Any borrower’s recently looking for hard money to fund their projects have noticed a HUGE difference in the market. It’s not like it was 6 months ago! Six months ago, rates were around 8% and deals were not getting looked with nearly as much scrutiny. Right now, rates are north of 11% for experience borrower’s and marginal deals are just not getting funded.
So what happened to the hard money market?
Up until about June, the hard money market seemed immune to the rate increases that borrowerswere seeing in the residential and DSCR market, where rates went up 40% since January. Rates of hard money loans didn’t increase even as the Federal Reserve increased rates twice earlier in the year. However, that all changed in June. The credit markets got very spooked from the unexpected 75 bps increase by the Federal Reserve and liquidity seemed to evaporate overnight, with several institutions involved in the secondary loan purchase market completely stop buying loans. This caused a lot of deals that were on the table to either get put on hold or get pulled because lenders ran out of liquidity- they couldn’t sell their loans to free up cash to be able to close loans. With only one or two note buying institutions in the market still, they became flooded with deals and became very choosy of the loans they bought. Prior to this time, if the loan fit buyer’s lending parameters, it would be purchased with no issue 95% of the time. With institutions being choosy, lenders then tightened up their guidelines and this all rippled down to borrower’s.
Further complicating the market, lenders became increasingly concerned about the effect of interest rates on asset prices. As interest rates increase, asset prices are expected to fall since the cost to carry that asset has increased. This is also known as “cap rate expansion.”
To mitigate the risk of falling asset prices, lender have reduced their leverage points. For instance, prior to June 2022, fix and flip deals were getting done at 90% of purchase price and up to 75% of the after repaired value. Now in this market, borrower would be lucky to get 80-85% of purchase price and 65-70% of after repaired value.&n犀利士5mg bsp; This was a shock to most borrowers, as some did not have the additional equity needed to close the deal. This really hit borrowers who had “hard” deposit money down on contracts, and then had to scramble to bring additional capital to the closing table.
Where is the hard money loan market heading?
For better or worse, the hard money market is correlated to the broader capital markets. This is largely because most lenders need to sell their loans on the secondary market to free up capital to close the next deal. When liquidity dries up in the capital markets (investors pull money out of stocks and bonds), the secondary loan market also gets squeezed. The institutions are forces to sweeten the terms to bring in more investors- rates the interest rates they pay their investors for the same or lower risk. This is then passes along to borrowers as higher rates and more money down on projects. So to answer where the hard money market is going, we need to know where the capital market’s are heading. Right now there is a lot of concern about the pace of the federal reserve increasing rates. If the fed signals that rate increases will begin to slow, we expect the capital markets to recover, which will cause rates in the hard money market to come begin to decline.
Stay tuned for our next update!