Mortgage financing is drifting further from traditional banks and into the hands of private lenders.
This democratization of financing, or sharing economy taking over the lending space could have a major impact on the market. It is creating huge opportunities for both active front line real estate investors and individual investors looking for better returns and more safety for their portfolios. What’s happening? What opportunities does it offer?
Mortgage Lending May Not Be Headed Where You Expect
Be ready. Contrary to common hopes that mortgage borrowing will get dramatically easier in the months ahead may not materialize. In fact, experts who get the mechanics behind the scenes of the banking and mortgage industry pose that is could get harder for regular homebuyers and those looking to place their savings and investments.
What about Dodd Frank? Analysts are split on whether they think President Trump and the current administration will be able to repeal the Dodd Frank Act. Hopes are that some of the most constrictive and counterproductive elements may be stripped away piece by piece. For now it is tough for banks. For many capital and holding home loans is a liability. According to Bloomberg News, banks like Capital One have been closing down mortgage divisions due to the disadvantages it puts them in. It’s hard for these organizations to get returns in most safe traditional investments, they can’t sell the mortgage paper, and it’s a liability. So, many are getting out of the mortgage business, because so many regulations make it unprofitable for banks to do it. This is specifically true for regular owner occupied home loans.
The Business Lending & Investment Property Boom
A report by the Washington Post says that after the top 3 banks in America consolidated the bulk of the US home loan business, following turning on and burning mortgage brokers in 2006, that dynamic is changing again. In fact non-bank lenders are doing a great deal of the lending today. This may include mortgage companies, as well as masses of capital being plowed through crowdfunding portals, and alternative lending subsidiaries of offshoots of banks.
The biggest boom has been in commercial mortgage lending and ‘business purpose’ lending to real estate investors. Among this groups of lenders are a variety of corporate asset based lenders and a rising number of individual private investors lending their money to real estate investors. Providing it is for non-owner occupied investment property, lenders see a huge opportunity for profiting well, without the burdens of overwhelming and profit crushing regulation banks face.
There is a lot of cash and capital out there. It needs to be invested for solid returns. Those with the money still see real estate as the best investment. It’s just a matter of how they get involved.
They are no longer letting banks make all the money and barely handing back any of the profits on their deposits. They are seeking more direct options to invest and fund investments. Ones that may include investing savings through self-directed IRAs and 401ks, as well as front line investors in turn flipping that money in house rehabs, or offering seller financing to regular buyers who are just tired of dealing with all the hoops more conventional lenders are demanding today.
The Advantages of Private Lending for Borrowers
There are many advantages for investors who borrow from private lenders including:
- Reliability in closings
- Ease of financing
- Common sense underwriting
- Finance partners who want to help them expand
The Advantages of Private Lending for Individual Investors
Those with some money to invest and loan can find many benefits of becoming private money lenders too.
- Much higher investment returns
- Tangible hard collateral to secure capital
- Clear knowledge of what money is being invested in
- Simple recourse options for the worst case scenario
- Knowing they are providing a valuable service
The Time Is Now!
The time is ripe for more individuals to become private money lenders. There is great demand, poor alternatives, and as the Association of American Private Lenders points out, technology is making it possible to do well and more profitably than ever before too. Those that establish themselves now will definitely have and edge in the months and years to come, and will be able to cherry pick the best investments to make.