In my October 5 post I shared why I thought that it was a great time to consider Trust Deed investing. Throughout the horrible 4th quarter where we saw real estate values continue their plunge, our company continued to write loans, but with a marked difference. We wrote almost no “equity-only” loans, and requested full documentation on virtually every application. This is a major shift in private lending.
The private money lending industry was founded on the principal of equity lending, basing the decision to lend largely on the asset, with sometimes scant attention paid to the borrower or his ability to service the loan. In this new market, we are no longer ignoring or overlooking the borrower. Much to the chagrin of recent applicants, we are now insisting on detailed financial information including pay stubs, W-2’s, bank statements and tax returns. In addition, we always pull credit and conduct a background check.
Previously, a borrower would typically object by saying “If you’re going to make me provide all that information I may as well get a conventional loan.” In today’s tight credit environment, the banks are not presently an option. In fact, many of our loan applications today come by referral from mortgage brokers who can’t place their client’s loan, and the application comes already fully documented!
Private lending in 2009 will look markedly different than in previous years. The quality of the loans is already much higher due to the continuing scarcity of conventional financing for the investor. Additionally, on every loan we analyze these three key areas:
1. What is the true value of the property?
2. What is the borrowers’ capacity to service the debt?
3. How sound is the exit strategy?
Stricter underwriting guidelines, coupled with lower LTV ratios, result in an investment product that has more safety factors than in previous years.