The past few months have certainly been interesting for the financial services sector. As the market goes, so do most financial services. Even hard money lending has been impacted to some degree. You can see it in who is still lending. Some hard money lenders have pulled back while others have not.
So what’s going on? Is hard money at risk of failing? No. What we are observing now are the natural results of a free-market economy in which hard money lenders must adapt to economic conditions. It is no more difficult than that.
Understand that hard money lending relies on liquidity. Hard money is private money. That means lenders must have sufficient liquidity in order to make a loan deal. If liquidity goes south, so does the lender’s ability to approve new loans. Therein lies the issue for those hard money lenders that have pulled back in recent weeks.
Three Types of Lenders
There are essentially three types of hard money lenders. Each one is affected by market conditions differently. The first is a company with just a couple of partners who fund loan deals with their own money. This sort of organization doesn’t depend on any outside financing. The partners who lend are also the same people who own the resources.
This first type of lender is the least affected by liquidity. By their very nature, these types of lenders always have access to their cash. They scale their lending in proportion to cash flow. When liquidity is a problem, it tends to be minor.
The second type of hard money lender is an organization that loans money on behalf of third-party investors. Liquidity for them is a bit more of an issue. Those who fund their loans typically have money spread out in all sorts of assets. That is not a bad thing until some of those other assets begin to fail. As losses mount, these investors have fewer resources to put into hard money lending.
The third type of hard money lender is the one that suffers the most during economic downturns. This is a lender funded almost exclusively by some sort of institutional investment fund. That institutional fund is also diversified in order to protect investor interests.
The problem here is market volatility. As the financial markets fluctuate, so does liquidity. More volatility leads to less liquidity as investors try to shore up their resources. That is exactly what has happened in recent weeks.
Hard Money Will Survive
It is important right now to remind clients that hard money will survive. Salt Lake City-based hard money lender Actium Partners says that even if some lenders have pulled back, that pullback will not be permanent. They will start lending as soon as liquidity is restored. As for those that still have money to lend, they might be willing to lend less in response to lower LTVs. That is just the nature of economic downturns. But loan they will.
Remember that the heart of hard money lending is collateral. Unfortunately, rough economic times tend to devalue property. We could see significant declines in property values if the economic shutdown persists too much longer. We will have to wait and see. If property does crash, LTVs will fall along with them.
In the meantime, some hard money lenders have pulled back while others continue to lend. It is all about liquidity. Lenders who still have money to lend will make it available to clients with strong collateral. Those whose funds have dried up will have to sit and wait until they regain liquidity.