Private Lending Industry Update 2024 Q1
In this article, I’ll provide an update on what's happening in the private mortgage lending industry as of the end of the 1st quarter of 2024. I'll touch on lender sentiment, loan volume, securitizations in the secondary market, interest rates, and what most lenders are concerned about at this time. The information I’ll share was gathered from talking to many of our lender clients and from attending 2 private lending events in the past few weeks - the California Mortgage Association Spring Conference and the Innovate Geraci Conferences hosted by Geraci LLP . While private lending mostly relates to residential investment properties, it also includes small balance commercial real estate lending.
Scroll to the bottom to watch a video version of this article.
Private Lender Sentiment in April 2024
Only a small percentage of lenders in our network told us that 2023 was a record year for them, compared to the past 5 years. For most private lending companies, 2023 was a tough year with extremely low loan volume and low profit margins. The year started off slow, but many lenders informed me that February was better than January and March was amazing. The high loan volume in March has given many lenders a big boost of confidence and a strong outlook for 2024.
Many lenders are bullish and aggressively marketing to find deal flow. Many are hiring to grow their sales teams. Many new lenders are entering the market, and many new debt funds are being formed. There is still lots of capital available in private lending, but deal quality is the main challenge.
Another thing I've heard from lenders is they are dealing with a bunch of loan defaults - both maturity defaults and payment defaults. So many borrowers asked for loan extensions in 2023, and typically it's not feasible for most lenders to offer more than 1 or 2 extensions. Borrowers that don't have enough equity to refinance or sell their properties are going into foreclosure. Some lenders have sold their non-performing loans, but many are going through foreclosures directly and taking on losses. It doesn't seem to be an alarming number, but there are definitely losses.
RTL Securitization Update
Private lenders that sell loans to the secondary market are excited about the 2?rated?private lending securitization deals that have happened this year. In early March,? Toorak Capital Partners sponsored the first-ever rated securitization of Residential Transition Loans (RTL) in the amount of $240MM. In early April,? Genesis Capital LLC closed a $500MM securitization which was also rated. It will take time for more rated deals to be adopted, but in the meantime, there are a bunch of unrated securitizations still happening.
At the Innovate Conference, Ryan Shanberg from?Nomura?mentioned that the volume of private lending securitizations for all of 2023 totaled around $3.5 billion. In just the first quarter of this year, the securitization volume has been around $2.25 billion, so deal volume is expected to triple or quadruple this year compared to last year. This means that there is a huge appetite on Wall Street for residential property bridge loans, and lots of capital is available to buy quality loans.
Fraud by Real Estate Investors
Although 2024 is projected to be a good year in our industry, many private lending companies are concerned about fraud. The most common fraud by real estate investors at this time is falsifying bank statements. Prior to funding, most lenders need proof that the borrower has sufficient cash on hand to complete a rehab or construction project, or to operate their rental property. While many real estate investors are struggling to complete multiple projects, some are editing their bank statement PDF files to make it appear that they have sufficient liquidity. There is technology available for lenders to access borrowers' bank accounts, but it's quite expensive and not used by all lenders. Without the technology, lenders are receiving PDF files which can be doctored with little effort.
There is another deceptive practice that some real estate investors are using to get loans, and it has to do with transferring title. What's happening is investors are transferring title to properties from one of their entities to another one of their entities with the intent of making it appear that a sale has occurred with a higher valuation, and then they try to get an equity cash out loan. Lenders have to research the chain of title in great detail and discover who the members of each entity are. Because of this and other potential fraud associated with equity loans, some lenders are refusing to provide any cash out with refinance bridge loans.
Private Lending Interest Rates for 2024 Q1
Here's some interest rate data for the 1st quarter of 2024. According to?Lightning Docs, the average interest rate for DSCR long-term rental loans in Q1 across the entire country was 8.12% and the average loan amount was $278,000. These are the averages of over 3,000 DSCR loans which were closed by lenders that use Lightning Docs to produce loan documents for their deals. Since DSCR loans don't vary much per state, I'll just leave you with the national averages. If you'd like to see the numbers for each state, you can find that information on our website, and I'll tell you how in a moment.
Shifing to short-term bridge loans, including rehab and construction deals, the national average interest rate according to Lightning Docs was 11.47% from 3,800 total loans in the 1st quarter of 2024. Since short-term loan pricing varies quite a bit per state, I'll give you the numbers for some of the larger states:
Michigan had the highest average interest rate of 12.55% out of 68 loans.
In addition to Lightning Docs, we have a partnership with?Liquid Logics?to publish average interest rates throughout the country. They are one of the largest loan origination software companies for private lenders. Liquid Logics has not provided us with the total number of loans, but they are showing a national average interest rate of 11.16% with an average origination fee of 2.5%. The average rate in each state is slightly lower than what we have from Lighting Docs:
How to Find Average Interest Rates Per State
If you'd like to see the average interest rates in each state, simply perform a search for lenders on PrivateLenderLink.com.
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