By Kevin Chiu
Homeowners and business owners alike are borrowing money to keep their homes and commercial properties at high interest rates by the droves, sending hard money lenders busily searching for more cash to loan. The business of hard money lending is projected to hit a record $2-trillion in the U.S. within a year.
Desperate homeowners who are unable to qualify for conventional rate mortgages, business owners in distress over financial short-comings and those down on their luck or unemployed are flocking to the so-called “loan to own” lenders.
“This is an extremely dynamic and powerful force, and it’s going to impact the overall economy,” said Leonard Rosen, a former TV business anchor, who holds seminars for those who want to get into the business of loaning hard money.
More than 400 conventional mortgage lenders have failed and been forced out of business by the FDIC. Tighter under-writing criteria and nervousness over the economy is constricting the flow of lower rate conventional mortgage money. Hedge funds with real estate portfolios and investment banks are troubled, and hundreds have failed as a result of bad loans.
“People are desperate for money,” said Willie Pena, a former Countrywide Mortgage originator, who has joined the ranks of hard money lenders in Burbank, California. “They really need the cash to stay in their homes and businesses.”
But in the current economy, the business model for hard money lenders has transformed. Those who specialize in lending to the needy are now loaning at only 50% of a properties value down from 65% just a few years ago, and interest rates can run into the double-digits.
Bankers like homeowners are leery about the prospects of the market’s decline in value in many areas and don’t want to get caught holding a larger mortgage than what a home or commercial property can be re-sold for in case of default.
Hard money lenders would fund residential and commercial deals before and then sell the deals off to investors at a discounted rate. But concerned about the magnitude of the real estate collapse, and the foreclosure epidemic, many investors were uncomfortable with investing in just a single property, forcing the change.
Hard money lenders are becoming real estate portfolio managers, creating mortgage funds bringing investors in to carry the financial burden. The business model is changing to accommodate investors who are more realistic over returns than before the real estate crash.
“The portfolio manager business model is much more profitable for the lenders and safer for the investors who are not looking for double-digit returns,” said Rosen. Funds are spread out over a portfolio of properties they are secured against instead of just a single home or business, which was the case just a couple of years ago.