The impact of the COVID-19 virus on the hard money loan market has been hard and fast. The market effectively dried up last week with deals not only being killed, but even some funded deals having the money rescinded post-closing—crazy times!
Many people are asking when this will end, and when they’ll be able to close. The honest answer- No one really knows right now. However, to understand when hard money lending will come back, one needs to understand the investor base for these loans, as well as the security of the underlying collateral.
The landscape for hard money loans has changed substantially over the past 10 years. If you needed a hard money loan 10 years ago, you paid 14% and 2 points. This was mainly because lenders for hard money loans in the past had limited options for funding their loans. Lenders back then either used their cash on hand or credit lines, or some combination of the two, to fund loans. However, in the past five years or so, there has been a HUGE influx of money coming into the hard money market in the form of note buyers. Now hard money lenders have multiple options to sell loans, which gives them a MUCH greater capacity to lend more money.
Where is this money for hard money loans coming from, you ask? In short, EVERYONE! There is a HUGE appetite for people looking for “yield” in this low interest rate environment. Interest rates have been historically low for what seems like FOREVER now, but people still need to earn interest on their money. So these investors, many every-day retail investors, have turned to hard money loans to get their yield. Hard money loans allow to investors to earn relatively high interest rates (sometimes up to 10%) on 1st position real estate loans. Sounds like a great investment? It is! And it has been for many people- both institutional investors (think pension fund managers) or your “mom & pop” investor.
The note buyers are dominated by only three to four big players (they buy a combined $5 billion a year in notes). With the uncertainty surrounding the COVID-19 crisis, ALL the note buyers put the brakes on buying hard money loans. This caused hundreds of lenders to immediately stop closing deals because they couldn’t sell their notes off. Because the note buyers are so concentrated (three or four main players as we mentioned), it only takes a few decision makers to freeze up the market.
We expect the market for hard money loans to come back once the cases for Coronavirus flattens out and volatility in the equity markets subsides. This is a day-by-day situation. However, we fully expect the market to rebound back swiftly as property values remain stable and note buyers will continue to look for yield. Interest rates have only trended lower, which supports the case for investing in hard money loans.