Hard Money loan rates have dropped 50 to 150 basis points over the past 18 months, depending on the market and type of property. This market trend provides more favorable rates for borrowers and reduced yields to Hard Money Lenders. Hard Money Loans, and in some instances called bridge loans, typically involve borrowers or situations that may not qualify for conventional (bank) financing. Additionally, these short-term, 1-5 year loans are used to finance transitional or distressed assets, those needing rehabs, upgrades and property repositioning.
Why are Hard Money Rates declining? In simple economic terms an increased supply of capital through the 5 areas below have reduced borrower rates:
- Institutional Money Chasing Yield: More capital is entering the hard money lending space from a wide range of non-bank sources, including institutions, hedge funds, private equity funds and REIT’s. The lack of current income yield from Wall St. instruments have forced these institutions to realize the outsized return compared to the risk in private money finance. These institutional players that now have capital allocations for private lending increases the pool of money chasing loan opportunities and causes a decrease in rates.
- Increased FinTech, Peer to Peer (P2P) Lender and Marketplace Lending Capital Now Available: Fintech, Peer to Peer (P2P), Marketplace Lenders and Crowdfunding firms seeking higher yields have also crowded into the hard money lending space. The combination of a lot more folks in the hard money space chasing fewer deals ends up driving down pricing for borrowers. Discounted rates are more prevalent in major metros that tend to have a bigger concentration of lenders.
- Dodd Frank Regulation: Consumer lending regulations including; no balloon payments, no prepayment penalties, liability exposure, and severe rate restrictions limit consumer lending by private lenders. These consumer lending restrictions under Dodd Frank increase capital supply and apply downward pressure on rates in the business purpose hard money lending world.
- Historic Market of Rising Real Estate Prices: The healthy housing market reduces foreclosures and lender losses and has attracted new capital to real estate investing. ATTOM Data Solutions, Irvine, Calif., said foreclosure filings in April 2017 fell to their lowest level since November 2005. Corelogic, Irvine, Calif. said, “Foreclosure activity continued to search for a new post-recession floor in April thanks in large part to the above-par performance of mortgages originated in the past seven years.
- Historically Low Rates for Warehouse Lines and Lines of Credit: Interest Rates on Loans collateralized against Mortgage and Hedge Funds create leverage and lower rates for hard money borrowers. According to Armanino LLP, an Audit and Consulting Firm, SEC Regulated Mortgage Funds in California have an Average Weighted Cost of Capital of 5.85%. This lower cost of capital allows these lending entities to lend at rates in the 7%-9% range while still earning a sufficient profit spread.
These lower rates fuel borrower interest for hard money loans and force lenders to accept lower, yet still attractive yields.
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