by Brian Brady
Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL
Loan broking in the private mortgage marketplace can be the most rewarding sector of the lending. I have helped families who faced foreclosure due to unforeseen negative events. I’ve watched a businesswoman land a huge contract because she could access quick capital. I’ve beamed with pride as a property investor turned around a dilapidated multi-family complex and provided quality housing for 20 families.
None of these positive events came to fruition with out the loan shark. The “loan shark” is a pejorative term accorded to participants in this industry. The loan broker charges relatively high points or fees and the private investor (or lender) charges high rates. I offer you an explanation for the expensive terms these loans offer:
1- This market is diminutive when compared to the amount of capital available in the secondary mortgage markets. The loan broker has a finite amount of capital available to him because these loans are held for investment by the private lender and not securitized. The economic principle of scarcity of supply applies in this market. A loan broker who specializes in this market may only have five to ten million dollars available each year to lend. Origination fees of 3% to 6% are not uncommon because of the scarcity of capital.
2- The private mortgage lender has many other investment options available to her. Investing in a mortgage-backed securities pool, guaranteed by a government agency (like a Ginnie Mae pass-through security) is going to yield approximately 6% in today’s environment. There is no risk of default to that investor because an agency of the US Government guarantees those loans . If we start with 6% as a baseline (and zero default rate), it becomes apparent why yields of 10-14% are not uncommon for the risk the private lender takes (default rate for private mortgage loans can be as high as 8-10%). Default brings unwanted complications for the private mortgage investor: temporary loss of income, legal action, and eventual disposal of the collateral.
Responsibility in the underwriting of these loans becomes more important because a loan broker is dealing with an individual investor’s nest egg, not an institutional investor’s portfolio. The very nature of that stringent underwriting begets questions like:
1- How did this borrower get into this mess?
2- Will this loan solve the problem or perpetuate it?
3- Is there a tangible net benefit to the borrower if we make this loan?
4- Why are we giving this borrower cash-in-hand?
5- Can the borrower afford the service the monthly debt?
6- What is the exit strategy that results in a successful payoff of this loan?
7- Is the collateral sufficient coverage in the event of default ?
I hope to educate you in this series about this oft misunderstood but necessary niche practiced by highly-specialized loan brokers and knowledgeable investors. Specialized lending requires experience, an analytical mind, and a desire to help both borrowers and investors. The talent in the mortgage industry tends to gravitate to this market because loan performance, the true measure of our work, is realized more expeditiously.
Stay tuned to Bloodhound Blog for a weekly update about ” Life as a Legal Loan Shark”.
RESOURCES:
California Mortgage Association
geno petro says:
Mr Brady I presume, I didn’t realize you were over here. Congrats. You should think about a book with your title and content…very readable. ‘Easy’ may be better than ‘hard’ but ‘hard’ is better than nada.
Best to you in 07. Here’s to hard money and the return of junk bonds, which in the right hands were very lucrative as I recall.
Geno
January 8, 2007 — 8:13 pm
NYCJoe says:
Brian,
Good post. I have a question for you, related to:
I’ll admit up front that I’m not totally familiar with the lending business here, hence my question: are mortgage brokers required to act as fiduciaries? Is there some legal requirement that they act in the best financial interests of the borrower?
January 8, 2007 — 9:41 pm
Brian Brady says:
Quite the opposite, Joe. Mortgage brokers never act as fiduciaries as they are paid by both borrowers and lenders; that is the underlying problem.
Any mortgage originator who uses the NAMB suggested brokerage disclosure (most wholesale lenders require this to be signed by the borrower) can not represent himself as a fidiciary:
http://www.namb.org/namb/Model_Disclosure_Form.asp?SnID=7081
The closest thing that establishes a fiduciary relationship for a mortgage broker is the upfront mortgage broker’s agreement:
http://www.loan-wolf.com/retainer.htm
It’s not perfect but it’s close.
The reason for stringent underwriting is the regulators review private mortgage transactions with a fine tooth comb. A secondary reason is that you don’t want your investor’s burned by a bad loan.
January 8, 2007 — 9:55 pm
Brian Brady says:
Geno:
My favorite ex-Philadelphian! How you doin? Glad you stopped in!
January 8, 2007 — 9:56 pm
NYCJoe says:
Brian:
Interesting. So, what kind of legal protection is there for borrowers? Does it vary by state, or is there some kind of federal standard?
January 10, 2007 — 12:34 pm
Brian Brady says:
Caveat Emptor, Joe.
January 10, 2007 — 5:26 pm
Tiana says:
How do I go about getting a hard money loan?
March 25, 2008 — 2:10 pm
Brian Brady says:
Tiana:
You can e-mail me if you’re in California
March 25, 2008 — 3:43 pm
ca hard money says:
Brian,
Your post is good advice and a good educational resource for consumers. It seems that few borrowers are educated before reaching hard money lenders or brokers. The ones that already understand the process are the savvy ones that learn from sources such as your well written blog post.
-Jason
April 1, 2008 — 10:12 pm
Hunter Jackson says:
I have been looking into more info that I can understand (sorry, things have to be watered down a good bit) when it comes to Hard Money for Real Estate.
I wonder if soon we won’t see hard money becoming a thing of the past with the current political/housing crisis going on.
June 23, 2008 — 11:29 am
Dennis Wilson says:
Looking for a Lender in the Atlanta Area to post a 24k loan on for a last minute “Must pay first” Air conditioning equipment for a new project that has to be paid for by the 12th of November by Official Check and Fedxed to Tulsa Oklahoma so the delivery will have the eqiuipment will be here on jobsite by NO LATER than the 19th of Nov. Equipment as already been fabricated but the notice of “Pay before shipping” was just recieved. I’ll willing to pay up to 15% premium for only 45 day return.
Please contact this Email address if anyone is available. This is a above board purchase but Bank won’t lend this much due to a small Tax lein on my house that will have to be paid off first. No time for all that.
Thanks
D. Wilson
November 7, 2008 — 1:08 pm