The past two years have been riddled with uncertainty amidst the global pandemic and subsequent economic turbulence. In an era where things are seemingly in a constant state of flux, finding a bit of stability when it comes to your finances seems like a tall order. Fortunately, Corridor Funding has been consistently lending at optimal capacity throughout the coronavirus and are showing no signs of slowing down even as inflation continues to rise. The following is a closer look at why some private lenders are finding the current market dynamics untenable and why our approach to funding is (and will continue to be) superior.
Breaking Down the Private Lending Conundrum
Real estate investors need reliable and efficient access to capital—a luxury that is becoming increasingly hard to come by. With LIBOR increasing nearly sixfold since the start of 2022 and the median 30-year mortgage fixed-rate jumping 1.5 percentage points in the last three months alone—the most rapid spike in over 28 years—some private money lenders are responding by lowering leverage to 65-70% of purchase price of proposed projects or even halting lending operations altogether.
Understanding why certain private lenders are currently struggling is important when it comes to choosing the best funding partner. A significant number of private money lenders are largely dependent on funds sourced from external Wall Street lenders in order to sustain their day-to-day business activity. The recent uptick in interest rates throws a proverbial wrench in this particular business model.
As of April 29th, the 10-year US Treasury Note was at 2.885%, up from March’s 2.324%, representing an increase of 4% in a matter of 29 days. On May 5th the Fed increased its most aggressive interest rate hike of ½ percent, thus marking the most aggressive fight against a 40 year high inflation.
When investors are able to buy a “risk free” rate from United States Treasuries, other interest bearing instruments such as bonds, mortgages, and loans that have default risk are going to require a higher interest rate to attract lenders to these lending spaces. This has promptedFor many on wall street who have aggregated millions and tried to securitize their loans (sale their bonds to institutional investors), these groups were forced to sell their loans below par value, or what essentially means below the cost of the loans they extended. Other loan aggregators that had either hedged their portfolios or marked up rates in anticipation of the Fed increasing the world wide rate for risk free interest bearing instruments, these groups sustained this rapid rise in rate increases and are very likely thankful for the trouble and expense they went to to 1) charge borrowers a higher interest rate than some of their competitors who may no longer be around, and 2) very glad they spent the premiums required to insure and protect their portfolio of loans against a rising rate environment.
For decades the US economy has enjoyed operating in a low interest rate environment and low interest rates often stimulate business spending, consumer spending, home buying, and other drivers that benefit our economy. However, inflation is a very dangerous phenomenon when an economy becomes overheated as it drives up asset prices like homes, causes food staples, transportation, gasoline, and everyday necessitites to really inflict pain on the working families in our country that find it harder to make ends meet.
That you see rates rising at your local banks, your mortgage rates, Wall Street bond issuances, or your real estate investment lender; it is important to remember that this additional interest is not the beneficiary of the lenders you are working with; but rather it is the passing along of the overall cost of capital that lenders have to work with in order to serve their lending niches.
At Corridor Funding we are hopeful and optimistic that our Federal Reserve will soon get our inflation under control so that homes and rents are more affordable,food staples are available to families, and education, transportation and other costs of living continue to help our great country proseper!
The Corridor Funding Edge
Considering the inherent volatility of the stock market, it pays dividends to have sufficient in-house and alternative capital sources to remain untethered from the constant up-and-down swings of Wall Street—which is exactly what Corridor Funding has accomplished. Our relative financial independence grants our team an enviable degree of flexibility when it comes to supporting our clients and delivering the very best end-product so they can continue investing with the confidence that they will have the money they need when they need it to close deals, cover renovation expenses, build a new home or accomplish any other investment goal they may have.
Even with interest rates steadily climbing, there is still a notable housing inventory imbalance—with Freddie Mac estimating that the shortage has increased 52% between 2018 and 2020 and will continue to grow in the coming months. At the same time, the demand for available housing options has ramped up as aspiring homebuyers look to escape the urban sprawl in light of increased telework accommodations and the developing COVID-19 situation. This market dynamic presents a unique opportunity for savvy investors concentrating on in-demand locations for maximum return on investment (ROI).
Ready to get started on your next real estate investment project? Look no further than Corridor Funding. Our streamlined lending approach promotes success in your investments without all the hassle and time it takes traditional banks. As a direct private real estate lender, you can rest assured that you are getting the absolute best terms along with unparalleled customer service when you choose to work with Corridor Funding. Contact us today to learn more about how we can help you accomplish your investment goals!