lending community. If you need assistance for your business as you plan for the remainder of 2022 or going into 2023, our experts would love to help.