Could The Corona Virus Provide The Next Boon For Private Mortgage Lending?
Written By: Edward Brown
Sunday, June 28, 2020
This situation may provide a boon to the private lending industry as it has done at times over the past 30 years; however, a cautionary tale might ensue should the perceived lockdown last for a few more months. The main reason is that a prolonged economic decline can produce long lasting effects that may take years to recover, especially in certain markets such as restaurants, retail, and any place where people gather. Different economic interruptions have occurred over the past 30 years that, for the private lender, with foresight, fared better than just before the downturn in the market.
In the mid 1980s to the mid 1990s, the Savings and Loan crisis shuttered many real estate lending institutions. Almost one out of three Savings and Loans failed from 1986 to 1995. It was the most significant collapse since the Great Depression. According to author, Kimberly Amadeo, In the 1970s,nbsp;stagflationnbsp;combined low economic growth with highnbsp;inflation. Thenbsp;Federal Reservenbsp;raised interest rates to end double-digit inflation. That caused a recession in 1980.
Stagflation and slow growth devastated Samp;Ls. Their enabling legislation set caps on the interest rates for deposits and loans. Depositors found highernbsp;returns in other banks. At the same time, slow growth and the recession reduced the number of families applying for mortgages. The Samp;Ls were stuck with a dwindling portfolio ofnbsp;low-interest mortgages as their only income source.nbsp;
The situation worsened in the 1980s.nbsp;Money market accountsnbsp;became popular. They offered higher interest rates on savings without the insurance. When depositors switched, it depleted the banks source of funds. Samp;L banks asked Congress to remove thenbsp;low-interestnbsp;rate restrictions. The Carter administration allowed Samp;Ls to raisenbsp;interest ratesnbsp;on savings deposits. It also increased the insurance level from 40,000 to 100,000 per depositor.
By 1982, Samp;Ls were losing 4 billion a year. It was a significant reversal of the industrys profit of 781 million in 1980.
Between 1982 and 1985, Samp;Lnbsp;assets increased by 56. Legislators in California,nbsp;Texas, and Florida passed laws allowing their Samp;Ls to invest innbsp;speculative real estate.
Amongst scandalous activity such as putting pressure on the Federal Home Loan Banking Board to overlook suspicious activity, the crisis pushed states like Texas into a recession. When bad land investments were auctioned off, real estate prices collapsed.
In addition to the simple laws of supply and demand where the supply of money available for real estate purchases decreased due to the number of Samp;Ls closing, other conventional lending institutions became skittish and backed off; even for the more conservative loans.
Enter the private real estate lender. For those who could think outside the box and use some creative thinking, loans were made that, in one persons opinion was like shooting fish in a bar>
Then, in the late 1990s, we experienced the Dot Com bubble and burst. During the 1990s, more people were getting use to the World Wide Web. At the same time, a decline in interest rates increased the availability of capital. Add to that the Taxpayer >
In early 2000, the Fed raised interest rates, leading to stock market volatility. At the same time, Japan entered a recession. In April 2000, a judge ruled that Microsoft was guilty of monopolization and violation of the Sherman Antitrust Act. This led to a 15 decline in the shares of Microsoft. On the same day of the judges ruling, Bloomberg News published a widely read article that stated, Its time, at last, to pay attention to the numbers. Within two weeks of that article,nbsp;the NASDAQ had dropped 25. Many investors sold stocks just before April 15th in order to pay for gains they had realized from sales in 1999. This compounded the decline of the NASDAQ. In addition, investor confidence was further eroded by several accounting scandals and the resulting bankruptcies that ensued. This spiral downward turned Dot Dom to Dot Bomb as it was known.nbsp;
Although the Dot Bomb era was not real estate >
Again, enter the private real estate lender. During this period, real estate had not seve>
The next time the banks curtailed lending occurred during the Great Recession in 2008. This time, real estate was specifically cited as a major contributor due to the credit bubble and subsequent mortgage meltdown. Real estate prices fell precipitously, and although real estate declined in value, there were ample opportunities for private real estate lenders. Many private lenders were curtailing their guidelines regarding LTVs, but they were making loans based on the then new, lower values and making a good living. For example, Mark Hanf, president of Pacific Private Money, started his business in 2008. Normally, one would have thought starting a lending business in 2008 was the wrong time, but Pacific Private Money flourished, as they made loans to borrowers in need at conservative, newer, LTVs, and no client lost money during the continued decline through 2012 due to conservative underwriting.
Up next, the Corona Virus; although the pandemic has substantially hurt the economy regarding sales/profits, the underlying economic picture was strong prior to the virus, and there is compelling reason to think that it can be strong again after restrictions are lifted, as the various restrictions were created by governments rather than economic forces and can be undone when governments decide to disseminate them; especially if a lockdown is only for a few months rather than years. So far, real estate has not shown signs of collapsing. Sellers are unwilling to unload their properties at depressed prices.nbsp;
Buyers still exist. Transactions are still being completed even if they are hampered by social distancing and more people working remotely. However, the banks are doing what they always seem to do during unsettling times; they pull back. They have less manpower via closed offices and less employees able to accomplish what is takes to make loans. This, again, gives the private lender the ability to provide the oft needed financing for borrowers. Interest rates have gone up for these borrowers even when the Fed has reduced interest rates. Less capital in the markets to lend means the demand for capital will raise the price for that capital. As long as the conventional lenders have basically stepped aside from real estate lending, the private lender should have the same opportunities that existed during the Samp;L Crises, the Dot Bomb Crisis, and the Great Recession.nbsp;
Of course, nobody knows how long the virus will be around and how long governments will intervene rather than let the virus run its course on its own. A long, protracted shutdown would seve>
Edwardnbsp;Brownnbsp;is in the Investor >
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