While the ongoing coronavirus pandemic continues to impact every facet of life, businesses across all industries have begun to adapt to a ‘new normal.’
Zoom calls have usurped in-person meetings. That once expansive corner office has been replaced by a laptop on the kitchen table or a FaceTime call from the couch. Processes that were anticipated to be future implementations—including virtual showings and e-Closings—have had advanced launch timelines because they must be used in the present day in order to complete a transaction. Regardless of the specifics, the one certainty is that we are all doing our best to adapt to the new norm for doing business.
COVID’s Impact on the Mortgage Industry and Bridge Loans
As the nation slowly emerges from its mandatory lockdowns whilst still practicing social distancing and other measures to flatten the curve, the mortgage industry is actively navigating a broad array of novel issues in light of the COVID-19 health crisis. The economic fallout from the virus has turned the industry on its head, leading to liquidity concerns, widespread layoffs, increased stress on loan servicers, and a potential spike in defaults that has thrown the industry into an even more heightened level of uncertainty. To provide some clarity on the state of the mortgage industry, we polled some of the best and brightest bridge loan professionals to get some insight into the market and what the expected trends are for the remainder of 2020.
A bridge loan is a type of short-term loan intended to assist businesses or individuals in the gap between two long-term financing loans. Frequently, companies and investors use bridge loans when necessary to cover cash shortfalls when they must repay one loan before having time to obtain a new longer-term loan. From a real estate investment perspective, bridge loans are commonly used on fix-and-flip projects to cover renovations costs prior to the property being re-sold.
Despite the impact of the virus, bridge lenders are continuing to see a demand for bridge loans from house flippers. And while some lenders had taken a more conservative approach in the initial stages of the pandemic to mitigate risk, the majority of them have returned to pre-COVID levels of lending without any added stringency in the loan approval process. For example, Allen Marsh with Boomerang Capital Partners initially tightened lending conditions even though demand was there for loans, in order to be conservative with an uncertain market. By August and September, Boomerang is already back to pre-COVID lending requirements and loan approvals. Noah Brocious with Capital Fund I also initially tightened requirements, but since has reverted to pre-COVID operations. His company even recently expanded their footprint to the Denver market due to high demand for bridge lenders.
Regarding the government stimulus package, the overall net impact has been generally positive in that it assured all businesses that the government was going to be proactive in addressing the pandemic. For smaller lenders and businesses, it functioned as a backstop, and for bigger lenders with considerable business outside of the mortgage industry, it offered assurance that borrowers had adequate support. Some lenders are wary about government action at a state level, in particular in states where there are foreclosure or eviction moratoriums that include investment properties in broad definitions. For example, Stephanie Casper with LendingHome is cautious about new loan originations in Oregon due to their new legislation related to foreclosures and forbearances in light of COVID-19. On the other hand, Eric Abramovich with Roc360 is optimistic about the Oregon market and sees an opportunity to help communities rebuild in the aftermath of the devastating fires in the area.
Lenders are also being creative in their approach to tackle areas of their business that were previously conducted in person or by third parties. For example, LendingHome is using virtual property inspections that are completed by their borrowers to verify construction projects are hitting relevant milestones. According to Stephanie, they are actually seeing better results from these self-reported inspections, since borrowers have skin in the game to get the project completed in a timely manner to receive their construction budget draws.
Bridge lenders are also seeing slight shifts geographically leading to a high demand for inventory in projects in certain areas. Noah and Allen’s companies are primarily based in Arizona, and they are seeing a high demand for loans in the area along with low inventory related to the aftermath of COVID-19. Many people are taking advantage of a remote workplace that many companies are leaving permanently in place to move to less expensive locations. As a result, the Arizona market is currently booming, and Noah and Allen are at the forefront to help their borrowers fund new fix and flip projects to turn the final product over to the end consumer. Eric also sees some shifts geographically, as many people leave large cities to the suburbs and financing needs to rehab projects in those areas increase.
From a historical perspective, the obvious and perhaps only comparable market event is the Great Recession that spanned between roughly December 2007 and June 2009. Still, there are significant differences between the present coronavirus crisis and the prior recession. For instance, borrowers have more equity in their homes and median credit scores are healthier. Additionally, there is a lower percentage of AMR loans presently as compared to in 2007, which means there is less of a risk of payment shock if and when rates increase in the future. The COVID-19 environment is more akin to the market turbulence prompted by a natural disaster which sparks a major disruption to a localized economy and usually has a shorter-term impact than a full-onset recession period. There is a lingering concern with regards to liquidity, but that has gradually begun to reside as business operations have started to resume.
On the whole, the outlook is positive. The lenders we spoke with all took smart action immediately to wait out initial uncertainty, and then dove back into lending with force as soon as they had some clarity about how COVID-19 would affect the industry. A contentious election, social unrest, and a potential spike in COVID cases may change the market outlook in the months ahead, but the overall attitude is of cautious optimism. LendingHome, Roc360, Capital Fund I, and Boomerang Capital all plan to grow their businesses, continue lending, and keep a close eye on the national atmosphere in the months ahead, but are confident they will continue to see positive trends in bridge lending.