Financial experts of all stripes have varying opinions about hard money lending. Regardless, hard money meets a legitimate need. If it did not, lenders wouldn’t stay in business. The fact is that hard money often fills the gap between borrower needs and bank willingness. Thanks to the COVID-19 pandemic, there is plenty of proof unfolding before our eyes.
The economy was humming along before the onset of COVID-19. Then suddenly, everything just stopped. The economy tanked overnight. It took with it millions of jobs and a record chunk of the nation’s GDP. Banks were understandably nervous about lending.
Not much has changed. Weary banks are still hesitant six months later. Their unwillingness to lend makes the case for hard money.
Consumer Mortgage Lending
Weary banks populate both the retail and commercial sectors. In the retail market, bank nervousness is most easily observed in mortgage lending. Banks are being extra cautious about who they lend to and the amount of money they are willing to lend.
The New York Times recently profiled a North Carolina couple who felt like they had to jump through hoops to close on their mortgage, despite both having steady and verifiable jobs as public school teachers. The couple was forced to pay a higher down payment than they originally anticipated. Their bank also continually checked their employment status throughout the underwriting process.
In addition to more stringent lending requirements, the New York Times says that lenders are setting aside billions of dollars to cover future defaults. In other words, they are hoarding their cash rather than loaning it out. Even mortgage applicants with stellar credit are running into problems.
Small Business Lending
Small businesses are not faring any better. Back in the spring, when Washington approved small business loans to keep companies afloat, banks were warning of a chaotic system that could lead to more harm than good.
We now know that most of the government money provided for those loans went to just a small fraction of the businesses in need of them. Worse yet, a lot of the money went to large companies and corporations rather than the intended small businesses.
In short, banks were nervous about lending to small businesses. They still are. Making matters worse are those loans made before the start of the pandemic and now coming to maturity. Despite the economic downturn, banks are reticent to grant extensions or refinance clients whose limited cash flow prevents them from meeting their payment deadlines.
The Hard Money Answer
Hard money doesn’t do much for home buyers unless all they need is a bridge loan. However, it can be a lifeline for small businesses that either cannot get bank financing or are facing the maturity of an existing loan. Lenders like Salt Lake City’s Actium Partners specialize in this kind of lending.
Hard money is private money loaned by investors directly to borrowers. Lenders make their decisions based primarily on collateral, usually real estate. The strength of the borrower’s collateral determines loan-to-value ratio as well as the total amount offered. Terms can be as short as one year or as long as three.
Another advantage of hard money is the speed at which approval and funding takes place. Where banks can take weeks or months to fully fund an approved loan, hard money lenders can do it in days. Fast approval and funding are often the difference between applying for hard money and sticking with the bank.
Despite what you might think of hard money, it meets a legitimate need. A growing unwillingness among banks to lend makes that case.