At the beginning of April 2020, nearly every country in the world is experiencing the impact of the spread of the COVID-19 virus, taking a human toll in lost lives and an economic toll as the global economy has essentially been shut down to slow the spread of the virus. The residential mortgage industry has changed significantly in the last thirty days. Hard money lending saw significant changes in March. But, hard money lending is definitely not dead. In fact, loans are still funding frequently.
Though hard money lending is still flowing, loans are not flowing like they had been at the beginning of March. Some lenders are experiencing hurdles due to credit lines being frozen. Most lenders are cutting back to fund only the best quality loans to the most qualified borrowers. Property Valuations and Loan-To-Value (LTV) ratios are being cut by 5-10% of where they had been in February due to the uncertainty of how deep the COVID-19 recession goes. Nobody knows how much economic and real estate deflation could happen in the months to come, so they are proceeding with caution.
Obtaining a hard money loan during COVID-19
Borrower
To borrow hard money, you need to be “strong to quite strong” in the areas of personal credit, real estate experience, and have significant liquidity. The strongest borrowers will be able to obtain hard money loans during this time.
For house flipping, the lenders FCTD funds fix and flip financing through have all adjusted their guidelines requiring an extensive track record, more liquid assets, and the ability to ride out an extended downturn in the market.
FCTD recently had new applications come in from borrowers who normally wouldn’t use hard money but their primary funding sources either stopped funding or have drastically reduced guidelines that proved to be prohibitive for the borrower. Bank borrowers may take out more hard money loans as banks cut back on new loans while increasing loan loss reserves for future defaults.
Property
Properties in urban and suburban areas are expected to hold their value the most due to demand for housing in these locations. FCTD expects to fund the majority of loans in major markets on the west coast, primarily near Interstate 5, including:
- San Diego
- Los Angeles
- Orange County
- Riverside
- San Jose
- San Francisco / Oakland
- Sacramento
- Eugene
- Salem
- Portland
- Bend
- Olympia
- Tacoma
- Seattle
- Spokane
Location will be key for the hard money loans that fund during Q2 2020. Lenders will likely steer clear of loans in rural areas because those areas tend to see prices fall further and take longer to recover than higher density locations due to a less economic activity to lift property values.
Maximum loan amounts have come down over the last 30 days. Some of FCTD’s go to Fix and Flip lenders, who had been lending up to $10,000,000 on a loan, have reduced their maximum loan amount down to $3,000,000. Some lenders, such as individual trust deed investors or family offices, have reduced their maximum loan amounts due to not knowing when their outstanding loans will be paid off. They are choosing to keep more cash on hand and therefore will only lend at lower amounts until they start receiving payoffs from refinancing or the sale of a property by their current borrowers.
Obtaining a loan during COVID-19 will be different than borrowers have been accustomed to over the past five years. Prime borrowers who had borrowed from banks will likely borrow hard money more than before. Lenders will be more selective seeking out the best credit risks to ensure they issue loans that will be repaid. But, hard money loans will still be funding during the COVID-19 recession.