By Izzy Leizerowitz
It wasn’t too long ago that when the term hard money was mentioned in real estate financing, one would envision individual investors with deep pockets providing loans at predatory rates and terms, not unlike loan sharks. Today, hard money portfolios are considerably more likely to be discussed and evaluated in most offices on Wall Street than in some dingy back office on Main Street.
There are still many misconceptions regarding who lends hard money and who borrows hard money today, and what are the primary motivations behind both parties. As expressed earlier, the misconception was that a loan shark type individual would lend money to desperate borrowers about to be foreclosed on their property. However, today’s reality could not be further from that image. If you were to review the current monthly issue of the Scotsman’s Guide, a leading monthly magazine serving both the residential and commercial mortgage origination industry nationwide, you would be to able to count approximately 109 lending institutions that originate and fund commercial hard money deals, and approximately 60 hard money lenders that originate and fund residential hard money deals. All of them are regulated by current state and national legislation that have been updated to limit predatory high rate loans and provide guidelines for other loan related parameters. Several of these lenders even fund their portfolios from monies through marketing to private investors looking for safe returns (12%) on their money.
These lenders are driven by primarily the desire to fund deals that provide high yield investment returns over a period of six months to two years. They are more likely to be constantly analyzing yield curves on their hard money portfolios, and most if not all hard money lenders would prefer to never have to deal with foreclosure related issues.
Although hard money borrowers still include user profiles such as poor or no credit history, minimal available documentation, borrowers of hard money today are driven by primarily one factor; the speed needed to close deals that otherwise would take months to transact through typical or sub-prime banking channels. When a borrower is motivated by a real estate contract deadline fast approaching, or a sudden need to create liquidity perhaps as an equity cash out on existing property, there are few legitimate fast funding financing entities other than hard money lenders.
Hard money lenders try to maintain the high yields on their portfolios by being very conservative with regard to underwriting guidelines as to how and what types of properties are funded. Although most hard money lenders don’t pay significant attention to a borrower’s credit history, income verification capability, total available assets, their appetite for risk is small and is mitigated by several universally accepted underwriting criteria:
-Typically keep the Loan To Value ratios at primarily 65% percent or less dependant on type of property
-Relying on self administered appraisals and property valuations
-Maintaining a first lien position on the loans, unless lending on a second mortgage but limiting exposure on seconds to total LTV factors listed above
-Excluding certain classes of properties
-Maintain pre-payment penalties where possible and feasible
-Evaluate each borrower/entity for the ability to repay the loan
As the availability of hard money continues to increase with higher levels of funding being achieved, the servicing and even secondary markets for hard money will mature along with the rest of the post funding processes, even perhaps on par with current prime and sub-prime markets. In short time, we will begin to see significant activity in securitizations and the sales of these newer type of asset backed securities. To take literary license with a pop culture phrase, this is not your father’s hard money lending anymore.