2021 Winter (Q1) by American Association of Private Lenders

SPE CIAL F E AT U R E: A APL CO N F E R E N CE H I G H LI G HT S

The Official Magazine of AAPL | Winter 2021

LEGAL CFPB Under Biden Administration LENDER LIMELIGHT

MARKET TRENDS The Moratorium Effect

SPECIAL FOCUS Business-Purpose Loans Need Exemption

Susan Naftulin Her Unexpected Journey to Entrepreneurship

WINTER 2021

SORRY WALL STREET. We don’t sell our notes.

The rehab market is booming. If you’ve exhausted your balance sheet, we invite you to leverage ours. As a privately-owned lender, we’re not subject to Wall Street. We consider correspondent lenders our partners, and your notes stay with us.

PRIVATE LENDER

Learn more about how our Correspondent Lender Program can help you expand your business at residentialcapitalpartners.com/correspondent

CONTENTS

WINTER 2021

06 BUSINESS S TR ATEGY

0 6 A n Insider ’s V iew

10 I nsur ance C over age Guidelines for R EO

18 D is s ec t ing Real E s t a te

22 T he CFPB A ns wer s to t he President Now

26 H ow to Evalua te a Pr i va te Money C ons t r uc t ion Loan 30 R ecover ing Your Inves tment f rom Bank r upt Bor rower s

34 LEGISL ATION

3 4 B usines s - Pur pos e Loans Should Be E xempt f rom Relief M easures

P i vot ing in t he Pr i va te

Lending Space Dur ing a Global Pandemic

70 T he C ommodi t iz a t ion

74 T he Housing Boom

8 0 T he Mor a tor ium E f fec t

T he Power of Loan Ser v ic ing

50 LENDER LIMELIGHT

A n Unex p ec ted J our ney

56 C A SE S TUDY

H ome Remodel “O pens Up”

Tr adi t ional C ali for nia Home

of Pr i va te Lending

I s Jus t Ge t t ing St ar ted

84 MARKETING & SALES

46 LOAN SERVICING

A ppr aising

22 LEGAL

42 GROW TH S TR ATEGY

Rewards: Pr i va te Lender s COV I D Mar ke t

38 B usiness-Purpose Loans Should Not Be Subjec t to Mor tgage Lender Licensing

14 R ules, Risk s, and C api t al Find Succes s in a Pos t-

of Fund Management

Proper t ies

C onnec t ing Deals and Lender s

88 CONFERENCE REVIEW 94 RESOURCE GUIDE 98 L A S T C ALL

N ow and Be t ter

60 MARKET TRENDS

6 0 H ome Flipping in

6 4 B r idge Loan Mar ke t

6 8 O ppor t uni t y

t he T ime of COV I D I s Changing T ides

C ont inues to Grow in Single - Famil y Rent als

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OPPORTUNITY UNLEASHED ®

YOUR TRUSTED LENDING PARTNER Amidst all of the changes in today’s market, one thing remains the same ... CIVIC’s commitment to all of our valued partners. We are operating as strong as ever and our robust pace of funding continues undaunted. If you need an experienced lender that provides superior service, quick closings, and competitive rates, you’re in the right place.

BRIDGE

PRIVATE

RENTAL

CORRESPONDENT

© 2020 Civic Financial Services All Rights Reserved. This is not a commitment to lend. Restrictions may apply. LTV limit is based on current, accurate appraised value. Civic Financial Services, LLC reserves the right to amend rates and guidelines. All loans are made in compliance with Federal, State, and Local laws. Civic Financial Services, LLC is a California Finance Lender under NMLS 1099109 and the California Department of Business Oversight License #603L321, AZ Mortgage Broker License #092863, FL Mortgage Lender Servicer License #MLD1536, ID Mortgage Broker/Lender LENDER License #MBL-9610, NV Mortgage License MB4419, NV Broker License #4443, NV NMLS ID #1410002, OR Mortgage Lending License #ML-5282, UT DRE Mortgage Entity License #10570639. Civic Financial Services, LLC is an equal opportunity lender.

(877) 472-4842 www.civicfs.com

FROM THE CORNER OFFICE

YOUR ASSOCIATION UPDATE EDDIE WILSON

Although 2020 was the year that somehow lasted a

CEO, AAPL

decade, we’ve decided here at the American Associ-

LINDA HYDE

ation of Private Lenders that 2021 will be the Year to

Managing Director, AAPL

Work Forward.

KAT HUNGERFORD

The nation and our industry still do not fully understand

Executive Editor

the far-reaching health and economic impacts of the

KELLY SCANLON

Covid-19 pandemic. But a vaccine is in the offing, and

Copy Editor

DAVID ALLEN RODRIGUEZ Design

CONTRIBUTORS

Dennis Baranowski, Michael Baz, John Beacham, Katie Bean, Daren Blomquist, Rocky Butani, Stephanie Casper, Cort Chalfant, Nema Daghbandan, Andrew Damico, Nathan Goodhart, Matt Gunter, Sam Kaddah, Jeffrey Levin, Melissa C. Martorella, Kyle Niewoehner, Caleb Nissley , Erica Sikoski, Ray Sturm, William J. Tessar, Marc Weitz, Shawn Woedl

COVER PHOTOGRAPHY Master of Light Photography

Private Lender is published quarterly by the American Association of Private Lenders (AAPL). AAPL is not responsible for opinions or information presented as fact by authors or advertisers.

SUBSCRIPTIONS

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while uncertainty remains, we owe it to ourselves and others to work toward recovery. As we endeavor to support the private lending industry and our members through the challenges ahead, we’ve realized that mindset is everything. It is easy to feel worn down, worn out, and ready for this to be over. It is far more difficult to channel the determination, grit, and yes, even optimism, that enable true progress. To our readers, we offer this advice: 2021 will likely not be easier, personally or professionally, than 2020. But it does offer an opportunity to mentally hit the reset button on how we choose the ethos with which we tackle the year ahead. Many of the issues that 2020 laid bare came as a surprise, but we can work forward in 2021 with eyes open. We encourage our AAPL network to band together. View your fellow private lenders not as competition, but as cohorts. If you are facing a challenge, reach out to us, your association, for help. We may not be able to find a solution, but we may know someone who can. This year, we won’t just “look forward” to when present circumstances smooth out and the nation rebounds: We will “work forward” to that goal. Join us in bringing that mindset into practice.

LINDA HYDE

Managing Director, American Association of Private Lenders

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An Insider’s View of Fund Management Here’s an overview of what you need to know if you plan to launch your own fund—or if you’re just curious about how funds work. by Cort Chalfant

This is the first in a short series of articles about the practical aspects of fund management. There’s a lot to cover, but the goal is to give you a foundation you can build upon. Nexus Private Capital launched its current fund more than three years ago, in March 2017, and it has grown to approximately $36 million of investor capital.

PRIVATE LENDER

short list of high-

level concepts you

should consider when

forming a fund includes: B eing a manager—not

just a deal junkie.

Barriers to entry—they do exist! Fund structure. Leverage. Attracting capital.

This list is not exhaustive. Each item includes myriad finer points. Plan to dig deeper into each of these points before you commit to your own business plan.

MANAGEMENT CONSIDERATIONS In the old-school model of private loan originations, one or a handful of investors would fund each note, and each investor would be named in the deed of trust or collateral instrument securing the loan. This approach covers the vast majority of private originations historically. But, these investors suffer from a lack of diversification, and the mechanics of rapidly funding loans and managing foreclosures can be problematic. An investment fund is great for solving these problems, but management, rather than simply deal flow, becomes the key success factor. To be successful as a fund manager, you must be operationally sound and have an especially strong resume.

You will need to have a highly disciplined focus on formal processes such as fund servicing, accounting, reporting, and managing people rather than on just the deals. Trust, ethics, and track record will become your new currency, because investors generally don’t like to go into a blind pool governed by nothing more than fund documents and faith. You can mitigate these reservations by bringing proven talent into the company at the senior management level or by establishing an advisory board or formal board of directors. It will also help if you establish checks and balances for how cash is handled and decisions are made. At the end of the day, there is no fail-safe mechanism to prevent a fund manager from taking off with the cash. More than anything else, this is why management must have a collective resume that unquestionably builds confidence.

BARRIERS TO ENTRY Fortunately, or unfortunately, depending on your stage of fund life cycle, there are barriers to entry. It is not uncommon to spend $50,000 or more on the preparation of fund documents, which consist of the private placement memorandum, operating agreement, and subscription agreement. You also will need to invest in office space, technology, a website, and people—unless you are a multitalented prodigy who already possesses specialty skills in fund accounting, fund servicing, loan servicing, business

development, investor relations, and law. Finally, don’t forget about your annual audit, preferably prepared by a firm sporting the Public Company Accounting Oversight Board (PCAOB) certification. This assumes, of course, that you want to give your investors peace of mind or you intend to seek institutional capital. Our first annual audit cost $55,000. We have since reduced the cost to the $20,000 range.

FUND STRUCTURE Take time to thoughtfully parse through alternative fund structures. Then build a financial forecasting model that measures revenues to the manager and investors, respectively, based on various assumptions about key activity drivers such as loan originations, subscriptions, and redemptions. Deciding whether your fund is “open” or “closed” may dictate whether you need systems for calculating daily share prices. The structure will also shape policies for admitting or redeeming member subscriptions. Your choice of fees the manager is entitled to versus the sources, as well as priority and timing of distributions to investors, will define the ultimate risk-return profile of your offering. Importantly, your fund

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structure will establish and project the extent to which the interests of manager and investors are earnestly aligned.

extension and late fees, and a share of the

As a generally rule, you will find that managers keep a number of fees entirely to themselves (e.g., loan origination,

to charge asset management fees equal

interest coupon generated by loans). In addition, it’s not uncommon for managers to half a percent to 1% of assets under management (AUM) plus fees for fund

servicing and/or loan servicing that could equal another half a percent to 1%, each. Under these arrangements, it’s not uncommon to see targeted payouts to investors in the 7%-8.5% range, but there are also examples as high as 10%–11%. Differences often come down to the size and track record of the fund, average loan sizes, the quality of collateral, and/ or the types of property financed. Much more could be said about alternatives to the structure outlined above, but it is the most common. However, it is not the form we’ve adopted. An argument can be made that the traditional approach falls short of adequately aligning the respective interests of manager and investor. We’ll address the alternatives in future articles, describe why this traditional approach can fall short, and explain why we chose an alternative form for our fund.

LEVERAGE The degree to which a fund is designed or permitted to use leverage is another important consideration. Like many other tidbits that are hard to pin down in the highly fractured, mostly privately held and closely guarded industry of private lending, you will find conflicting information about the extent to which funds use leverage. It does seem safe to say, however, that most funds have the ability to use some level of leverage, and it is not uncommon to see a 1-to-1 ratio of debt to equity. The issue to consider here, of course, is fear and greed: fear investors will feel from having their capital subordinate to a bank if things go bad and greed that may

PRIVATE LENDER

tempt you to overly weight toward this cheaper source of capital (currently in the 5½% - 6½% range) to juice your returns. A secondary, but equally important, consideration about leverage relates to what happens to your business model when markets seize and credit facilities get called—as they did when COVID-19 hit and during the 2008 market meltdown.

ATTRACTING CAPITAL Raising capital is big lift. As noted, investors tend to not like investing sight unseen, and they will demand impeccable management resumes. To successfully launch your fund, more than likely you will need a stable of friends and family to seed your offering. You should plan to contribute a significant chunk of your own capital as well. Your contribution doesn’t have to be huge, but it should be painful to you if you lose it. It also helps if you subordinate your capital to those of your investors as a way to demonstrate your commitment. Beyond friends and family, you will need to solicit investments from people you don’t know. If you organize your fund through SEC securities registration exemption 506c, then you can generally advertise your fund to “accredited investors,” subject to a serious duty to verify the accredited status of each. Organizing under registration exemption 506b will shift the burden of verification to the investor, but it will limit the extent to which you can promote your fund.

If yours is a small fund (under $50 million) or you can’t point to a three-year track record supported by ideally PCAOB-certified annual audits, then don’t waste your time approaching institutional sources of capital or even family offices. Although exceptions can be made if you are an exceptionally well-known commodity within their circles, institutions generally won’t look at you if your AUM is less than $100 million.

ABOUT THE AUTHOR

Similarly, family offices will have trouble overcoming control issues and will be conflicted by not wanting to invest less than $5 million but not wanting to be more than 10% of your assets. For these reasons, during the early stages of your fund, time is likely better spent focusing on individual accredited investors that you can source from your existing sphere of influence and/or from angel networks.

Cort Chalfant is the manager of Nexus

Invariably, your best source of investors will be existing happy investors. The yield-hungry public has few choices that can match the outstanding combination of yield and safety that a diversified, professionally run fund of well-secured loans can offer. For that reason, and after you prove yourself, they will refer friends and reward you with follow-on investments.

opportunities, threats, resources, and

As an added tip, be sure to offer your investors a reinvestment option. That way your fund will grow each month from reinvested earnings alone. ∞

CORT CHALFANT Private Capital. He is a seasoned

executive in multistate real estate

acquisitions, asset management, leasing, development, and commercial debt

transactions. He has a demonstrated

track record of managing and directing a diverse range of real estate projects and affiliate operating companies.

Chalfant’s core competencies are synthesizing complex business

conditions into winning strategic plans; financial underwriting; and mentoring

high-performing teams. He is a skilled negotiator of legal contracts, leases,

ordinances, and agreements and has a solid understanding of mortgage and

capital markets, syndications, and capital formation.

Before his tenure at Nexus Private

Capital, Chalfant was vice president of Coast Range Investments, senior

vice president of the Rancho Sahuarita Companies, and an acquisitions

and asset manager at the Holualoa Companies.

He has an MBA from the University of

Arizona, where he graduated first in his

class (tied), and a BBA in finance from the University of Delaware.

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Insurance Coverage Guidelines for REO Properties Make sure your properties are appropriately covered if the expected wave of foreclosures hits. by Shawn Woedl

oreclosures are expected to surge in 2021 because

of the pandemic and subse-

quent financial crisis. Some people

believe they may double (or worse).

As a lender, you must be prepared to secure insurance on these properties. Whether you are a large lending institution or a private or hard money lender, make sure your lending requirements include criteria that your borrowers must comply with for insuring their properties. You can use the same general guidelines should you need to acquire lender-placed insurance coverage to protect your interest in a property you foreclose. Here are some considerations for developing those guidelines or shopping for your own coverage. These recommenda-

PRIVATE LENDER

tions focus primarily on single-family rental properties and small multifamily locations. Higher unit counts have additional risk considerations. Keep in mind that you should always discuss your coverage with a licensed insurance agent familiar with lender-placed insurance and non-owner-occupied, renovation, or vacant properties.

HOW MUCH INSURANCE DO YOU NEED?

investment in the property in the event of a total loss. This means that for loans with a lower balance, the insured value will be substantially lower than the actual value of the property. Carefully read the policy to ensure there is no co-insurance penalty the carrier can levy against the property owner for underinsuring a property. (On a proper lender-placed policy, there should be no co-insurance, but be cognizant of it and make sure your agent eliminates it if itâ&#x20AC;&#x2122;s there).

As soon as you begin the foreclosure process, obtain a lender-placed insurance policy on the property for the outstanding loan balance. You may require that borrowers insure the location for up to 125% of the loan value. As a lender foreclosing on a property, you are only able to recover your

Be sure your insurance agent knows whether the property is under renovation or vacant. Vacant homes come with certain risks the carrier needs to be aware of in order to afford coverage in the event of a loss. Also, make sure to take appropriate security measures to mitigate theft and vandalism of the property.

CHOOSING YOUR TYPE OF COVERAGE

Although these coverages can vary, as a standard, Special Form policies typically exclude:

Neglect Nuclear hazard Governmental action

M old and fungus

Equipment breakdown

exposures, consider purchasing Special

Wear and tear

Ordinance or law

Form property coverage. Think of Special

Sewer and drain backup

To minimize exclusions and unnecessary

Form as all-risk coverage. It is the most comprehensive coverage form available for non-owner-occupied, renovation, and vacant properties. There are several

E arth movement (including quake and sinkhole) Flood

As a side note, many policies have long included a bacteria and virus exclusion; some are now including a COVID-19 exclusion. Keep in mind, however, that property insurance is intended to cover

P oor workmanship and defective

losses as a result of property damage.

specifically excluded is automatically

faulty zoning and materials)

(or business income insurance) would

covered. This leaves the burden of proof

Damage caused by vermin

standard exclusions from Special Form policies, but any peril (cause of loss) not

on the insurance company to prove to both you and your insurance agent that the

maintenance (also extending to

Intentional damage by tenants

loss that occurred was from an excluded

Power failure

peril. Otherwise, coverage is afforded.

War

So even a coverage such as loss of rents kick in only if the property itself suffers damage that renders it uninhabitable. Several of the exclusions above can be bought back by endorsement or on a stand-alone policy. Others are

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considered uninsurable by insurance companies. Some coverages that can be purchased separately include earth movement, flood, equipment breakdown, and ordinance or law. Basic Form is the other coverage option available. It is a “named peril” form that has additional exclusions that can harm you. In this type of policy, only those causes of loss named in the policy are covered, and it is incumbent on the insured to prove the loss was caused by a covered peril for coverage to be afforded. Perils covered on Special Form but excluded from Basic Form are theft, weight of ice, sleet or snow, water dam-

PRIVATE LENDER

age, collapse, and falling objects. If your foreclosure is vacant, you may be at a higher risk of theft. Water damage as a result of burst pipes, weight of ice, and sleet or snow can be higher risks in colder climates, so consider this exclusion if your foreclosed property is in a cold-climate area. Regardless, be sure to keep the temperature at the property set to 55 degrees or above and shut off the water to avoid possible water damage. Many lenders require their borrowers to carry Special Form coverage. For an REO property, you should factor in the local climate, season, and safety of the neighborhood, and then weigh those against your appetite for risk.

Choose a property deductible of no more than 2% of the total insured value of the property. This deductible applies to the AOP (All Other Perils) property deductible. The more severe perils of wind and hail (including named windstorm), water damage, and theft/vandalism often come with a higher deductible.

TWO SETTLEMENT METHODS There are two loss settlement methods for you to consider when shopping for insurance. Actual Cash Value (ACV) factors in depreciation when settling a partial loss. Replacement Cost (RC) allows

you to recover that depreciation, but it is handled in two payments. First, you will receive a check for the ACV amount (as determined by the claims adjuster.) Then you will submit receipts for the additional cost to repair or rebuild in order to obtain reimbursement above the ACV settlement. You should strongly consider requiring your borrowers to maintain RC coverage. This coverage can help minimize any financial hardship they may experience from not recovering enough money to make them whole again and potentially affect their ability to repay the loan. On your foreclosure, RC coverage may be overkill. In a total loss, you will be reimbursed for the loan amount regardless of the settlement method. You can clear the land, sell it, and move on. If there is a partial loss and you are on an ACV policy, your reimbursement will factor in depreciation, but that may be sufficient to cover repair. ACV coverage can save 20-25% in premium costs, so you must weigh that savings against the potential need to cover some repair costs if the ACV settlement is not sufficient. With regards to liability coverage, you (and your borrowers) should carry commercial premises liability with a per occurrence limit of $1,000,000 and a $2,000,000 annual aggregate. Premises liability coverage extends to slip and falls, or personal injuries, that occur on the premises. Defense costs should be outside of these included limits of liability so they do not dimin-

ish what is available to settle a loss. For locations with higher unit counts or more stories, consider higher limits.

ABOUT THE AUTHOR

INSURANCE FOR YOUR BORROWERS As the lender, you should be listed as the mortgagee on the property insurance policy. This ensures you receive notice before coverage canceling due to non-payment or any other underwriting issue. It also guarantees you are listed on all claim payments for property losses at that location. This protects your interest in the property. For a liability policy, being listed as “additional insured” on your borrower’s policy ensures you are notified if the coverage cancels and extends coverage to you for that property. If you are notified that coverage is canceled for a property on which you have an interest, immediately obtain a lender-placed insurance policy to protect your interest. You will pay the premium on a policy of this nature but collect it back from the borrower by adjusting their monthly payment. Maintaining a set of defined insurance requirements and having a relationship in place with a trusted insurance agent who can help you when lender-placed insurance becomes necessary is critical to minimizing your risks as the lender. An agent who understands the real estate investing landscape and can help you design an insurance package to fit your needs is a valuable partner in uncertain times. ∞

SHAWN WOEDL Shawn Woedl is CEO and

president of National Real

Estate Insurance Group (NREIG). He has been instrumental in

growing NREIG into the largest

insurance program in the country for residential investment

properties, insuring more than 88,000 locations today—and

growing. Through his efforts, the NREIG program has expanded to accommodate investment

properties up to 20 units, vacation rentals, and non-performing

notes, just to name a few. He has

also introduced a suite of ancillary coverage options with the aim

of filling any gaps investors may

experience in their property and liability coverage.

Woedl is responsible for

overseeing all aspects of the

agency, specifically focused on maintaining strong carrier and

industry relationships, developing new and innovative product

offerings, and managing internal

sales and service processes. With

more than 15 years in the industry, he is a recognized speaker and educator with an expertise in

commercial property insurance.

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RULES, RISKS, AND CAPITAL REWARDS: PRIVATE LENDERS FIND SUCCESS IN A POST-COVID MARKET by William J. Tessar

PRIVATE LENDER

Today, as Wall Street is looking for measured risk and maximum yield, private money for business-purpose residential loans is reemerging as an ideal market for their investments.

OVID-19 delivered a major

well underwritten have greater liquidity.

space for a brief period.

institutional investors want originators with

blow to the private lending

Beyond loan characteristics, however,

However, it is unlikely to have any significant, permanent impact on the market. In fact, volumes are already heading back to pre-pandemic levels. Still, there have been eminent changes.

proven track records. It’s not uncommon

Repo facilities, for example, have generally lowered advance rates, and LIBOR spreads have widened, which has made the cost of warehouse financing more expensive. That being said, spreads and advance rates are typically benchmarked to securitization execution, and they should improve over time as the securitization market gains momentum.

the internal infrastructure to manage risk

WHAT INVESTORS WANT

to see elevated levels of delinquency for

business-purpose loans, so the real puzzle is how to manage non-performance.

For private lenders, this requires having

and understand value to prevent borrow-

ers from getting in over their heads. Many

capital partners spend a significant amount of time analyzing how lenders look at the

world and how deeply they work to validate the borrower’s strategy. Investors want to

know, for example, how much information lenders collect from borrowers seeking

rehab financing and how the construction

process is managed. They’re also interested Perhaps a bigger change is how the capital markets and institutional investors perceive the private money space. More than ever, investors want to make sure the lenders they do business with have the expertise and resources to make good loans. They want high-quality paper, which boils down to a question of liquidity. In other words, how difficult will it be to sell the loan—and for what price?

in the cash reserves they have to work with

The basic rules apply here—higher rate, lower loan-to-value (LTV) products that are

in place with the servicer around loss

and whether loan requirements change depending on a borrower’s real estate

investment experience level or FICO score. These days, private lenders can expect to spend quite a bit of time with their counterparty’s credit team, walking

them through the origination process and underwriting criteria. Another

focal point is the procedures that are mitigation and REO management.

Most leading private lenders already recognize their fiduciary responsibility to act in the best interest of borrowers and have already put into place methods to reduce risk. For example, having valuation and construction experts on staff who can look closely at each transaction to ensure the deal makes financial sense. Such experts can help identify construction risks the borrower might not be considering, as well as assess reserves and cash flow to ensure borrowers aren’t getting too far ahead of themselves on their rehab exposure. In addition to protecting borrowers, these methods can also give capital partners extra confidence in loan quality. One lesson COVID-19 taught is this: Over the past few years there’s been a gradual deterioration in the quality of private money loans, to the point where the capital markets began taking a hard look at the risk associated with the paper that was being written. The private lenders best prepared for the disruption were those that weren’t overleveraged, had liquidity, and had developed multiple sources of capital. These lenders quickly adjusted, managed LTVs closely, and did not overcorrect on interest rates or fee compression. By acting prudently, smart private money lenders were able to recapture their markets relatively quickly.

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OPPORTUNITIES FOR GROWTH Today, as Wall Street is looking for measured risk and maximum yield, private money for business-purpose residential loans is reemerging as an ideal market for their investments. Competition is returning to the market as more large lenders and new capital partners reenter the space, and pricing has become more reasonable. Still, private lenders have quite a bit of wood to chop when it comes to educating our investor base and continuing to press the limits on pricing. Most in our space believe private money is the best relative value in all of mortgage lending, yet it still prices worse than other mortgage products. For this reason, there are tremendous opportunities for any lender that can offer consistent volume and quality while continuing to introduce the asset to more investors searching for yield. Obviously, diversifying your capital sources can offer protection against having to shut down during a crisis. However, it’s important to understand the intent of your purchaser and limit your exposure to markto-market (MTM) financing, if possible. If you are dependent on purchases that rely on mark-to-market financing, subsequent whole loan transactions or securitizations to recycle cash, you need to be prepared for the scenario we experienced earlier this year, when a rapidly shifting repo environment and securitization market caused secondary markets to virtually disappear. Private lenders can hedge these risks by having sufficient capacity on a committed non-MTM repo facility to wait out any

PRIVATE LENDER

“Competition is returning to the market as more large lenders and new capital partners reenter the space, and pricing has become more reasonable. ” future storm or focus on issuing revolving securitizations with 24-month investment periods and a one-year wind down. Of course, smaller lenders that do not have these options are at a disadvantage, but they can partner with larger players that have access to institutional capital. In doing so, it is critical to learn their partner’s secondary market execution strategies and the risks that go along with them. Having such a partner to bridge the gap with capital markets can open avenues for growth. The private lending market is still not back to 2019 levels, but for lenders that provide quality financing and have access to a variety of capital sources, the future for private lending is brighter than ever. With conventional mortgage lending rates at record lows, it is clear that Wall Street is looking for quality, quantity, and consistency in their investment opportunities. With private money lenders, the ability to take advantage of growing demand for financing alternatives to conventional lending at reasonably low interest rates has never been greater. While all lenders are susceptible to setbacks, they are also capable of learning

from them. The lenders that prevail in a post-COVID market will have diversified their capital partners and have proven, experienced leadership capable of making smart decisions when uncertainty and chaos arrive—as they eventually will. ∞

ABOUT THE AUTHOR

WILLIAM J. TESSAR William J. Tessar is president of Civic Financial Services, one of the largest institutional private lenders in the

United States. He has more than 30 years of experience in the financial

services industry and has been one of the nation’s top loan originators.

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PRIVATE LENDER

Dissecting Real Estate Appraising Is it an art form or a science? by Michael Baz

he definition of appraisal—”an opinion of value”—appears straightforward and simple.

In fact, the appraisal is likely the most misunderstood aspect of a typical real estate transaction. When it goes well, the appraisal is an afterthought. When it does not go well, it has the potential to delay or even spoil your closing.

Within the appraisal community, there has been an ongoing debate: Is real estate appraising an art form or a science? Critics may argue whether it can be science if two appraisers view the same home yet arrive at differing opinions of value. The reality is that real estate valuation requires a process to develop an opinion of value, and two appraisers may use different processes or view the data differently.

APPRAISED VALUE VS. SALES PRICE According to a 2017 National Association of Realtors’ study, owners rarely shop

for realtors, and only 26% interview multiple realtors. In most cases, sellers count on the realtor to establish not only a marketing strategy but also an asking price. The borrower only sees homes the realtor preselects, so they are generally within an agreed-upon value bank. Like appraisers, realtors will tell you that establishing the right approach to a listing price is an art form because there is no single list price. Different agents, employing varying techniques, will suggest different prices. Often realtors arrive at a price per square foot to establish value. Price per square foot is an acceptable approach if homes are identical. However, except in new developments, they never are. Price per square foot never factors in characteristics that account for value differences (e.g., size, location, condition, quality, etc.) Realtors rate these differences by relative comparison; one home might be in a better location, and another may have a larger lot. These are the factors sold to a particular buyer.

In general, realtors arrive at an overall listing price using qualitative techniques. Agents also factor marketing strategy into the list price. Some agents may suggest listing a home for sale around the market value or just below. They hope to create momentum and stress anxious buyers into a bidding war. Other realtors will set a higher price point and allow buyers room to negotiate. In either case, the listing price plays an integral part in the process. “Anchoring bias” is a cognitive bias that causes us to rely too heavily on the first piece of information we’re given about something. And it works. When given a number (the sales price), you unknowingly tether your opinion of worth to the asking price. The listing price sets the standard for the rest of the negotiations. Prices negotiated lower than the listing makes the home seem more reasonable than the initial list price, even if they are still higher than what the data says a home is really worth. This approach is particularly effective if online sources also skew high. Most WINTER 2021

BUSINESS STR ATEGY

buyers will use an online valuation tool to get an idea of value. These tools validate the price they negotiated. However, online tools cannot factor in the location, quality, and utility of the home or the condition. In reality, the online tools may provide a positive bias toward inferior homes and a negative bias against homes that deserve to be at the top of any given market but judged as if they are typical. If the transaction is financed, then an appraiser will be used. The realtors should be able to support the contract price with closed sales data, which most appraisers welcome. Once the appraisal is complete, if the appraiser arrived at a value lower than the contract, the realtor should be able to provide similar closed sales that support the contract. Buyers should be prudent and ask their realtor for these sales before making an offer.

APPRAISING DURING COVID-19 We are witnessing how COVID-19 is changing how we will live. Homeowners’ needs are changing. Some areas are going to benefit, while others, in time, will have an oversupply of inventory. Appraisal analysis should include looking at inventory, days on market, and identifying homes with extended marketing times or with huge price reductions. These homes may or may not be signs of distress. Investors’ expectations are for appraisers to base trend analysis on quantitative analysis, most prominently, closed sales. This technique is effective in determining present trends. However, it’s not as effective in identifying what is coming because, in effect, we are looking through a rearview mirror. If the sale is a flip, how much was spent on updating? A good appraiser will

PRIVATE LENDER

review MLS, including the subject prior sale MLS. The appraiser will contact the selling agents to understand the condition, quality, and any unknown sales factors. A comparable choice should illustrate the subject market and its place within that market. The ideal comparable selection would be in the same market and, if the subject is a condominium, in the same development. They should be similar in physical characteristics, as well as be relevant to the current market. When markets are shifting, the more recent sales and listings reflect current market conditions.

ABOUT THE AUTHOR

MICHAEL “MIKE” BAZ Michael Baz is a certified residential

real estate appraiser in California and Wisconsin. With more than 25 years’ experience in real estate valuations,

A good appraiser will reconcile their opinions of market value to the pending sale price of the subject property. Often, this tends to make sense if the pending sale price of the property falls within the range of the market data collected (after being adjusted for variances to the subject property) because appraisers are essentially trying to “mirror the marketplace.”

he provides expertise in all areas of

While much of the appraisal process requires quantitative techniques, making adjustments is often a combination of quantitative and qualitative. Although appraisers would love every comparable to be perfect, they are not. There are always value-influencing differences between two homes. In these cases, appraisers make adjustments. Some home features add value but are hard to quantify.

mortgage servicers.

Regardless, the most common reason for the difference of opinion between the contract and the appraisal is the adjustments—which just happens to be the most qualitative part of the appraisal process. After all, it is not science, nor art. It is a little of both. ∞

valuation, appraisal processes, USPAP, and FNMA guidelines.

Baz is the director of QC Escalations

for PCV Murcor, reviewing thousands of nationwide appraisal and BPO reviews. For four decades, PCV Murcor has

managed valuation needs for mortgage lending, financial institutions, estate

and litigation, real estate investors, and Baz is a member of the Appraisal

Foundation Industry Advisory Council,

the Association of Appraiser Regulatory Officials, and the Real Estate Valuation Advocacy Association.

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LEGAL

The CFPB Answers to the President Now What does this mean under a Biden presidency? by Melissa C. Martorella and Caleb Nissley

This is a follow-up to “The Future of the CFPB Is at Stake,” published in the Spring 2020 issue of Private Lender.

n June 29, 2020, the Supreme Court of the United States handed down its highly anticipated decision in Seila Law vs. Consumer

Financial Protection Bureau. This case,

brought by a consumer debt relief services firm (Seila Law), hinged on whether the president of the U.S. has the power to fire the director of the Consumer Financial Protection Bureau (CFPB) without cause. Title X of the Dodd-Frank Act allowed for a single director of the CFPB appointed by the president for a five-year term but not removable by the president, except for cause. In a 5-4 majority opinion written by Chief Justice John Roberts, the Supreme Court held that “the CFPB’s leadership 22

PRIVATE LENDER

by a single individual removable only

for inefficiency, neglect, or malfeasance violates the separation of powers.”

THE COURT’S REASONING As we predicted, the Court focused

its analysis of the merits of this case

under the president’s Article II, Sec-

tion 3 power to “take care that the laws be faithfully executed.” The Court

referred to the legal issue in this case as a “new situation.” For several reasons,

the Court was not persuaded to uphold Title X’s for-cause removal provision. The Court reasoned that the lack of

historical precedent signals a “severe

constitutional problem.” According to the Court, only a handful of incidents support removal only for good cause for high-level government officers. All the examples are modern and contested and do not involve regulatory or enforcement authority comparable to the director of the CFPB. The single CFPB director structure itself was incompatible with constitutional structure according to the Court, because it did not divide power. This by itself is not problematic for certain executive functions since the president is accountable to the people who can vote him or her into or out of office. But the CFPB’s single director structure was “accountable to no one.” Furthermore, the fact that funding for the CFPB comes from the Federal Reserve and not the annual budget signed by the president means the president has no power to influence the CFPB through its funding. In sum, a lack of historical precedent and a failure of the Dodd-Frank Act to check the director’s power led the Court to rule the for-cause removal provision unconstitutional pursuant to the president’s power under Article II, Section 3.

THE COURT’S REMEDY Seeking to avoid the consequences of a 2017 CFPB enforcement action against it, Seila Law argued that if the for-cause removal provision was unconstitutional, then the entirety of the CFPB should be ruled unconstitutional. The Court unanimously rejected this argument. Instead, the Court chose the much less disruptive remedy of simply severing the for-cause provision, just as we predicted.

In reaching this decision, the Court reasoned:

been run by directors appointed by

resentatives explain, [eliminating the CFPB

Rather than use a “bulldozer” to remedy the constitutional defect, the Court chose to use a “scalpel.”

disruption and would leave appreciable

IMPLICATIONS FOR PRIVATE LENDING

During the tenure of Obama-appointed

er-finance arena. … We try to limit the solu-

The stark differences in how the CFPB has been run under a director appointed by President Obama versus how it has

collected an average of $59.6 million in

“As the Solicitor General and House of Repentirely] would trigger a major regulatory

damages to Congress’s work in the consumtion to the problem, severing any problematic portions while leaving the remainder intact.”

President Trump gives us some insight into the effect of this decision. Director Richard Cordray, the CFPB consumer restitution per case of illegal consumer financial practice. But after his

WINTER 2021

LEGAL

“ ONE THING WE CAN PREDICT IS THAT THE CFPB WILL BE LASER-FOCUSED ON COVID-RELATED SERVICING ISSUES…”

ABOUT THE AUTHORS MELISSA MARTORELLA ESQ. Melissa Mar-

torella Esq. is

departure and Trump’s appointments of Mick Mulvaney and Kathy Kraninger, the CFPB collected an average of $2.4 million in restitution per case, a 96% decline. The contrast between the actions of Obama-appointed Director Richard Cordray and Trump Directors Mick Mulvaney and Kathy Kraninger highlight how the Court’s decision in this case gives the president the power to implement more borrower-friendly or lender-friendly policies depending upon whom he appoints.

A BIDEN-APPOINTED DIRECTOR We expect president-elect Biden to use the power granted to him by the Court, in this case to nominate a new CFPB director. Some likely contenders are former CFPB Director Richard Cordray; U.S. Representative Katie Porter, a protégé of CFPB founder Elizabeth Warren; Rohit Chopra, formerly assistant director at the CFPB and currently member of the Federal Trade Commission; and Manny Alvarez, commissioner of the California Department of Business Oversight. Whoever gets the nomination for CFPB director, we expect more aggressive enforcement under Biden than Trump. Already president-elect Biden has put together a team of advisers to assist in his review of federal agencies. The team includes fierce advocates for Wall Street regulation, including 24

PRIVATE LENDER

Michael Barr, who was a senior Treasury Department official during the Obama administration during the passage of the Dodd-Frank regulation law in 2010, and Leandra English, whom Trump ousted from the Consumer Financial Protection Bureau during a messy power struggle several years ago. One obstacle to Biden’s nominee is the Republican-controlled Senate, which could block approval of a more controversial candidate. But perhaps lender anxiety over a Biden-nominated CFPB director is somewhat exaggerated. CFPB enforcement investigations have declined over the last several years, suggesting few investigations wait in the pipeline. Furthermore, even under President Trump, the CFPB expanded the scope of its enforcement powers. For example, a 2018 amendment to the Home Mortgage Disclosure Act (HMDA), enforced by the CFPB, now requires certain private lenders making business-purpose loans “secured by a lien on a dwelling” to comply with HMDA’s annual reporting requirement. Going forward, one thing we can predict is that the CFPB will be laser-focused on COVID-related servicing issues, at least in the near term. No matter what the CFPB focuses on or who runs it during the Biden administration, the private lending industry should continue to make every effort to stay current on lending regulations and maintain compliance with the law. ∞

a supervising attorney and

department head

of Geraci LLP’s Banking and Finance and

Foreclosure practice groups. Her practice

primarily revolves around the representation of nationwide mortgage professionals and

providing for their transactional documenta-

tion and compliance needs. She also advises on all default-related matters. She can be

reached at M.Martorella@GeraciLLP.com.

CALEB NISSLEY, J.D. Caleb Nissley,

J.D., is a recent

graduate of the University of

California Irvine

School of Law and an incoming associate at Geraci Law firm. Before joining Geraci Law

firm, he studied finance and political science at Cedarville University and spent several years working in finance and on legal issues at J.P.

Morgan, the California attorney general, and

the Ohio attorney general. He can be reached at C.Nissley@GeraciLLP.com.

Geraci LLP, AAPL’s general counsel, is the

nation’s largest law firm that focuses on the

representation of nonconventional lenders.

The Â® Your Ultimate Lending Platform

WINTER 2021

LEGALÂ

HOW TO EVALUATE A PRIVATE MONEY CONSTRUCTION LOAN If you look out for the best interest of your investor and do your due diligence, these loans can provide a great return. by Dennis Baranowski and Kyle Niewoehner

PRIVATE LENDER

be worth after it is finished. Unlike fix-and-flip loans, where a property is already built and just being renovated, ground-up construction projects present a wide range of potential outcomes. The finished value will ebb and flow with the economy and market conditions. In addition, on construction deals you won’t have a lender-borrower relationship like you have with most standard loans. You’ll be dealing more with third parties, such as the appraiser (who values the property), builders, designers, architect, and others who make the project happen and help determine the future value of the property.

and schooling, or they’re just trying to

Now may be an excellent time for you to explore funding private-money construction loans. As housing starts continue to be strong in the COVID economy, not all builders can easily obtain traditional bank financing. They need the specialized services private money lenders provide. If executed properly, these types of loans can be very lucrative for your portfolio.

Now that housing has snapped back, there

REVIEWING THE DEAL

areas of the country, driven both by con-

The first thing you need to worry about is the speculative aspect of the deal. A construction loan is different from most loans, in that you must understand the market to know what the property will

s the COVID-19 crisis has ravaged many parts of the real estate market, one of the standout sectors has

been homebuilding. Interest rates are

at record lows. Many families are migrat-

ing to the suburbs and other low-density

areas seeking more room for home offices avoid the worst effects of the pandemic. is a severe shortage of inventory in many sumer demand and by COVID-induced shortages in raw materials. This has

created an opportunity for lenders able to provide funding for new housing starts.

It’s helpful to establish strong relationships with these parties so you can benefit from their expertise in aspects of the transaction that are crucial to success, but where you are not an expert. These pieces of the puzzle that you do not typically see in other loans are vital in making an informed decision about the estimated value of the finished property.

MITIGATING RISK Any time so many parties are involved in a process, it creates additional risk factors. For one thing, it is far from guaranteed they will all do their job properly. When just one party fails to perform, it can affect the jobs of other participants and could even jeopardize the entire project. It is important to monitor all parts of the project carefully to ensure the various pieces come together smoothly and all the contributors are meeting expectations. This extra scrutiny can help ensure the project is done right and moves forward on schedule. WINTER 2021

LEGAL

So, unlike a typical loan where it closes and then you just need to service it, a construction loan requires the lender to monitor the project to ensure its progress during the term of the loan. Construction loans typically involve much larger holdbacks than fix-and-flip loans, and the post-closing disbursement process is far more involved. Typically, advances will be made as the contractor meets certain milestones. Each disbursement is a chance for the lender to evaluate the progress of the project. It is also important to know how far the project has progressed and what still needs to be completed in case there is a possibility of foreclosure. If the loan ends up defaulting, this knowledge will help determine whether you want to step in to finish the project or just foreclose.

EFFECTIVE UNDERWRITING The underwriting process is one of the best ways to protect yourself when making a construction loan. During underwriting, you can learn more about your borrower beyond what is on the application (e.g., their background, track record, how many properties they’ve built over the past year or two). Get a list of properties the borrower has completed and check the selling price. It is also essential to find out how long it took the borrower to complete the projects. Be sure to acquire documentation of the completion schedule of the borrower’s past work. Also ask the borrower to provide before-and-after photographs

of previous projects. This will give you insight, not only about the quality of their work, but about how well they can

ABOUT THE AUTHOR

drive a project from beginning to end. A construction loan needs to be evaluated

DENNIS BARANOWSKI

not only on the borrower but also on the

Dennis

project itself. It is essential to list all the

Baranowski,

a partner and

jobs that will be involved in the project

supervising attor-

and have the borrower produce names for each one. This list will help you dig deeper into the probability of the project being completed and your loan getting repaid.

ney at Geraci LLP,

has extensive experience in helping banks, credit unions, mortgage funds, private

lenders, brokers, developers, and loan ser-

vicers navigate through complex transac-

tions, including negotiation of terms, trans-

PROTECTING YOUR INVESTOR

action review, and drafting of documents.

Baranowski reviews, negotiates, and drafts

The key to funding any construction loan is looking out for the best interest of your investor. If done correctly, these loans can provide a great return. But not properly doing due diligence and vetting

custom loan documents, construction loan agreements, loan workout agreements,

leases, loan purchase and sale agreements, subordination agreements, intercreditor

agreements, hypothecations, loan servic-

ing agreements, and investor agreements.

of the project could lead to complicated problems. The additional risk that a

KYLE NIEWOEHNER

ground-up construction project presents

Kyle Niewoehner

can be mitigated by properly underwrit-

is a transac-

ing the project, adequately collateralizing

tional attorney

the loan, and making sure you have the

in the banking

proper insurance coverage in place.

and finance

Adhering to these principles will improve your chances of success and significantly enhance your ability see the project

Georgetown University Law Center where he was published in The Tax Lawyer law

journal. Prior to joining the Geraci transac-

through to completion. Utilize all the resources at your disposal, and if you are still unsure, employ the help of a third party experienced with construction projects to evaluate and advise on the likelihood of achieving success.

department. Niewoehner graduated from

∞

tional team, Niewoehner worked on more

than 1,400 loan transactions. As part of his work at Geraci, Niewoehner drafts custom loan documents, advises clients on title

issues, reviews document templates, and prepares complex modifications, among other services. In addition, Niewoehner has experience in default-related legal

services, including foreclosure, forbear-

ances, and loss mitigation as well as lender compliance.

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WINTER 2021

LEGAL

Recovering Your Investment from Bankrupt Borrowers Borrowers filing for bankruptcy is normal, but you must have a good plan and a good bankruptcy attorney to help you get the highest recovery in the shortest amount of time. by Marc Weitz

This is the first in a four-part series about practical steps to take when a borrower declares bankruptcy. This first article provides an overview of the process from end-to-end. The articles in this series are for informational purposes only and not meant to be legal advice. Consult your local bankruptcy attorney. The law is different in every jurisdiction. 30

PRIVATE LENDER

orrowers who go bankrupt is a reality for private lenders. The key to getting a good recovery in the shortest amount of time is having a plan. This article explains how to analyze your position as a creditor and develop strategies to improve your success. It also covers the actions you can take in advance to mitigate your bankruptcy risk.

THE BORROW FILES FOR BANKRUPTCY It’s usually not a surprise when a borrower files for bankruptcy. They are behind on payments, late fees are adding up, many times you’ve already entered into a forbearance or two, the foreclosure process has begun, or the

foreclosure sale is imminent. When you receive notice of the bankruptcy, ask for the case number. Contact your bankruptcy counsel and execute the plan. Private lenders run into three types of bankruptcies: chapters 7, 11, or 13. Chapter 7 is a liquidation. In a Chapter 11, the debtor’s objective is to reorganize or liquidate in an orderly manner. In a Chapter 13, a debtor can save his home if he pays off the arrears over a three- to five-year plan while keeping current on mortgage payments. Your problem is the automatic stay, which is an injunction that comes into play when bankruptcy is filed. It stops creditors from taking any actions to collect their debts, includ-

ing foreclosure. It is permitted

“It’s usually not a surprise when a borrower files for bankruptcy.”

to postpone the foreclosure sale date while finding a solution.

Here’s how to analyze the bankruptcy.

S TEP 1 IS THE AUTOMATIC STAY IN EFFECT AND DOES IT APPLY TO YOUR COLLATERAL?

is no automatic stay. The debtor may ask the court to reimpose the stay for cause. The debtor is ineligible for bankruptcy and there is no stay if bankruptcy has been filed in violation of a previous

S TEP 2 DO GROUNDS EXIST TO GET THE BANKRUPTCY DISMISSED?

court order or if you filed a motion for

If the bankruptcy is dismissed, the

ruptcy owns the property. If the prop-

ruptcy but the debtor dismissed the

may proceed with the foreclosure.

the debtor or the property is owned as

Make sure the entity that filed for bank-

relief from stay in a previous bank-

automatic stay goes away, and you

erty is owned by another LLC held by

bankruptcy before it was heard.

If the debtor is a corporation or partner-

If you’ve obtained an order granting relief

ship, the governing documents stipu-

the same debtor within the last two

whether by a majority, supermajority,

a non-filing spouse’s separate property, the automatic stay does not apply.

If the debtor had another bankruptcy

from stay on the same property against

late how a bankruptcy is authorized,

years, the automatic stay does not apply.

or unanimous consent of directors or

dismissed within one year before the

In all these circumstances, you should

shareholders. If the entity did not get

lasts just 30 days. If there are three or

no stay. File a motion to confirm that

has been improperly authorized

current bankruptcy, the automatic stay more bankruptcies within a year, there

not foreclose under the assumption of

this approval, then the bankruptcy

the court agrees before proceeding.

and grounds exist for dismissal.

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LEGAL

Second, if the debtor has no realistic possibility of confirming a plan, grounds exist for dismissing the bankruptcy.

S TEP 3 SEEKING RELIEF FROM THE AUTOMATIC STAY.

Third, if you can present evidence the debtor filed the bankruptcy in bad faith, you can try to dismiss the bankruptcy. There are limits that determine whether debtors are eligible for certain chapters. For Chapter 13, the limits are

If the first two steps don’t work, see whether grounds exist for a motion for relief from stay. This is asking the court for permission to lift the stay to foreclose. It is made by motion and can

unsecured debt of $419,275 and secured

usually get done within 25 to 45 days.

debt of $1,257,850. The new Chapter 11

In a Chapter 7, if the debtor has no equity

subchapter v was $2,725,625 in non-contingent debt, but the CARES Act temporarily increased this to $7,500,000. Chapter 7 has income limits.

PRIVATE LENDER

in the property, the grounds exist for relief from stay. In chapters 11 and 13, you must additionally show that the property is not necessary for reorganization.

The bankruptcy code provides for

adequate protection payments if there is a decline in the collateral’s value. If the debtor does not make those pay-

ments or they turn out to be inadequate, the court can grant relief from stay. Another category is bad faith or

scheme to hinder, delay, or defraud creditors. As explained previously, you’re arguing that the debtor is abusing the bankruptcy system.

If your relief from stay was granted,

foreclose as quickly as permissible so the debtor doesn’t play more games. In Cali-

fornia, you may foreclose and get paid. If there’s a deficiency, then you have to file

a claim with the bankruptcy court. Other jurisdictions may require other steps. Don’t just file relief from stay to be

ment does not lift the automatic stay. You must either wait for the case to close or move for relief from stay.

unable to get relief from stay, then you

If the trustee has sold your collateral, the trustee will ask you for a payoff demand. If you’re undersecured, you are entitled to what was owed on the petition date and the deficiency becomes an unsecured claim. If you’re oversecured, bankruptcy law allows you to demand post-petition interest, expenses, late fees, legal fees, etc., to the extent there’s cash available.

File your proof of claim. This is a state-

RISK MANAGEMENT STRATEGIES

aggressive. If you do, you lose credi-

bility and may have trouble filing one later when better grounds exist.

DEALING WITH THE BANKRUPTCY If the automatic stay applies, there are no grounds to dismiss the case and you’re will have to deal with the bankruptcy.

firm that the court recognizes these approaches before foreclosing. The last recommendation: Move quickly with all steps in the loan process and foreclosure process. You don’t want to be caught with the borrower filing for bankruptcy when you have unrecorded liens or unsent foreclosure notices. A borrower filing for bankruptcy is a normal part of your business. Be sure you have a good plan and a good bankruptcy attorney to help you get the highest recovery in the shortest amount of time. ∞

ment of everything owed to you as of the

petition date, including late fees, default interest, etc. Include backup, such as the promissory note and the trust deed. Ask for adequate protection pay-

ments if the value is declining. Make sure the plan correctly reflects your claim. Debtors often try to sneak in

changes in principal, interest, or the loan term—although this is allowed

in a cramdown, where the debtor has enough votes from other creditors to approve the plan. Know how to pro-

tect your rights. Beware of lienstripping. That is when the court reduces

the amount of your lien to the market

value of the collateral. Finally, negotiate with the debtor and see if you can

work out a plan that suits both of you. If you’re stuck in a Chapter 7, a trustee is appointed to sell the property, if

there’s enough value. Otherwise, the trustee will “abandon” the property.

The property then reverts to the debtor, and you can foreclose. But abandon-

Some new things are being tried by private lenders to mitigate their risk before bankruptcy. The first is writing into your loan documents that the automatic stay doesn’t apply if the debtor files for bankruptcy. Courts are split on its validity. It is generally not allowed in the original loan agreement but could be valid if put into a forbearance agreement, agreements approved by courts, or confirmed Chapter 11 plans. Blocking shares or blocking directors are another new idea. You can ask the borrower to put the collateral in an LLC and require the unanimous consent of the board or shareholders to file for bankruptcy. You then appoint your own board member or hold voting shares. You can now, in theory, block a bankruptcy filing. Check how your jurisdiction treats both these approaches before employing them. In both cases, you would still need to file a motion to con-

ABOUT THE AUTHOR

MARC WEITZ Marc Weitz is a California bankruptcy

and real estate attorney helping private lenders recover investments from bor-

rowers in bankruptcy. With a combined 23 years’ experience between the

law and investing, Weitz has a unique

knowledge and understanding of both the investment and the legal sides. Weitz is also a Chartered Financial

Analyst (CFA), a California-licensed

real estate broker, and an investment property owner.

WINTER 2021

LEGISL ATION

Business-Purpose Loans Should Be Exempt from Relief Measures AAPL opposes foreclosure moratoriums and mandatory forbearance on business-purpose loans. by Matt Gunter

OVID-19 has created some of the most far-reaching

impacts our industry has

seen. It is no surprise then that

governments at all levels took some measure of direct action to guard against one immediate negative

consequence of that health crisis: skyrocketing unemployment.

A consequence of unemployment, of course, is homeowners’ inability to pay their mortgage loans. Out of fear of mass homelessness, the federal government, and many state and local governments prohibited, in most respects, the foreclosure of mortgages. And many required forbearance of mortgage loan payments from borrowers when requested. As it so often does, AAPL finds itself threading the needle on this issue. We 34

PRIVATE LENDER

believe commercial, business-purpose mortgage loans must be viewed apart from and treated far differently than consumer, household-purpose mortgage loans, precisely because they are different.

your ability to foreclose. However, state

AAPL takes no stand as to the wisdom or efficacy of foreclosure moratoriums or forbearance programs, generally. AAPL does, however, strongly oppose these actions and programs specifically concerning commercial, businesspurpose mortgage loans because, by definition, they do not impact or increase homelessness for the loan borrower.

LEGISLATIVE ACTION

In the wake of COVID-19, the federal government prohibited foreclosures of federally-backed mortgage loans. The vast majority of commercial, business-purpose loans are not federally-backed, so this moratorium has no direct impact upon

and local governments have taken broader approaches, either by legislative action, administrative action, or court action.

Two examples of legislative action on foreclosure moratoriums or forbearance requirements highlight the issue of separating businesspurpose and household-purpose loans.: The first is California’s AB3088, and the other is New York’s S8243C. Both require consideration of modification and forbearance requests, but California extends the requirement to many business-purpose mortgage loans and New York does not. It is not a coincidence that

it worked out this way. California requires licenses for most commercial mortgage loan transactions and regulates them; New York’s Banking Law does not. The forbearance requirements, then, directly stem from the various government’s understanding of our industry.

ADMINISTRATIVE ACTION Two examples of administrative action can also highlight the effects of broadly or narrowly viewing types of mortgage loans: (1) The New Jersey governor’s executive order for a partial foreclosure moratorium and (2) the New York governor’s executive order for a total foreclosure moratorium. New Jersey’s moratorium is partial in two respects. First, it does not stop the foreclosure process. The courts will continue to process new and existing cases all the way to judgment. Second, it applies ostensibly only to properties used for “residential purposes.” In another perplexing layer of administrative action on the subject, different county sheriffs who handle and process the foreclosure sales are each interpreting the executive order differently—from those who understand a residential structure that is unoccupied would not qualify for protection under the moratorium to those who equate “residential purpose” with “residential property” and apply the moratorium across the board. New York, on the other hand, completely banned foreclosures of all types for at least 90 days at the outset, subject to further extension. A few additional factors may be at play in New York. For example, with a judicial foreclosure

system, one would be expected to

have court appearances that were no

longer possible given social distancing

guidelines, as well as service of process

issues for the same reason. However, even with the quick advent of virtual court hearings, the moratorium still stuck. Foreclosure moratoriums also came into effect in states that allow for

nonjudicial foreclosures. For example, in a combination of legislative and

not apply to commercial loans. However, because post-foreclosure title insurance is critical to obtain in nonjudicial states, the quasi-administrative action of the title companies in Massachusetts prevented most foreclosures from moving forward out of their refusal to issue policies on properties foreclosed during the moratorium period.

COURT ACTION

administrative action, Massachusetts

passed a statute that provided for a 120day foreclosure moratorium that was

extendable by the governor. Critically,

this moratorium was strictly limited to

Judicial foreclosures are generally viewed as equitable proceedings that give the courts the power to do the right thing and consider all relevant WINTER 2021

LEGISL ATION

“WE FEAR THAT THE OVERLY BROAD INCLUSION OF BUSINESS-PURPOSE MORTGAGE LOANS WITH HOUSEHOLD-PURPOSE MORTGAGE LOANS WILL LEAD TO A PERMANENT BLURRING OF THE LINES IN THE MINDS OF OUR LEGISLATURES, ADMINISTRATIONS, AND COURTS.” circumstances to ensure complete justice is done. To that end, for example, the courts in Connecticut, by order of the chief administrative judge, ordered a moratorium on all foreclosure sales and would not allow existing cases not yet at judgment stage to progress further (new case e-filings were ostensibly still allowed).

For the vast majority of commercial,

Interestingly, the court made the determination “consistent with [FHA’s] 60-day moratorium on foreclosures” which, as stated previously, applies only to federally-related, FHA-insured mortgage loans. Recently, however, the court ordered the creation of a new form affidavit for those pursuing foreclosures that do not fall under the FHA moratorium to be able to proceed.

moratoriums. In fact, since the main

Connecticut recognizes the difference between business-purpose and householdpurpose mortgage loans. No license is required to lend on business-purpose mortgage loans, and such mortgage loans in foreclosure are exempt from a separate mediation requirement that homeowners enjoy. Yet, the court saw fit to overly extend its order in a manner that belied those distinctions.

PRIVATE LENDER

business-purpose mortgage loans,

the secured property is not owner-

blurring of the lines in the minds of our legislatures, administrations, and courts. AAPL consistently advocates for maintaining the complete separation of business-purpose and householdpurpose mortgage loans. Each time that distinction is breached, it becomes easier to breach again. It is a battle on many fronts, and these rushed emergency measures added yet another. AAPL remains vigilant in supporting actions to maintain the distinction that defines our industry, and you should bolster that effort in every way you can. ∞

occupied. Without an owner-occupant at risk of losing their home from

foreclosure, there is no need to block foreclosures on these types of loans.

Tenants are likewise not going to lose

ABOUT THE AUTHOR

their homes due to separate eviction

driver of these moratoriums is to prevent homelessness and provide a safe place for people to quarantine, resuming foreclosure of an unoccupied and

otherwise unused property can bring it

back into the market so it can be occupied.

MATTHEW GUNTER

A LASTING SYSTEMIC EFFECT

counsel at RCN Capital.Gunter’s focus

Matthew Gunter is assistant general

is in licensing compliance, mortgage

finance transactions, foreclosures, REO

The existing foreclosure moratoria and forbearance requirements are meant

to be temporary, such that no lasting

regulation remains in effect. That very well may be technically true. We fear,

however, that the overly broad inclusion of commercial, business-purpose mortgage

loans with consumer, household-purpose mortgage loans will lead to a permanent

property and tenant management, real estate closings, title clearing,

bankruptcy management, business

litigation, contract management, and lobbying/lobbying management.

Gunter received his bachelor’s degree

in political science from California State University Long Beach and a J.D. from University of Connecticut, School of

Law. Gunter presently practices in the Connecticut state and federal courts.

MEMBERSHIP

MEANS SOMETHING. Join the oldest national association representing the private lending industry as a viable alternative for borrowing and investing. As a member, youâ&#x20AC;&#x2122;ll gain prestige through our:

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SUPPORT

NETWORKING

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WINTER 2021

LEGISL ATION

BUSINESS-PURPOSE LOANS SHOULD NOT BE SUBJECT TO MORTGAGE LENDER LICENSING AAPL advocates for national business-purpose loan exemption from mortgage licensing. by Nema Daghbandan

enerally, private lenders in states that require a mort-

gage lender license to make

a business-purpose loan are already licensed, and those in states that do

not require a license are not licensed.

What is probably more surprising is that private lenders who make loans in states that require a license generally assume all states require a license to make business-purpose loans. Similarly, private lenders who operate in states that do not require a license to make a business-purpose loan assume they can make loans anywhere in the country without being licensed. Well, they are both wrong. American Association of Private Lenders has identified the inconsistent 50-state mortgage licensing patchwork for business-purpose loans as a key area we seek to impact and to create uniformity. 38

PRIVATE LENDER

SAFE ACT AND FEDERAL LAW RELATED TO MORTGAGE LENDER LICENSING A big misconception of many lenders is that federal law governs mortgage licensing.

Many lenders believe that if the collateral securing a loan is a 1-4 family residential property, they must be licensed as an

NMLS loan originator. The root of this

misunderstanding is a misunderstand-

ing of the SAFE Act and how it applies. In response to the financial crisis of

2008 and the rampant mortgage fraud

that occurred prior, Congress passed the Secure and Fair Enforcement for Mort-

gage Licensing Act (SAFE Act). The SAFE Act required all states to enact legislation that would require the licensure

of any person who “takes a residential

mortgage loan application” or “offers or negotiations terms of a residential mortgage loan for compensation or gain.” Under the SAFE Act, a residential mortgage loan is defined as “any loan primarily for personal, family, or household use that is secured by a mortgage, deed of trust, or other equivalent consensual security interest on a dwelling…” In plain English, this means any person who takes a loan application or negotiates the terms of a consumer loan secured by a 1-to-4 family residential property must be licensed as a mortgage loan originator (MLO) in the state where the mortgage property is located. The definition above was set out as a floor of regulation. What that means is that all states must require a MLO license if the person is involved with consumer loans secured by dwellings. However, states were free to enact legis-

lation that was more restrictive should

ates a residential mortgage loan.

SAMPLE STATE LAW DEFINITIONS

Similarly, a mortgage company is defined as a person that takes residential loan applications or negotiates a residential mortgage loan.

they choose to do so, and many did.

Under the Safe Act, all consumer loans secured by dwellings require a license,

but what about business-purpose loans? To answer this question, you must look at the definition of an MLO and mort-

gage lender in the state statutes. Because the SAFE Act permits each state to

Here the definition of a residential mortgage loan means, in part, a loan that is (a) primarily for personal, family, or household use, and (b) secured by 1-to-4 family dwelling. This is the same definition used by the SAFE Act.

tions are inconsistent, even when using

Therefore, in Colorado, a mortgage lender does not need to be licensed to make, take an application, or negotiate a business purpose loan.

rado and Oregon illustrate the point.

EX AMPLE 2: OREGON

define who is considered an MLO and/ or mortgage lender, the actual defini-

the same terms. Examples from Colo-

EX AMPLE 1: COLOR ADO

A mortgage loan originator is defined

as an individual who takes a residential mortgage loan application or negoti-

A mortgage loan originator is defined as an individual who (a) takes an application for a residential mortgage loan or (b) offers or negotiates terms for a residential mortgage loan.

At first blush, you may assume you do not need to be licensed to negotiate a business-purpose loan because the defini-

tion in Oregon is basically the same as

in Colorado. However, the definition of residential mortgage loan is a loan that is secured by a 1-to-4 family property. Oregon does not require the loan be

primarily for personal, family, or house-

hold use, only that the collateral is a 1-to-4 family residential property in order to require a license to originate the loan.

STATES WITH RESTRICTIONS FOR BUSINESS-PURPOSE MORTGAGE LENDERS A total of 21 states (outlined below)

have some form of restriction on business-purpose mortgage lenders.

License necessary to originate all

business-purpose loans // The most WINTER 2021

LEGISL ATION

AWA R D N O M I N E E S

restrictive states require a license to originate business-purpose loans regardless of collateral type. For example, in these states, you could be financing a 100-story office building and would still need to be licensed as a mortgage lender to make a loan. These states are Arizona, California, Nevada, North Dakota, South Dakota, and Vermont.

License necessary to originate a business-purpose loan if the collateral is the primary residence of the borrower // First, mortgage lenders are often surprised they can make a business-purpose loan secured by the primary

residence of the borrower. Mortgage lenders often refer to business-purpose loans as non-owner-occupied loans. But occupancy is not the most important issue for determining licensing or other consumer-related laws. In fact, it is generally irrelevant. However, for licensing purposes, the following states would require a license to make a business-purpose loan if the property is secured by the primary residence of the borrower: Georgia, Iowa, Kansas, Maryland, and Washington. License necessary to make a busi-

ness-purpose loan secured by 1-to-4

family residential property // A few states follow Oregon’s statutory scheme in which they require a license to originate a business-purpose loan if the collateral securing the loan is a 1-to-4 family residential property. These states are Utah, Oregon, Minnesota, and Idaho. Other restrictions // A few states have random rules for licensing. For example, in Rhode Island, if the loan is made to a natural person and is less than $25,000, then a license is necessary to make a loan. These states have some form of licensing and/or registration-related issue: Alabama, Florida, Kentucky, North Carolina, and Virginia.

AAPL’S PROPOSED SOLUTION AND CALL TO ACTION Unfortunately, the SAFE Act did not track other consumer legislation by providing an explicit exemption for business-purpose lending. The SAFE Act was clearly intended to regulate consumer loan transactions and was never intended to cover business loan transactions. Unfortunately, without an explicit exemption in the act, the current definitions led to unintended consequences in that state regulators attempting to comply with the SAFE Act ended up incorporating new definitions into their own mortgage lending licensing laws, which covered more than just the consumer loans. A proposed solution would be to amend the SAFE Act by including an additional exemption to the definition of loan originator under the act. This exemption would mirror the language already provided in TILA and RESPA, the primary regulations governing consumer loans. 40

PRIVATE LENDER

ABOUT THE AUTHOR

NEMA DAGHBANDAN ESQ. Nema Daghbandan Esq., a partner at Geraci LLP manages the firm’s Real

Estate Finance Group. Daghbandan’s practice entails all facets of lending

matters across the country, including but not limited to, the preparation of loan documents and addenda in all 50 states, loss mitigation

efforts, preparation and negotiation of secondary market documents,

including loan sales and participation agreements, line of credit/warehouse facilities, hypothecations, and

securitizations. Daghbandan advises financial institutions on various

lending matters, including licensing, usury, and foreclosure. He is also an expert in default management and

By adding this simple exemption, states would finally have clarity about how to implement their own regulations surrounding mortgage lending licensing. This clarification would demonstrate Congress’s affirmation that the SAFE Act was intended to protect consumers and not intended to cover business or commercial credit transactions. AAPL is specifically proposing the following additional exemption to the definition of loan originator: (v) does not include a person or entity solely involved in extensions of credit for business, commercial, agricultural,

or organizational credit as provided for in section 1603(1) of Title 16. This consistency in exemptions helps provide a clear framework for analysis for commercial mortgage lenders.

leads the firm’s nonjudicial trustee group. He can be reached at Nema@GeraciLLP.com.

AAPL intended to advocate this position this year in March during our annual Day on the Hill, which unfortunately coincided perfectly with the coronavirus pandemic and subsequent lockdowns. The Government Relations Committee of American Association of Private Lenders still strongly believes, however, that this issue will remain at the forefront of our advocacy efforts. ∞ WINTER 2021

GROWTH STR ATEGY

Pivoting in the Private Lending Space During a Global Pandemic How easily can you reposition your business model to weather the bad times? by Jeffrey Levin

nprecedented. Pivot.

inward to assess and reevaluate. The forced

Quarantine. Zoom.

home orders, provided the industry—and

Peloton. Puppies.

These are just some of the words that have come to embody our current environment. How did we get here? In January 2020, the private lending space and the economy were humming along. At my company, Specialty Lending Group (SLG), we had just begun to explore new opportunities, including efforts to capture greater market share, starting a new fund to help with our forecasted growth, and actively seeking new loans. In March the world—and all plans—came to a standstill. Unbound

shutdown of the economy and the stay-atme, personally—with time to reflect.

Prior to the global pandemic, the private

lending industry was getting increasingly

crowded, margins were being squeezed by easy access to both credit and capital, and loan volume was at an all-time high. As uncertainty about the length and effect of the economic shutdown persisted, a retreat to basics became necessary.

RETREAT, REFLECTION, AND REEVALUATION

optimism was replaced by uncertainty. As the global pandemic hit U.S. shores, loans came to a halt and the industry turned 42

PRIVATE LENDER

At SLG, we went from an offensive strategy to a defensive one. Stuck at home,

I had the luxury to reflect on industry trends and loan performance in real time. We took a deep dive into the health of both our loan and our real estate portfolios. We looked at our performing and non-performing loans with the objective of creating different exit strategies based on various scenarios for all categories of assets. Like many other private lenders, we decided to temporarily suspend lending while we reevaluated the market and considered the uncharted terrain. Unfortunately, we were under-capitalized at exactly the wrong time. We had to retreat and map out a survival plan. Where better to retreat than a remote cabin in the middle of Canada? After being quarantined in Washington, D.C., from March to June and rarely leaving

our home, my family headed north to the Canadian Shield. Lucky for me, I married a Canadian, so we were all able to get away, gain entry, and regain perspective. Being able to spend more time with my family had a grounding effect on me. Combined with being away surrounded by big open sky, I had some space to really dig into my business, how the industry was reacting, what SLG needed to do, and how SLG would fit into a post-COVID world. Although markets seized up at the beginning of the pandemic, as the summer progressed, those who were well-capitalized were poised to take advantage of the cash crunch plaguing many lenders. As secondary markets closed, some lenders were left holding loans on warehouse lines or in cash, creating liquidity challenges. Even

those who had ample access to funds went into caution mode, making getting a loan much more difficult. Only the most experienced and qualified borrowers could get loans, and those loans were issued at much more conservative LTV and LTC limits and higher rates and cost. This re-created the opening for the kinds of margins that had all but disappeared pre-COVID.

TIME TO PIVOT At that time, SLG was not in a liquid position to leverage the opportunities created by the tightening of the private lending market. We had to pivot and figure out where our sweet spot was. It is trite to say that within every crisis there

is opportunity for those ready to seize it. A global pandemic was not something we had anticipated or ever experienced, so the ensuing recovery remained unknown. Seizing opportunity required foresight and a steadfast confidence. After taking a step backwards, SLG reverted to the plans we had been making before the pandemic. Of course, we had to adapt to new circumstances and tinker with implementation. We decided to move forward by leveraging technology and broadening our product offerings. Although everyone has had to learn how to leverage technology to work remotely, our objective was to use technology to become leaner and more efficient. Our pivot also included broadening our product offerings and creating WINTER 2021

GROWTH STR ATEGY

“Life is about how you react in the face of adversity, not about how successful you are when things are easy.”

additional business lines and sources of revenue. To do this, we looked to SFR long-term rental programs, commercial, multifamily, and owner-occupied loans.

ness lines can support and grow from

In times of turmoil and uncertainty, it is always best to return to your roots. I began my career as a residential mortgage lender. When the Fed dropped interest rates to zero in March 2020— and then pledged in September to keep it hovering around zero for years to come—the residential mortgage market exploded. During my career, I had built and run two successful residential mortgage companies, so adding owner-occupied loans to our product offering seemed like a no-brainer. To facilitate this move, I decided to reinvigorate the brand I had left behind when I turned my focus to private lending.

LESSONS LEARNED

SLG has also turned to new business verticals that leverage our private lending experience. We are building a real estate development arm, investigating ways to enter the proptech market, and becoming a stronger, more reactive and flexible platform for private lending. The best way to survive in times of uncertainty is to have a diversified business model so that different busi44

PRIVATE LENDER

review where you are. You must identify and get in front of small problems before they snowball and become big problems. When times are good, success is easy. The real question is: How is your portfolio and your business model positioned to weather the bad times? ∞

ABOUT THE AUTHOR

one another. We have reopened for

business leaner and more diversified.

As we retreated into our homes in March, and the world as we knew it came to an

abrupt halt, suddenly there was room for reflection. What I realized, aside from the need for diversification within the

company and multiple buckets of capital, is that life is about how you react in the

face of adversity, not about how successful you are when things are easy. Without

the time to reflect, you can continue down a path and not even realize that it may

not be your path. Sometimes, when you

think you should be going in one direction to get to where you are going, you need

to pivot and go in a different direction. When I consider the lessons I have learned during these trying times, I would say that living your life and finding time to spend with the people who are most important to you is what really matters. That is

the key to a successful business career. I also learned that as a private lender,

you need to find the time in your day to

JEFFREY LEVIN Jeffrey Levin is a renowned lending

industry expert with 25 years of real

estate financing experience. During

his career, he has overseen total loan production of more than $1.5 billion

and has generated over 3,500 loans. Levin is the president and CEO

of Specialty Lending Group and

iWantaLowRate.com. A frequent

speaker and panelist on real estate

investing, Levin is the author of “The Insider’s Guide to Private Lending.”

He earned a B.A. from The American University and lives in Washington, D.C., with his wife and two sons.

Where will your network take you? The top echelon of the real estate investment and private lending industries meet in one place: the Presidents’ Circle. Circle members build deep connections across the REI landscape, learn tomorrow’s trends from leaders driving the industries, and step into the spotlight via Think Realty and the American Association of Private Lenders’ powerful media outlets. Will you be there? aaplonline.com/presidents-circle

WINTER 2021

LOAN SERVICING

PRIVATE LENDER

THE POWER OF LOAN SERVICING Although servicing may not be exciting, it can be rewarding.

stamp communications helps keep both

you and your borrower on the same page— while better protecting your investors’

investments with the proper audit controls. Having these discussions clearly labeled and bookmarked becomes essential if

things take a wrong turn and delinquencies and foreclosures come into play.

Communication between you and your

borrowers is vital, especially as lending environments become more compli-

cated with an increase in loan modifications, deferments, and forbearances.

by Nathan Goodhart

When your borrower has irregular payments and deferments, it typically has

a direct impact on distributions. These

calculations would give any Excel guru a headache. Add to that the fun game

of telephone tag between you, an outsourcer, the borrower, and even your

“Servicing is the most exciting part of alternative lending”—said no lender ever!

you to fund their next project or give you

most important back office process that

are a few things to keep in mind.

This is where another key to in-house

COMMUNICATION AND LOSS MITIGATION

for any loan situation and scenario. If you

Still, loan servicing can arguably be the helps your firm scale and grow quickly. Many lenders try to take on servicing manually using spreadsheets and paper

files, or they outsource the responsibility altogether. Either way, you typically end up putting more work on your shoulders. The result is a customer service nightmare for your investors and borrowers. With the right technology in place, however, reporting, borrower communication, and investor relations become easier and rewarding to manage. When you can process a payoff, negotiate a loan modification, and never

more capital, leading to growth of your firm. So how can you make servicing rewarding instead of burdensome? Here

What lenders do not immediately realize is that servicing goes beyond the numbers. When your borrowers need to negotiate payment terms after the loan has already been funded, you must be able to track communication. If you do not have the CRM controls in place to track these discussions, it can become a “he said, she said” situation that lacks clear direction.

miss or miscalculate a distribution, your

Having event journals and reminders that

clients on both sides of the process will want

detail conversations and physically time

investors and the stress escalates.

It goes without saying: Stressed borrowers and upset investors are bad for business.

servicing comes into play—being prepared have the servicing technology in place

to begin with, then loan modifications,

deferments, and forbearances can become an opportunity rather than a problem.

When you get that call from your borrower requesting a change in terms, you—as both the lender and the servicer—can

efficiently and effectively negotiate win-win solutions for the borrower, your investor, and your firm. You do not have to spend

hours in a spreadsheet running calcula-

tions or on the phone going back and forth with a third party. You have the controls in place and at your fingertips instantly.

WINTER 2021

LOAN SERVICING

SAFEGUARDING ASSETS With the right technology, you can better protect your investments through compliance and insurance reminders. Surprisingly, it is easy for lenders (especially newbies) to overlook an incredibly important fail-safe to your investment— property insurance. Many alternative lending projects include financing construction projects—fix-and-flip, ground-up, bridge, purchase loans, and the list goes on—but the risk is similar, and you must be prepared. Construction projects do not always go as planned, and Mother Nature sometimes wreaks havoc too. If your borrower lacks the proper insurance, the responsibility and the lack of preparedness falls on both the lender and the borrower. Tracking insurance and setting reminders to initiate your own insurance if the borrower does not react fast enough can prevent a disaster to your portfolio. You need to have a process to track this to protect you, the lender, and your borrower.

HMDA, RESPA, AND TRUST ACCOUNTING Compliance is another area you should not overlook. Dodd-Frank, in particular, added rules and regulations lenders need to monitor. The word “compliance” alone makes many lenders second guess servicing in-house. Frankly, monitoring compliance can be quite easy to balance if you have the right system in place. Simply assuming your spreadsheet or third48

PRIVATE LENDER

party servicer is properly managing state and federal regulations is risky. Establishing back office processes that easily provide HMDA reporting, follow RESPA guidelines, and help you monitor escrow accounts as required for high-rate or highcost mortgages can offer you peace of mind and make audits simple and stress free.

ADDITIONAL REVENUE AND LIQUIDITY One of the best parts about servicing in-house is the additional revenue you can earn through retaining servicing fees and late fees rather than splitting them or forfeiting them to a third party. Servicing in-house gives lenders the opportunity to make revenue and profits from unexpected areas too. For example, you can create liquidity by selling off all or part of a loan, yet retain the servicing to continue to generate a trailing interest strip or interest arbitrage. Many private lenders continue to receive 100-200 basis points or 2% interest or more “after” they have sold or syndicated their loans.

Although more revenue is great for the lender, your borrower can appreciate that you have the final call on late fees and additional service fees, in general. When you control whether or not fees are assessed, you enhance the long-term relationships with your borrowers. You decide whether to be lenient when assessing late fees to a borrower who maybe just fell into a month or so of hard times. Either way, it is your decision, not that of someone outside of your organization.

IT’S ALL ABOUT CONTROL At the end of the day, servicing in-house is about one thing: maintaining complete control over your portfolio. When a lender can control the entire process from origination, to servicing, to pay off, they can control the entire relationship and life cycle of the loan. ∞

ABOUT THE AUTHOR

The lenders you sell to actually enjoy the trailing interest strip, since the original lender still has skin in the game to ensure a continued successful project. The opportunity to earn interest strips on sold-off loans is really only available if you service in-house. A lot of lenders will assume that servicing in-house only provides minimal returns on the servicing fees. The negotiation prowess of holding interest strips, plus servicing fees, is the most rewarding part of servicing, and with the right processes and system in place, it’s very easy to automate and manage.

NATHAN GOODHART Nathan Goodhart is a global

software sales executive at Applied Business Software, makers of The

Mortgage Office. He can be reached at ngoodheart@absnetwork.com, TheMortgageOffice.com, or (800) 833-3343.

WINTER 2021

LENDER LIMELIGHTÂ WITH SUSAN NAFTULIN

PRIVATE LENDER

An Unexpected Journey Susan Naftulin navigated a career from history major to fashion retail to private lending and entrepreneurship— a path she never envisioned. by Katie Bean

usan Naftulin is an unexpected entrepreneur. Perhaps no one was more surprised than she was to find herself on this path..

“I always call myself the accidental entrepreneur because I am not a risk-taker,” she said.

“I’m not entrepreneurial. I like the security of knowing that someone else is doing most of the work to make sure I get my paycheck.” Yet her journey led her to co-found Rehab Financial Group.

FASHION SUITS A native of suburban Philadelphia, Naftulin started her career in fashion retail in New York City. She wasn’t like the wide-eyed ingenue in “The Devil Wears Prada,” trying to make it in the industry. Naftulin was far more practical: She was looking for a field that she could break into as a history major, and she found it. WINTER 2021

LENDER LIMELIGHT WITH SUSAN NAFTULIN

She was accepted into the employee management training program at Abraham & Strauss. From there, she went on to work at Saks Fifth Avenue and Lord and Taylor. After about a decade, Naftulin said she

‘A NATURAL FIT’ At age 30, Naftulin enrolled in law school. Again, her reasoning was practical: She

the family,” medical school was out. Law school, however, seemed like a natural fit. The topics that resonated with her were code-driven courses, including bankruptcy.

needed a life change, but if she was getting

“I don’t get any pleasure out of the the-

a graduate degree, she wanted it to be one

oretical conversations. I don’t like the

“It’s a hard place to live when you don’t

that could directly lead to a career path.

abstract. I like the concrete,” she said.

have $50 million,” she joked.

Branding herself the “nonscientific one in

“The code cases to me were like a game

“soured” on New York.

PRIVATE LENDER

of monopoly: You advance to this square, and this one says go to free parking.

There’s a logical progression that you go through to end up with the appropriate and applicable law. It was the courses

where it was almost like playing escape room: there were a bunch of clues that

you had to follow, and you would eventually get to the right answer.”

At her first summer internship with a law firm, Naftulin rotated through depart-

ments. She clicked with the bankruptcy/ creditors’ rights department, and that’s

where she started her law career. When

bankruptcy work was slow, she helped the real estate department. What she learned

was foundational for her career trajectory. “There was a lot of interplay between the

two, but that’s really where I learned a lot about real estate practice that I wouldn’t necessarily have learned if I had been

there at a different time,” Naftulin said. Working at a law firm in the 1990s, Naf-

ON THE MOVE AGAIN Around the time she was considering how best to move forward, a mortgage lender in western Philadelphia approached Naftulin. He was looking for in-house counsel. She found the opportunity to be a great fit with her skills, interests, and ambitions. Starting as an assistant vice president, Naftulin rose to senior vice president and managing attorney. Bankruptcies, title issues, and the real estate owned (REO) department were under her purview. “I would have stayed there forever but for the giant meltdown of the mortgage industry in 2004 to 2006,” she said. The decimated company shrank from about 1,100 employees to fewer than 100. Naftulin was among the last of the employees, part of the group that sold all the loans and servicing rights, before the company ultimately closed.

tulin was bumping up against the glass

ENTREPRENEURSHIP BECKONS

firm, she got married and had two sons.

Over the next few years, Naftulin worked to regain her footing in the industry. She briefly joined a REIT. Then the owners of the mortgage lender that went out of business approached her. They had started a small new lending company, and Naftulin became general counsel there. When the owner died, however, she felt it was time to move on again.

ceiling. In the six years she was at the

She found it difficult to envision a path to

become a partner at the firm that satisfied both her drive and what she saw as a commitment to her family.

“I didn’t want to be an associate forever,”

she said. “It was very difficult for women with children to become partners. Quite

frankly, we had two women there who had managed to achieve it and made sure to

shut the door behind them—meaning they managed it so poorly and built up so much resentment among the male partners that it made it that much more difficult for women behind them.”

Her next job was a bit of déjà vu. A company that offered rehab loans hired her, but the two partners decided to shutter the business. Once again, Naftulin managed the closure. This time, there was a surprise ending.

THIS OR THAT ? TEXT OR CALL? PEN OR PENCIL? COFFEE OR TEA? COMEDY OR MYSTERY? DRAMA

MOUNTAIN OR BEACH? NIGHT OWL OR EARLY BIRD? WFH LOOK: FULLY DRESSED OR ZOOM SHIRT? DRESSED WITH UGG SLIPPERS

As the business was winding down in 2009, one of the partners told Naftulin he thought the time was right to try again— but with her as his partner. For a year, they lent their own money and discovered there was indeed a viable market. So, in 2010, they started a fund and officially launched Rehab Financial Group.

BACKGROUND UNDERSCORES CURRENT SUCCESS Rehab Financial Group works exclusively with residential investment properties, mostly one to four units and rarely more than 10 units. “If we have to take the property back, I don’t want to be in the landlord business,” Naftulin said. WINTER 2021

LENDER LIMELIGHT WITH SUSAN NAFTULIN

FAVORITES? MOVIE? AIRPLANE T V SHOW? SUCCESSION BOOK FOR PLEASURE? “MEMOIRS OF A GEISHA” BY ARTHUR GOLDEN

SEASON? SPRING GUILT Y PLEASURE? REAL HOUSEWIVES—DOESN’T MATTER WHERE THEY’RE FROM

However, the company rarely finds itself

in that situation because Naftulin, relying on her background in bankruptcy and

managing foreclosures, knows what red flags to look for in applications.

“I had seen so many default files that when I opened those up, it’s almost like I could

see why they defaulted in red lights from loan origination. But somebody wanted the loan closed, so they ignored certain

things,” she said. “I think I approach each loan file looking for those reasons why a loan would default—and we have an

incredibly low default rate. Incredibly low. And I think that’s because I’m so strict on the front end.”

She has good reason to be choosey. She’s

MEMOR ABLE TR AVEL S Before the coronavirus pandemic put a damper on most vacation plans, Susan Naftulin was an avid traveler.

Her favorite trip was a family vacation to India a few

years ago when her sons were both college-age. They traveled with a guide throughout northern India,

visiting Delhi, Agra and the Taj Mahal, New Jaipuar, and Mumbai.

To Naftulin, the stark differences between India and the Western world were intriguing. A guide helped them find authentic experiences.

“We’re not museum people,” she said. “We saw the

most fascinating things and interacted with the most fascinating people. … We’ve done really interesting trips, but that has to have been the highlight so far.”

ees, and everyone invested in Rehab Financial Group’s fund is friends or

family. Though she’s been clear with them that nothing is guaranteed, her goal is to continue providing a healthy return.

NO EXCUSES The challenges Naftulin has overcome

have proved formative in her career and

success. In law and private lending, she’s navigated being a woman in a man’s

world. It’s never been an excuse for her, just a reality.

“I’ve put up with a lot of nonsense,” she

said. “I have two sons, and if you ask them what my motto is, they would both tell

you it’s ‘don’t be a victim.’ Just figure out

a way around it. Work around it and learn

The only negative to such a wonderful trip? “We got

to pick your battles. It’s not worth fighting

about a year to eat it again.”

at one point in my career that if it isn’t

a little tired of Indian food three times a day. It took

responsible for the company’s 13 employ-

PRIVATE LENDER

over everything. I reached the conclusion

affecting my salary or my upward mobility, just let it go.”

At one job, her upward mobility and

salary were in jeopardy. She was set to

be promoted to senior vice president, but there was pushback from male managers who “didn’t like my style,” Naftulin said. “In many, many ways, I think like a man and I act like a man, and that’s very

uncomfortable for some people,” she said. As a compromise, she agreed to go to a

training she referred to as “charm school.” She received the raise and new title.

therapy, radiation and surgery—and she worked throughout her treatment. “That was my sanity, because when I went to work and I was just a voice on the phone to people, I wasn’t the sick woman,” she said. Surprisingly, Naftulin said, her cancer has been the fourth best thing that has hap-

“When people die, everyone comes out of the woodwork—like when my parents died, everybody showed up to tell me how

you just can’t budge the culture.

appreciated them,” she said. “I got to get

matter what you do, take your talents

that while I was alive, and I was overwhelmed with the love and the attention I got from not only the people close to me

CHALLENGE BRINGS PERSPECTIVE

Naftulin said she is more appreciative of

but the people I never expected it from.” every day. Now, she said, she doesn’t sweat

KATIE BEAN

the small stuff and she’s less Type A.

Katie Bean is a former newspaper and

different set of challenges to overcome.

Though there’s no sign of active disease

4 breast cancer. She’s endured chemo-

officially cancer-free.

In 2018, she was diagnosed with Stage

ABOUT THE AUTHOR

fabulous they were and how much they

somewhere else,” she said.

Most recently, Naftulin has had an entirely

“The old me would never have been able to live with that uncertainty. The new me, I’m just getting up every day and doing my thing until I can’t,” she said. ∞

and the birth of her two sons).

much they loved my parents and how

“The truth is, if you can’t change it no

Her response to that reality is proof of the transformation she’s gone through.

pened to her (after marrying her husband

But in some cases, such as at the law firm,

Naftulin said it’s better to recognize when

“It still lurks in my life,” she said. “I may never have a recurrence, but I might.”

as of August 2019, she’s not considered

magazine editor who loves telling the

stories of businesses and great leaders. She is based in Kansas City.

WINTER 2021

CASE STUDY

HOME REMODEL “OPENS UP” TRADITIONAL CALIFORNIA HOME A full remodel of a worn-out home in a popular Los Angeles-area neighborhood exceeds expectations, in spite of the pandemic.

his traditional home is nestled in the San Fernando Valley region of Los Angeles,

with access to great restaurants, shops, and

essentials. But it was worn out and in desperate

need of a modern touch to restore it to a vitality that matched the neighborhood’s.

The borrower embarked on a complete top-to-bottom remodel that included opening the f loor plan to create a more modern feel. In addition, a large, open family room and an entertainer’s open kitchen that backs onto a

2020. Even so, work on the project continued, despite the halt of funding for many other projects throughout the country. The borrower was able to complete the remodel and sell the home in just 9 months—it closed escrow in October 2020, despite the pandemic. The home not only sold quickly, it sold at a record price for that area. Triumph Capital Partners’ commitment to working

beautiful pool and open backyard were created To com-

together to find solutions during a pandemic and being a

plete the makeover, all new appliances, f looring, and

true capital partner allowed the borrower to make a very

high-end material were incorporated to give the home a

good profit and turn that into their next project, which

brand-new feel.

highest and best price. But then COVID-19 hit in March

Triumph Capital Partner recently funded. Because of this

The loan for the home originated in December 2019.

loan, the borrower has confidence to execute on future

The goal was to sell the home in 12 months or less, at the

projects with Triumph Capital Partner as their lender.

PRIVATE LENDER

Lender // Triumph Capital Partners Client/Borrower // H Stack London LLC Location // 19605 Rosita Street, Tarazana, California 91356 Architecture Style // Traditional Year Built // 1972 Square Feet // 2,681 Loan Amount // $$1,192,500

AFTER

LTV // 85% BEFORE

LTC // 87.65% Credit Score Considered // Yes, 758 Client Borrower Experience Level: // The borrower was

looking for a higher leverage loan but did not qualify based

on experience under standard guidelines. But, after consid-

ering the borrower credit score, the location of the property, and the borrower’s previous experience being “like-for-like” projects, the lender was able to get the borrower leverage maxed out and make an exception. Interest Rate: // 8.49% Loan Term // 712 months

AFTER

Rehab Budget // $3,000,000 BEFORE

AFTER

BEFORE

BEFORE WINTER 2021

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Loan Purpose Fix and Flip Value-Add

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PRIVATE LENDER

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WINTER 2021

MARKET TRENDS

Home Flipping in the Time of COVID Renovate-and-resell profits have soared during the pandemic, but does that make it a good time to flip? by Daren Blomquist

hen the COVID-19 pan-

pleted home f lips—properties sold

But starting the week of March 22, less

March, Chicago-based

a second time in an “arms-length”

than two weeks after the pandemic dec-

transaction within a 12-month

laration, completed home flips decreased

period—increased an average of 5%

from a year ago by double-digit percent-

compared to the same weeks in 2019.

ages for 14 consecutive weeks, through the

demic was declared in

investor Michael Hallman scrambled

to mitigate any home flipping losses that might result from the shock to the economy and housing market.

“I’ve got about 10 properties right now

for sale. … I’ve taken lower prices than normal. …I’ve had people pulling out

of them because of the coronavirus,” he said in a late March interview. “I can’t wait six months for it to clear up. I’ve

just got to cut my losses and move on.” Like Hallman, investors who renovate

and resell distressed properties (flippers) across the country pulled back following the declaration of the pandemic, accord-

ing to an Auction.com analysis of public

record data from ATTOM Data Solutions. In the first 10 weeks of 2020, before the pandemic, the number of com60

PRIVATE LENDER

HOME FLIPS FALL DURING PANDEMIC 7,000 6,500 6,000 5,500 5,000 4,500 4,000 3,500 3,000 2,500 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 WEEK OF THE YEAR

2019

2020

Source: Auction.com analysis of public record data from ATTOM Data Solutions

week of June 21. The number of home flips has continued to stay below year-ago levels since then, although not at the consistent double-digit percentages seen in the first three months following the pandemic.

FLIPPING PROFITS BOOSTED

and sale price) in the first full 10 weeks

Pittsburgh, Pennsylvania (128.7%),

same weeks in 2019. But since the week of

Pennsylvania (104.5%), Buffalo, New

tember (the most recent data available),

Nationwide, the average gross flipping

of the year was averaging 2% above the March 22 and through the end of Sep-

York (96.2%), and Akron, Ohio (93.1%).

average gross flipping revenue increased

ROI during the same period was 42.4%.

an average of 15% compared to a year ago. A similar pattern shows up in gross

Fears that the renovate-and-resell market would flounder because of a home price downturn triggered by the pandemic turned out to be, somewhat surprisingly, unfounded. Although home price appreciation initially slowed following the pandemic declaration, it quickly recovered in heroic V-shaped fashion.

Cleveland, Ohio (105.7%), Philadelphia,

RISING DEMAND FOR DISTRESS

flipping return on investment (gross

flipping revenue as a percentage of the flipper’s purchase price, not including

any repair, holding or closing costs). Gross flipping ROI was declining an average of 6% from a year ago in the first 10 weeks of the year, before the pandemic declaration. But starting the week of March

This quick recovery in home price appreciation, coupled with a scarcity of homes for sale, has helped to boost home flipping profits during the pandemic.

22, gross flipping ROI increased an

According to the Auction.com analysis, average gross flipping revenue (the difference between the flipper’s purchase price

the pandemic (second and third quar-

average of 7% compared to a year ago. Among 98 metropolitan statistical areas with at least 200 home flips during

ters of 2020 combined), those with the highest gross home flipping ROI were

AVER AGE GROSS FLIP REVENUE BOOS TED DURING PANDEMIC

Rising home flipping returns have

helped drive more demand for dis-

tressed properties, which are often good candidates for the renovate-and-resell

strategy. Bank-owned (REO) homes sold

on the Auction.com platform in September received an average of 12 bids per property, up from 11.1 in the previous

month and up from 8.3 a year ago to a

new all-time high as far back as data is

available, September 2012. The average

number of bidders per REO sold in September increased to an eight-year high. The heightened competition for REO

properties helped push the average price per square foot for those homes to a new

all-time high of $87.30 per square foot in

July, still 61% below the average price per

$95,000

square foot of $225.30 for all existing home

$85,000

sales in July, according to ATTOM data.

$75,000

Despite the rapidly rising potential profits available on home flips, growing com-

petition and rising prices for distressed

$65,000

properties have helped keep Hallman,

$55,000

the Chicago-based investor, cautious.

$45,000

“I’ll have my limit, and I’ll go above my

limit a little bit sometimes,” he said, refer-

$35,000

ring to his bidding for auction properties.

$25,000 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 WEEK OF THE YEAR

2019

2020

Source: Auction.com analysis of public record data from ATTOM Data Solutions

“A lot of people are first-time investors. They’ll do them once and they’ll get

killed on them, and they won’t be back.” WINTER 2021

MARKET TRENDS

Virtually all properties being sold at foreclosure auction during the pandemic are vacant or abandoned and, therefore, require no eviction. That’s because vacant or abandoned properties are exempt from a nationwide foreclosure moratorium on government-backed mortgages that has been extended through the end of 2020.

in the Chicago-area counties where he

RISING EVICTION RISK

buys, purchasing an occupied property to flip becomes even more of a risk.

Hallman, who has been flipping between 12 and 20 properties a year since 2012, said staying conservative has been a key to his long-term success as a real estate investor.

“The occupied property is always the wild card. The courts are biased toward the tenant. If you’re an investor, they don’t care about you,” he said, adding

“I’m a pretty conservative investor, and I’ll stay conservative,” he said, noting that’s particularly important during the pandemic because of moratoria on evictions.

the backlog of eviction cases now build-

Although the foreclosure moratoria mean less inventory overall at the foreclosure auction, the available inventory has slowly rebounded as banks and mortgage servicers have been able to identify more properties in the foreclosure process that are vacant or abandoned. The number of homes brought to foreclosure auction nationwide via

ing will slow down the process even when eviction moratoria are lifted.

Even before the pandemic, Hallman planned for a flip to take twice as long if it required an eviction. He planned six to eight months for flips with no eviction and 12 to 18 months when an eviction was required. Now that evictions are on hold

NO-EVICTION FLIP OPPORTUNITIES Foreclosure auctions represent a less eviction-heavy acquisition channel for home flippers like Hallman during the pandemic.

THE RETURN OF FORECLOSURE AUC TIONS BY S TATE September 2020 Foreclosure Auctions: Pct of Year-Ago Levels 111%

-8%

5% 10% 0% 7% 38%

28%

100%

33%

92%

27% 20%

43%

86%

28%

35%

28% 16%

14%

15%

20%

56%

21%

29%

54%

46% 43%

19%

26%

27%

49%

16% 28%

9% 16%

111% 38%

71%

35%

25%

46% 14%

Source: Auction.com

PRIVATE LENDER

“Although the foreclosure moratoria mean less inventory overall at the foreclosure auction, the available inventory has slowly rebounded as banks and mortgage servicers have been able to identify more properties in the foreclosure process that are vacant or abandoned.”

ABOUT THE AUTHOR

DAREN BLOMQUIST Daren Blomquist is vice president of

market economics at Auction.com. In this role, Blomquist analyzes and forecasts complex macro and microeconomic

data trends within the marketplace and

greater industry to provide value to both

buyers and sellers using the Auction.com platform.

the Auction.com platform increased to a six-month high in September. Foreclosure auction volume in September was still 78% below year-ago levels, but the inventory was much closer to year-ago levels in some states, including Colorado, Oklahoma, Kentucky, and Arkansas. Foreclosure auction volume in those four states was less than 50% below year-ago levels in September. Similar to REO auctions, competition for foreclosure auctions has also heated up during the pandemic. The foreclosure sales rate (percentage of properties brought to auction that ended up selling to a thirdparty buyer) increased to a seven-year high of 55.6% in August, according to data from the Auction.com platform. The foreclosure sales rate in 2019 averaged just under 40%. But unlike REO auctions, the additional competition at foreclosure auctions

has not resulted in an increase in the average price per square foot. In fact, the opposite is true. In September, the average price per square foot for foreclosure auctions sold on the Auction.com platform was $78.20, down 20% from January and down 21% from a year ago.

Blomquist’s reports and analysis have

The lower price per square foot is likely a result of the shift toward vacant and abandoned properties, which tend to have more deferred maintenance and represent the type of value-add opportunities that attract renovate-and-resell investors like Hallman.

CBS, ABC, CNN, CNBC, FOX Business,

been cited by thousands of media outlets nationwide, including all the major news networks and leading publications such

as The Wall Street Journal, The New York Times, and USA TODAY. He has been

quoted in hundreds of national and local publications and has appeared on many national network broadcasts, including and Bloomberg.

“They’re an eyesore for the neighborhood and nobody likes that property on their block,” said Hallman, adding that he typically sells to owner-occupant buyers after extensive renovations. “I sell them like I’m going to live in them. We don’t skip corners. …They look beautiful when we get done with them.” ∞

WINTER 2021

MARKET TRENDS

Bridge Loan Market Is Changing Tides In the wake of COVID-19, new lending trends are emerging in the bridge loan market. by Erica Sikoski

n March, COVID-19 disrupted

The other was to maintain lending with

curfews and lockdowns

Now that the private lending world has

everyone’s daily life. From

to wearing a mask in public, to

schools and workplaces shutting

their doors and moving to virtual formats, everyone’s personal

and business routines changed.

The real estate industry did not walk away unscathed either.

Because the industry was navigating uncharted territory, private lenders approached these new market challenges with different strategies. Two main strategies were prevalent. One was to press the pause button on lending on anything new during this time to focus on managing existing loans. 64

PRIVATE LENDER

very strict and specific guidelines. begun to adjust to current market fluctuations and uncertainties, new lending trends have emerged in the bridge loan market. They are switching up customer demand and investment strategies.

THE COMEBACK KID

until another financing source, usually conventional financing, is acquired. Bridge loans also give investors time—time to get a property ready and

Due to its ability to provide quick turnaround times and competitive pricing, bridge financing has always been, and will continue to be, a great resource for

cash-flowing, whether as a rental property or a flip, to be relisted in this fast-paced market. With the current pace of the market, real estate investors need every possi-

real estate investors. Bridge loans provide

ble tool to keep up. The mix of having very

short-term financing options, typically

low inventory, quick turnaround times,

and properties selling at a higher cost is a

in September. That indicates a continuance

great cocktail for bridge financing to liter-

of an unusually active and aggressive fall/

ally close the gap for investors looking to

winter seller’s market. This data sets up

acquire additional investment properties.

the market well for investors continuing

Realtor.com’s October Housing Data Release

to acquire investment properties in the

revealed that nationally a typical home for

upcoming winter months, as the real estate

sale spent only 53 days on the market. That

market shows no sign of slowing down.

is 13 days fewer than the same time in 2019.

Something to keep in mind when deter-

For the first time in Realtor.com’s records,

mining an investment strategy and when

in 2020, homes sold faster in October than

to utilize bridge financing: Inventory

of newly listed properties has declined

by more than 7% nationally throughout

this year, increasing the competition on properties listed and driving up prices. Realtor.com’s October Housing Data

Release revealed the median national

home listing price increased by 12% over 2020, to $350,000 in October. This is up

from the 11% growth seen in September. Bridge financers can speed loan closing for investors in a competitive market.

WINTER 2021

MARKET TRENDS

LUCRATIVE OPTION FOR INVESTORS The increased demand for bridge financing can also be attributed to the historically low-interest rates and the fast pace with which bridge lenders can provide funding. Although bridge loan rates are dependent on experience, credit score, term, and the size of the loan, the rates generally range from 4 to 13%. Those rates are lucrative when you consider how swiftly the bridge loans can be acquired.

add multiple inspection reports for rehab draws, a project’s timeline increases substantially. Given this situation, short-term bridge loans for fix-andflip projects are not as lucrative now as they were in January and February. This does not mean investors are walking away from bridge financing altogether though. In fact, just the opposite is true. Real estate investors are simply adjusting their investment strategies and, therefore, require different types of bridge loans

As stated previously, properties are spending, on average, only 53 days on the market, creating a fast-paced and competitive environment for investors. Working with bridge financers to purchase properties allows investors to close on these properties much faster than conventional funding, typically in just 7-15 business days.

from private lenders. Since investors are

Combine the experienced investors with the folks who left the unstable stock market to invest in real estate, as happened in 2008, and the number of loan requests to bridge financers has significantly increased this year.

Association’s weekly report, refinance

LONGER-TERM OPTIONS Although short-term bridge financing hasn’t slowed down, seasoned real estate investors have switched up their investment strategies this year. The days of buying distressed properties to renovate and quickly sell are no longer feasible due to new safety restrictions and protocols in this “new normal.” Getting one appraisal done on a property could be challenging enough. When you

PRIVATE LENDER

pausing on the flip projects and moving

LOOKING FORWARD What happens going forward is really going to depend on how the economy continues to recover. Recovery, of course, is contingent on the development of a COVID-19 vaccine and not having another major economic shut down. With the way the industry is moving forward now, it is anticipated that bridge and longer-term loans will continue to be in high demand, as investment properties are increasingly more desirable and home values continue to rise into 2021 and beyond. ∞

toward acquiring and holding long-term rental properties to build their portfolios, private lenders have adjusted how they market their short- and long-term

ABOUT THE AUTHOR

bridge options to attract more clients. According to the Mortgage Bankers applications increased 6% from the week prior or a full 88% higher than this timeframe in 2019, all due to folks looking to lock in these historically low rates. With preferences changing about what is important to have in a home (e.g., a backyard area and a designated home office), renters are flooding the market, presenting an immense opportunity

ERICA SIKOSKI Erica Sikoski, senior marketing specialist

for Bridge Loan Network, is responsible for maintaining and evolving the presence of

Bridge Loan Network in our field. Joining the

company in 2018, Sikoski’s focus has been on

for investors to become landlords.

creating informative and thought-provoking

According to the Urban Institute’s Hous-

marketing and tradeshow initiatives. She

ing Finance Policy Center, single-family homes for rent are the fast-growing sector of the U.S. housing market, with an estimated 3.4 million millennials preferring to rent rather than buy a home during these unprecedented times.

content to strengthen Bridge Loan Network’s manages Bridge Loan Network’s social media channels, email campaigns, and digital and print campaigns.

Sikoski graduated from Eastern Connecticut State University, with an honors degree in communications with a concentration in Advertising.

Expand Your Lending Network Brokers complete 25k+ searches each month on our proprietary lender search engines. COMMERCIAL

RESIDENTIAL

scotsmanguide.com WINTER 2021

MARKET TRENDSÂ

OPPORTUNITY CONTINUES TO GROW IN SINGLE-FAMILY RENTALS Residential lenders considering new products to grow their business in 2021 and beyond may find single-family rental an attractive option. by John Beacham

espite the uncertainty of 2020, one trend has been consistent: Single-family

homes are more valuable now than ever, both financially and intrinsically.

ACCELERATION OF A TREND Residential mortgage lenders trying to better align their business with the market realities of 2021 and beyond may find single-family rentals to be an attractive option. Macroeconomic trends that were already favorable for the asset class have been accelerated by the shift to remote work and structural changes in buyer demand. At the same time, recent developments in single-family rental lending practices have opened the asset class to a wider pool of potential borrowers. 68

PRIVATE LENDER

Even before the pandemic, macroeconomic conditions, especially the chronic shortage of affordable housing in the U.S., created a strong demand for single-family rental homes. During the last decade, median home prices have continued to increase, and housing starts failed to keep pace with demand. In fact, housing starts declined 2.4% year-over-year in 2020, signaling long-term supply constraints that many expect will send median home prices to all-time highs over a multiyear period. Long-term rental trends reflect this dynamic. From 2005-2015, the number of rental households outpaced the affordable housing stock across every age and income demographic, thereby increasing both rental occupancy and median rents to 30-year highs (see Figure 1). In fact, even the Great Recession failed to put downward pressure on rents. And while home

ownership rates began to show signs of growth in 2020, a wide gap remainsâ&#x20AC;&#x201D;tied directly to the affordability factor. When combined with a more transient workforce and a millennial cohort that is reaching peak housing formation age, these trends provide a long runway for continued appreciation of single-family rentals.

IMPACT OF URBAN FLIGHT As we have witnessed, remote work and extended time spent at home have motivated many to upgrade housing. This has caused a flight from urban multifamily apartment buildings to suburban single-family housing. That flight has already begun to hurt urban occupancy rates and pricing, especially in high-demand areas like Manhattan, where rents fell 7.8% yearover-year in 2020, and rental inventory increased 70%, according to a recent StreetEasy report. At the same time, affordable housing in all areas, already scarce before the pandemic, is now harder to find than ever, driving up prices and making entry-level housing more difficult to attain. In the end, higher home prices and a shortage of affordable housing make single-family rentals the most viable way to transition out of urban multifamily and into future home ownership. Though the long-term fallout from the pandemic remains unclear, the fundamentals supporting single-family rentals are both durable and widespread. While digitization and remote work have forced many businesses to reconsider their real estate footprint, consumers are doing the opposite.

100%

$350,000 94%

93%

95% 89%

90%

$330,000 $310,000

85%

$290,000

80%

$270,000

75%

$250,000

70%

68% $230,000

67% 64%

65%

$330,600

55%

$288,500

$216,700

60%

$210,000 $190,000 $170,000 $150,000 19

Home Ownership Rate (L)

Figure 1 Source: Census. From 2009-2020, the number of rental occupancies increased across every age and income demographic.

Though retail and office occupancy has suffered as digitization enabled a shift from physical to virtual, an analogous phenomenon is simply not possible with housing. Moreover, demand for affordable housing is outstripping supply in nearly every major market, even amid an economic downturn and unprecedented unemployment. As such, single-family rentals will continue to be the primary choice of consumers looking for near-term options to upgrade housing for years to come.

NEW FINANCING OPTIONS

For residential lenders considering new products to grow their business in 2021 and beyond, single-family rental investor loans are an attractive option. With new products and practices and abundant capital, lenders who take note of this trend are likely to find strong demand as continued appreciation of single-family homes drives more and more families to consider single-family rentals. â&#x2C6;&#x17E;

Rental Occupancy Rate (L)

Median Sales Price (R)

50%

rental market, it seems that capital markets have stepped in and made the asset class more accessible than ever for lenders.

metric used to evaluate borrower credit, a DSCR-based loan qualification sys-

ABOUT THE AUTHOR

tem is a better predictor of loan perfor-

mance. The strength of the DSCR-based approach is that credit decisions are

primarily based on the sufficiency of the rent collected from the rental property,

not the borrowerâ&#x20AC;&#x2122;s income to pay for the

debt obligation of the mortgage payment. That distinction results in less defaults and better loan performance. It also

expands the pool of potential borrowers, as qualification depends more on the

borrowerâ&#x20AC;&#x2122;s ability to find viable renters

than the current assets of the borrower.

JOHN BEACHAM John Beacham is the CEO and

founder of Toorak Capital Partners,

an investment manager dedicated to investing in small-balance business-

purpose residential, multifamily, and mixed-use loans throughout the U.S.

With a growing array of financing options available for single-family investors, the pool of borrowers eligible for these loans is expanding. For example, debt service coverage ratio (DSCR) has emerged as a primary factor in determining investor loan qualification.

Yet, these new products and practices are

and the United Kingdom, including

have become more attractive to lenders.

Headquartered in Summit, New Jersey,

Although personal debt to income ratio (DTI) has traditionally been the primary

reduced pricing. Given the strong fun-

not the only reasons rental investor loans Increasingly, institutional funders have

entered the space, which has made capital more abundant, added greater uniformity

of credit standards and underwriting, and damentals supporting the single-family

residential bridge loans.

Toorak acquires loans from leading loan originators and manages all

aspects of its investment portfolio, including loan sourcing, pricing,

underwriting, acquisition, and asset

management. Further information is

available at www.toorakcapital.com.

WINTER 2021

MARKET TRENDSÂ

The Commoditization of Private Lending More consolidation is comingâ&#x20AC;&#x201D;which coalition of federated solutions is going to lead the way? by Sam Kaddah

s private lending following

owner-occupied space, gener-

owner-occupied lending

more importantly, creating what

in the footsteps of the

market and becoming a commodity? Is the pace accelerating in the market?

By late 2019, we witnessed the perfect combination of four key factors that drove the private lending lineup, creating the perfect commodity:

01 L arge demand in the market for

private funding, driven by an increase in demand and shortage of housing units, whether for purchase or rental, multiunit or mixed-use urban trend demands

02 Abundance of liquidity in the

market, driven by a booming economy and the substantial entry of institutional funds into the private lending space

03 The flock of brokers

struggling to compete in the

PRIVATE LENDER

ating a flux of applications and, amounts to an abundance of

well-trained sales professionals hungry for new opportunities

04 The prevalence of technology

products, or exit the market altogether.

One lender, for example, is offering a quick

online application, no appraisal, a low rate, and high LTV/ARV minimal due diligence.

DRIVING MARKET FORCES

in the industry, presenting solu-

What are the forces driving the private

ing to new market needs

The first is, of course, capital. Thankfully

tions that are rapidly adapt-

Those market forces are so dominant

they are repeating themselves for

slightly different reasons at the end of 2020 as we wobble toward a rebound.

lending market? There are several.

for the private lending industry, the capital supply is in abundance from two primary sources: institutional capital and money from private individuals. Both are look-

Although the market product offering

ing for a return on their investment and

COVID, several lenders (letâ&#x20AC;&#x2122;s use that term

potential safe haven for their money.

contracted slightly during the early stages of

see real estate-backed private loans as a

loosely for now) offered lower rates, competi-

The second force driving the market has

tive underwriting terms, and quick closes. In essence, those lenders introduced what

appear to be higher risk products to the market, driving others to retreat, find alternative

been the increasingly commoditized

nature of owner-occupied loans. Lenders making these loans have seen their

products become a commodity due to:

01 Technology that allows lenders

to work directly with borrowers

rather than going through brokers.

02 Q uality Mortgage (QM) APOR rate limits.

03 Ever-increasing costs to lend-

ers to stay compliant with consumer mortgage regulations.

04 I ndustry consolidation, primarily due to the above points.

The third force driving the market is the entry of smaller lenders and brokers into the private lending market. Many of these lenders arrived at private lending after being driven out of the owner-oc-

The fourth force driving the private

lending industry, much like one of the drivers of the owner-occupied loan

industry above, is technology. Although adaptation of technology is still lagging behind the traditional consumer lend-

ing market, private lenders are making

with the advancements made by larger lenders and the commoditization of the consumer mortgage industry. The private lending industry faces fewer of the above issues and is not nearly as advanced technologically or as saturated.

a lender that could generate the necessary volume. The result? The aggregators started seeking smaller local lenders and, very shortly after, brokers who needed money to table fund their loans.

clear advancements and are beginning

Although they publicly deny it, the

the conventional loan market has done).

lowered underwriting quality, and drove

to leave slow adapters behind (much as

As industry advancements continue to be made, the private lending industry will

aggregators clearly drove rates down, higher-risk loans. The aggregators started eroding and squeezing traditional local

expand much as conventional lending did,

and regional private funds and lenders.

of some of the larger lenders in the space.

ments than the institutional money

THE TRANSFORMATION BEGINS

notable exception proved to be crucial:

even as it consolidates under the umbrella

Those lenders have higher yield requireflowing through the aggregators. One The regional and local private lend-

cupied (consumer) mortgage market because they were unable to keep up

revenue) and (2) solve their inability to be

The flux of new “lenders” became a target

ers who have their own money to lend

for the intermediate lenders (in some cir-

continued to lend though the middle of

had two problems to solve: (1) fulfill their

those lenders appear to be the saving

borrowed to lend (or, in some cases, placed

They continued to lend and ultimately

cles called “aggregators”). The aggregators

2020. Just as during the Great Recession,

obligations to the institutional money they

grace for traditional private lending.

in their custody to lend and generate

drove the market back to its feet. WINTER 2021

MARKET TRENDS

AN HISTORICAL PARALLEL PATH For a long time, owner-occupied lending was a niche. It was spread across 7,400 lending institutions, until the prevalence of technology, ever-declining interest rates, and shrinking margins finally caught up. Then we saw consolidations and the mass exit of the broker. The remaining players had to adopt technology solutions for efficiency and survival. Even some smaller lenders looking for survival turned to “non-QM” loans—higher interest loans that are considered uninsurable and high risk. But, given the competitive nature of the market and insatiable appetite of Wall Street, that market started flourishing even as securitization of those loans were sold to institutional investors.

HOUSE OF CARDS IS FALLING However, as the pandemic spread and took its toll on the economy, similar to the Great Recession, the first in the market to be impacted were non-QM lenders. This happened nearly at the same time that lenders who used institutional money sources saw their capital flow and, therefore, their ability to extend loans come to a sudden halt. None of the aggregators or the institutional lenders proved to be reliable. As the quick money from institutional channels dried and the aggregators froze, the brokers found themselves with no one to turn to, so the traditional regional and local private funds lending thrived. In fact, there is evidence those lenders increased their margins and rates, 72

PRIVATE LENDER

“The return of institutional money in a limited capacity, starting with modified longer-term rental products, is ushering the return to the inevitable.”

enjoying a 1.2% rate increase and an

additional average 1.5 origination points.

see the next wave of innovation that will propel lenders to take a leading role in

The return of institutional money to the

the industry. The growth, survival, and

with modified longer-term rental prod-

who is (or which coalition of federated

aggregators in a limited capacity, starting

consolidation is coming. The question is

ucts, is ushering the return to the inevita-

solutions) is going to lead the way.

ble. Volume demand, the return of insti-

∞

tutional funds, the abundance of brokers/

sales force, and technology is culminating to once again create a volume of products and lenders competing for market share,

ABOUT THE AUTHOR

turning private lending into a commodity.

THE IMPACT OF TECHNOLOGY (OR LACK OF) Technology is attempting to provide

the means for direct-to-borrower private lending. It threatens to cut the

middleman, namely the brokers, correspondent lenders, and aggregators. If

successful, it will certainly accelerate

SAM KADDAH Sam Kaddah, president and CEO of

Liquid Logics, has a broad background in complex environments. He is skilled

the commoditization of private lending.

in building consensus, producing

That doesn’t mean that technology, espe-

His career is characterized by providing

cially fintech, can’t be a solution. But, the

sheer volume of lending demand and supply of money cries for a technology solu-

tion that powers sound lending practices. If you analyze the tools that made the

home lending side thrive, you can easily

results, and streamlining operations. leadership to meet efficiencies and revenue while maintaining quality.

Liquid Logics provides fintech and

NextGen SaaS for the private equity lending space.

Your journey to private lending industry data begins here. AAPL has launched the industryâ&#x20AC;&#x2122;s first benchmark data survey from an impartial organization. The quarterly survey gathers information on everything from origination volume to loan terms and foreclosure rates. Respondents receive FREE aggregated and anonymized results on a quarterly basis, providing a national and regional snapshot of the private lending industry.

WINTER 2021

MARKET TRENDS

THE HOUSING BOOM IS JUST GETTING STARTED As the fourth quarter of 2020 wraps, we are in the midst of an undeniable housing boom—and it’s happening in the middle of a recession. by Ray Sturm

PRIVATE LENDER

xisting home prices

are surging. New home

building is up. Sales are

way up. Many construction com-

pany stock prices are at record

highs. The Fed has taken interest rates

basically back to zero, and the per-

sonal savings rate has jumped to over 25%. Behind all that, the stock market has somehow raised the net worth of

During the Great Recession in 2008, homeowners lost more than $3 trillion in home equity in a single year. This year, we’re seeing the complete opposite. Driving this year’s resilience and growth are the two forces that ultimately impact the real estate market more than anything else: demographics and mortgage rates.

THE HOUSING MARKET

America’s households to an all-time high. All this would be incredible and exciting on its own, but what is truly exceptional is it is all happening in the midst of a recession and pandemic.

and so many houses flying off the market and higher and higher prices, are we set-

ting ourselves up to repeat the 2008 crash?” The last bubble was really built from 2002 to 2006. Behind it, we had real home price growth in the double digits every single

year. Purchase application numbers went through the roof during that period too.

That’s simply not the case today. Existing home sales are still negative from 2019,

and real home prices are only adjusting Let’s dive into the housing market. First, let’s talk about that scary word being thrown around a lot lately: bubble. The question people ask is, “With rates this low

to inflation. Furthermore, with HELOCs

dropping by about 50% in the last decade, owners have significantly more skin in the game than in 2008 [see fig. 1].

FIG. 1

BREAKDOWN OF OWNER- OCCUPIED HOUSEHOLDS BY EQUIT Y POSITION

64% POSITIVE EQUITY

AS OF 2020 34% MORTGAGE DEBT

2% NEGATIVE EQUITY

WINTER 2021

MARKET TRENDS

Some have asked if these equity positions are phantom value, with prices

because borrowers often need to do more work on those homes to turn over

propped by each buyer hoping some-

and sell to the next long-term owner.

one else will pay more in a year.. It’s

Existing home sales have been par-

simply not the case. From 1985 to 2007, the average tenure in a home was five years. Since then, it’s basically doubled to almost 10 years. We have been building bigger and bigger homes, so people are not moving as much. That means the number of homes on the market has further limited supply, and the equity in those homes has been supported by years of market price appreciation. It also means good news for the private lending industry,

PRIVATE LENDER

ticularly interesting, as we have seen velocity increase ahead of 2018 levels [see fig. 2]. Given the pandemic, that’s pretty remarkable. New builds are doing well, but we should level set. We often find ourselves talking about existing home sales and new homes sales in the same sentence, as if they are the same thing. But let’s remember, existing home sales are almost 10 times the number of new homes sales. In any given year, we are

looking at a number around 6 million total sales. Only about 700,000 to 800,000 of those are new builds. If you are a higher-end buyer, you may have the luxury of thinking about a new home. It is often custom built for you and your needs, and everything is brand-new. But it’s expensive. Dollar for dollar, you simply almost always get more for an existing home. The biggest single-growth number was in the $1+ million homes, but that’s a small portion of the market. So, our industry, which has a foundation in rehabbing existing homes, does not face a danger from new home builds.

2020

2019

2018

2017

2015 Apr-20

2016

2014 Mar-20

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2001

2002

Year–to–Date Avg Monthly Percentage of Resale Inventory Sold

FIG. 3

Seasonally-Adjusted Occupancy 98.0%

97.5%

97.0%

96.5%

96.0%

Sep-20

Aug-20

Jul-20

Jun-20

May-20

Feb-20

Jan-20

Dec-19

Nov-19

Oct-19

Sep-19

Aug-19

Jul-19

Jun-19

May-19

Apr-19

Mar-19

95.5% Feb-19

Stepping back, a huge number of homes being bought for rental are being grabbed up by cash buyers. In a low-interest-rate environment, rents are a great way to get yield on cash. That is going to create a great additional layer of demand for these homes and for our industry’s borrowers who are turning over homes.

RESALE MARKET VELOCIT Y

Jan-19

Finally, let’s talk about a growing piece of many lenders’ and institutional buyers’ business: rental. While multifamily rental took a big hit early in the pandemic when basically 5% of occupants moved back home with their parents, that has not happened as much in the single-family home rental space. Occupancy is very high in houses, especially as people look for more space [see fig. 3].

FIG. 2

2000

Overbuilding of new homes is also not a real danger to rehabbers of existing homes, as many in our industry have speculated recently. We have been talking for 10 years about being behind on total homes and how we should be building more homes. How we need more homes. That’s all true, but the homebuilders are not irrational. They are not going to overbuild and push down their own margins. Specifically, they understand the demand in their home markets and understand their competition against cheaper existing homes. They are going to follow that demand without killing their margins. That means a proliferation of new homes should not pose any danger to the borrowers who come to private lenders to rehab and sell existing homes.

WINTER 2021

MARKET TRENDS

FIG. 4

Coming out of the last downturn, these types of buyers were typically buying at auction and then quickly flipping. This time, they’re holding on. At a time when interest rates are not moving up any time in the foreseeable future and about one-third of the population are permanent renters, this is an asset class that’s going to be very attractive for a very long time.

AVER AGE 30 –YEAR FIXED MORTGAGE R ATES

5.0%

4.5%

4.0%

3.5%

DEMOGRAPHICS AND MORTGAGE RATES

Funded and growing with nearly

$5 0 B .

Email toorakcapital@toorakcapital.com

PRIVATE LENDER

Sep-20

Jul-20

May-20

Mar-20

Jan-20

Nov-19

Jul-19

Sep-19

May-19

Mar-19

Jan-19

Nov-18

Jul-18

Your trusted institutional capital partner We buy the loan you keep your customer

Sep-18

May-18

Mar-18

Jan-18

Nov-17

Jul-17

May-17

Sep-17

Jan-17

Mar-17

Nov-16

Sep-16

May-16

Mar-16

Jan-16

2.5%

Jul-16

3.0%

Behind all this growth and resilience are our two main factors: demographics and mortgage rates.

Toorak Capital Partners leverages its premier access to capital markets to deliver best in class surety of funding. We are proud to provide customers excellent service levels, a highly versatile team, and access to our proprietary technology. Lending products include: • Bridge (1-4) • Bridge Multi (up to $10M) • Medium & Long Term Investor Rental Address 15 Maple Street, Summit NJ 07901

Phone +1 (212) 393-4100

FIG. 5

ABOUT THE AUTHOR

-2.0%

RAY STURM United States

West Virginia

2.1%

2.0% Illinois

2.2% Connecticut

Rhode Island

3.0% New York

3.1%

3.2%

4.1%

3.0% Pennsylvania

Ohio

New Jersey

Vermont

Michigan

South Carolina

Colorado

North Dakota

Idaho

Arizona

Florida

Nevada

Texas

Utah

District of Columbia

4.0%

9.0%

15.0%

17.3%

17.0%

18.0%

19.1%

18.2%

19.4%

20.5%

20.0%

21.0%

States Estimated Household Growth by Market 2010-20 Decennial Census Period

Ray Sturm is the CEO of AlphaFlow, a capital partner to private real estate

lenders. AlphaFlow works with private

lenders around the country and invests

on behalf of some of the world’s largest institutional investors.

Before launching AlphaFlow, Sturm founded RealtyShares, one of the

What we have is a millennial generation coming into their family formation years, which is when people tend to buy homes for the first time. We have only about 1.25 million houses sitting in the market, which is roughly equivalent to 3 and a half months of supply nationwide, after hitting a 40-year-low this summer. These millennials are hitting their prime buying age with the average 30-year mortgage rate at 2.78% and the 15-year mortgage at about 2.3% [see fig. 4]. Demographics are shifting around the country though. Although the coronavirus has spurred growth to certain states, the truth is that movement has already been happening for some time. Places with more space

and cheaper taxes like Colorado, Utah, and Texas have become fashionable destinations for families leaving cities in 2020, but they have also been growing areas since 2010 [see fig. 5]. Although the pandemic was clearly a huge challenge to our industry and the economy, the housing market was resilient. New home builds are growing, and the existing home sale market is on fire. Behind these, we have great fundamentals in demographics and low mortgage rates that should not change any time soon. The result is that the need for our industry— where lenders like those who make up the foundation of AAPL and are the lifeblood of the real estate investment world—is greater than ever. ∞

industry’s top platforms for real estate investing. His early career in finance

included investment banking at Bear

Stearns and Lazard Frères and private equity at CCMP Capital. Sturm has a BBA-Finance from the University of

Notre Dame and a JD/MBA from the University of Chicago.

WINTER 2021

MARKET TRENDS

The Moratorium Effect Government intervention in the housing and lending markets through eviction and foreclosure moratoriums is impacting private lenders’ ability to deploy capital and originate loans. by Stephanie Casper

o say things have changed in

Homeowners looking for more space and

statement of the century.

ing demand for single-family homes in

2020 would be the under-

Efforts to limit the spread of COVID19 have impacted all facets of life.

Real estate and real estate finance have

experienced a bit of a roller coaster ride since the initial lockdowns were insti-

tuted. Some asset classes such as retail,

office, and hospitality continue to be hit hard. But residential real estate, both

owner-occupied and investment prop-

renters who can afford to buy are driv-

markets nationwide. This, coupled with

historically low interest rates, has resulted in a veritable home buying frenzy. The

impact is also being felt in the residential investment space, with flippers seeing

their completed projects sell rapidly, often with multiple offers. Flippers do face

significant competition for deals, however, and foreclosure moratoriums remove a

erties, has benefited from what appears

key source of supply of new projects.

ple want to live. Remote working and

shift is occurring with demand for

more space. Demand for residential loan

demand for traditional stacked apart-

to be a structural shift in the way peo-

In the rental markets, a similar

learning have highlighted a need for

single-family rental homes outpacing

origination, after a bumpy credit markets shock in late March, is booming. 80

PRIVATE LENDER

ments. The theory is that residents

cooped up in their apartments want

more distance from neighbors and more space to work and attend school from home. Prompted by increased demand for their properties, rental investors are actively seeking to grow their portfolios. Although these trends represent a tail wind for both investors and lenders, government intervention in the housing and lending markets has started to create a drag on the velocity with which private lenders can deploy capital and originate loans. Let’s take a closer look at the impact of the two interventions: eviction and foreclosure moratoriums.

EVICTION MORATORIUMS To assess the impact of local eviction moratoriums on lenders, you first need to

assess the impact to the owner/landlord. Eviction is the primary remedy a landlord has to enforce their right to collect rents from tenants. With rental income being the key revenue source for landlords, a nonpaying tenant quickly erodes the P&L of a property, driving the landlord to dip into reserves and income from other sources to pay property level expenses, including debt service and property taxes. Although the intent of these moratoriums is likely in the best interest of the general public, meaning putting people into the streets in the midst of a global viral pandemic is probably a bad thing, there are unintended consequences. Roughly 60% of the rental homes in the U.S. are owned by landlords with 10 or fewer properties, so

the impact of these eviction moratoriums will be felt differently. Smaller owners will likely be disproportionately impacted versus large institutional landlords. Well-capitalized owners with low leverage, high levels of liquidity, and varied sources of capital should be able to manage through the moratoriums relatively unscathed, because they are often capitalized in a way that provides optionality and longevity. What does this situation mean for private lenders? There are two key implications for those lending on rental properties. One is related to future cost of capital, and the second is related to demand for loans. Lenders making rental loans should anticipate and plan for increased requests

for forbearance or payment deferrals from landlords due to loss of rents. Additionally, it would be reasonable to expect an erosion in performance of the loan book in terms of late payments and delinquencies. Both have the potential to impact lender cost of capital, as the weakening performance of the book couldÂ translate into higher borrowing costs over time. There is also the possibility of reduced demand from landlords for loans on rental properties. In the face of limited rights as a landlord, it remains to be seen whether rental ownership loses its luster. As a lender, you hate to acknowledge it, but owners with little to no leverage are best positioned to weather an environment where eviction is not allowed. Will

WINTER 2021

MARKET TRENDS

the regulatory intervention spook rental investors in such a way as to steer them away from borrowing over the long term? Both a higher cost of capital from weakening book performance and reduced appetite for loans by skittish landlords create a drag on a lender’s ability to put out capital at scale.

FORECLOSURE MORATORIUMS As with the eviction moratoriums, the intent of imposing foreclosure moratoriums was likely good—to keep people in

their homes during a pandemic. However, some states have imposed broad foreclosure moratoriums that do not include carve outs for loans made on investment properties. While it appears that agency lenders for owner-occupied properties have not skipped a beat in lending to homeowners and homebuyers, the impacts on the private lender sector could be far more negative, at least in the short term. Whereas eviction is the primary remedy landlords can use in the event of tenant nonpayment, foreclosure is the primary mechanism available to lenders in the event of borrower default and

nonpayment. If a jurisdiction nullifies the primary remedy a lender has in enforcing the loan contract with a borrower, why would a lender continue making loans in that market? Private lenders do face greater risk in making loans when foreclosure is off the table. When making a credit decision, lenders consider several factors, including the customer, property or project type, and location, to name a few. To mitigate the risks associated with each deal, private lenders have a few levers to pull from leverage and rates to points and forms of guaranties to ensure adequate compensa-

AAPL’s annual Day on the Hill returns fall 2021! Join us as we advocate for private lender and real estate investor-friendly legislation, telling the story of what we do and why we matter. Fall 2021 dates TBA soon. More information and registration at aaplonline.com/doth.

2019 Day on the Hill

PRIVATE LENDER

“If a jurisdiction nullifies the primary remedy a lender has in enforcing the loan contract with a borrower, why would a lender continue making loans in that market?” tion for and mitigation of the underwritten risk. None of these levers adequately addresses the risk that accompanies restrictions on using foreclosure. Lower leverage would normally provide some measure of protection because foreclosure allows a lender to get to the asset with less exposure in a downside scenario. Reduction in leverage becomes an irrelevant tool for mitigating risk when foreclosure is not an available remedy. Higher rates are a mitigant only so long as a sponsor has an incentive to keep paying. The threat of foreclosure and loss of the property provide that incentive. Without foreclosure as an option, this too is irrelevant. Foreclosure moratoriums result in the removal of a lender’s ability to enforce the loan contract and, ultimately, drive lenders to take a hard look at whether there is any reason to continue making loans in a given market. Lack of financing in a market drives property values lower over time. Foreclosure moratoriums have a direct impact on a private lenders’ ability to deploy capital via new loan originations. First, in states where moratoriums are broadly instituted and do

not carve out investment properties, lenders are likely to slow or even stop lending while the legal landscape evolves. Second, residential investors often use foreclosures as an important source of properties to feed their fixand-flip or fix-and-hold businesses. With fewer foreclosure properties available, borrower demand for new bridge and rental loans from private lenders will slow, again reducing the velocity with which lenders can originate. Foreclosure moratoriums cause a trickle-down effect that ultimately reduces the capital a lender has available to deploy in new loan originations. Although it’s a simplification, when a lender cannot foreclose to recapture some or all of the previously deployed capital, eventually they cannot continue making loans. The follow-on effect of lenders not lending is downward pressure on property values. Although the duration of the impacts of these regulations remains unknown, lenders can take measures to address risks associated with rental lending and lending in markets where broad foreclosure moratoriums exist.

Lenders could consider taking interest or P&I reserves for the time horizon they believe the impacts will last. Another option is to tighten the credit box in foreclosure moratorium states, limiting lending to existing proven customers and select new customers with strong track records, good credit, and strong liquidity. None of these solves for the full spectrum of new risks private lenders need to navigate. But developing an informed, medium-term view to guide credit policy and strategy that enables new loan originations seems like the best place to start. ∞

ABOUT THE AUTHOR

STEPHANIE CASPER Stephanie Casper leads the sales

team at LendingHome. She has been a lender to residential investors

since 2015 when she joined CoreVest Finance as head of bridge lending.

Her prior roles include operational, marketing, and sales management

positions at GE, Marriott International, and Green Street Advisors.

Casper has a B.S. from The Hotel

School at Cornell University and an

MBA from UNC Chapel Hill. She is an

investor in the SFR space, with a small portfolio of rentals.

WINTER 2021

MARKETING & SALES

CONNECTING DEALS AND LENDERS These lead-generation resources and tips help lenders and borrowers connect. by Rocky Butani

rivate lenders and bor-

When the lead fills out a loan request

financing run into a num-

one, but you will not know for sure until

rowers looking for deal

ber of challenges trying to find

and connect with each other. On

the one hand, private lenders must be able to vet quality leads. On the other hand, borrowers (real estate investors) or mortgage brokers strive to find and select the right lenders for their deals.

CHALLENGES FOR LENDERS Most private lenders have a good system and a budget for generating leads through various marketing channels. The hard part is generating quality leads, ones that “fit the box.” 84

PRIVATE LENDER

form, the deal may appear to be a good you dig deeper. Some lead sources are good at screening loan requests, but

others are unfiltered and can waste time. Let’s use a baseball analogy to illustrate. Receiving a lead that appears qualified

based on the initial content is first base. The next hurdle is getting the lead to

provide additional information about

themselves and the loan request. If you

over ‘til it’s over. Anything can happen to kill the deal before you score a run. As the lender works hard to close a loan, the borrower or broker may be shopping around for other offers. Competition is one of the greatest challenges private lenders face. Lenders must work extra hard to develop relationships with their clients. Providing excellent customer service is essential. One negative interaction can quickly cause a lender to strike out.

can get past all the due diligence (credit

To minimize the risk of losing leads to

valuation), you have made it to second

lenders to build a reputation online and

at third base—and so close to funding.

source of new business, lenders cannot

report, background check, property

the competition, it is essential for private

base. When you get to loan docs, you are

offline. While word-of-mouth is the best

But all lenders know too well that it’s not

ignore their online presence. Ask for

reviews/testimonials, stay in touch with

for their deals and better service from the

your network, and talk about some of the

lenders. Even so, finding the right lenders

deals you have funded. Even after you

for their deals can still be challenging.

have generated a lead, the borrower or

There are not many online resources

broker will still likely do some research on all the lenders they have reached out to. If your online presence is lacking, all that money you spent on generating the lead could be squandered.

CHALLENGES FOR BORROWERS AND MORTGAGE BROKERSÂ

Receiving quotes or term sheets from multiple lenders is easy. However, there are several other factors to consider besides loan terms, including:

that show specific details about lend-

I s the lender reputable?

ing guidelines and pricing. Also, many

Can they close on time?

lenderâ&#x20AC;&#x2122;s websites do not provide specific details about their terms, fees, processes, etc. Borrowers must take the time to contact each lender, receive

H ow long have they been in private lending?

Do they require a formal appraisal?

their quotes, and then compare them.

Do they offer extensions?

Borrowers that prefer for lenders to ini-

D o they lend from their

tiate the contact will find a few websites Many real estate investors and mortgage

that collect some basic details about the

brokers welcome the increased com-

loan request and sell it to lenders, who will

petition in the private lending market.

then call or email the borrower to start the

Competition can result in better terms

conversation.

own balance sheet?

Some of this information is not easy to figure out in advance. The question of lending from their own balance sheet can be complicated. Many lenders have multiple WINTER 2021

MARKETING & SALES

PRIVATE LENDING LEAD- GENER ATION RESOURCES

capital sources. A lot of lenders manage a

Here are some websites and other resources that can connect property investors and brokers with lenders.

be lent out. Other lenders fund with their

fund and have full control of the money to own money and sell the loan shortly after closing. Some lenders have a correspon-

B IGGERPOCKE T S.COM This is one of the most popular resources for residential real estate investors to network and learn. They have a hard money lender directory that gets a lot of traffic. or Borrowers/Brokers // View multiple lenders, chat with them in forums, F read reviews, and ask other investors for recommendations. For Lenders // Pay a membership fee to be listed, pay extra for more expo-

sure, participate in forums, and post funded deals.

dent relationship with a larger lender for certain loan types. Some lenders syndicate their loans to individual investors. The lender’s capital structure may not

be of concern to borrowers and brokers, as long as the terms are favorable and

they can close on time. The important

thing to look for on the term sheet is the origination fees (points). If points are

H ARDMONE YHOME .COM This is one of the highest-trafficked and largest lender directories. It has a great user interface and simple lender profiles. For Borrowers/Brokers // Search to view lender profiles, read reviews, and make contact directly. You can also request to get matched with multiple lenders. For Lenders // Pay a one-time fee to be listed, pay for premium placement, and pay per lead. You may already be listed and not know it.

being charged by some random entity, it could mean the lender is acting as a

broker or correspondent and is not a direct lender in the transaction. This may be fine, as long as it is disclosed upfront.

When working with a new lender, bor-

rowers and brokers should be concerned about bait-and-switch lending practices

H ARDMONE YOFFER S.COM This is a newer website that primarily matches borrowers/brokers with lenders using a few basic details, but it also has a directory of most of the lenders in the industry. The design and layout is very clean and simple. For Borrowers/Brokers // Enter a few details about the loan and get matched with lenders. or Lenders // Create a detailed profile and pay a monthly advertising fee to F show up in searches.

and whether they will fall victim to such

practices just before reaching home plate. The worst example of bait-and-switch is when a lender changes the terms of the loan just days before the closing

deadline, trapping the borrower into

accepting higher pricing, a lower loan

amount, or both. Some cases of bait-andswitch may be unintentional. AAPL’s

PRIVATELENDERLINK.COM This directory website is owned and operated by the author of this article. The lender profiles provide an enormous amount of details about each lender’s guidelines, but only a small number of lenders show up in searches. For Borrowers/Brokers // Browse lender’s profiles, make contact directly, and ask for recommendations. For Lenders // Create a detailed profile and pay a monthly advertising fee to show up in searches.

Ethics Advisory Committee recently

published an article by Mike Hanna with more information about this subject.

The following four strategies can help borrowers find the right lender:

01 A sk for recommendations.

Borrowers should talk to their

peers in the industry and ask which lenders they have worked with.

PRIVATE LENDER

02 H ire a mortgage broker. Real

Geraci Media, Pitbull Conference,

estate investors can save a lot of

National Private Lenders Association

time and hassle by working with

(NPLA), California Mortgage Asso-

a broker who already has rela-

tionships with private lenders.

03 A ttend industry events. Local REI

club meetings are a great place to talk to other investors and ask for recommendations. Lenders also attend these small local events. There are a few

companies and associations that host

ciation (CMA), Private Lender Expo, and National Lending Experts (NLE).

04 O nline search. It is easy to find private lending companies using an online search, but there is much more to research. See if they have any reviews, view their

live events focused on private lending,

social media profiles and feeds,

lenders, including American Asso-

lished, and check to see if they are

ciation of Private Lenders (AAPL),

a member of a trade association.

where you can meet tons of direct

ABOUT THE AUTHOR

read articles they may have pub-

ROCKY BUTANI Rocky Butani is the founder and CEO of PrivateLenderLink.com, a website where investors and brokers can

find direct private mortgage lending companies throughout the United

States. CA DRE Broker Lic. 01893537.

WINTER 2021

CONFERENCE RE VIE W 11T H A N N U A L C O N F E R E N C E H I G H L I G H T S E a c h y e a r, t h e A m e r i c a n A s s o c i a t i o n o f P r i v a t e L e n d e r s h o s t s t h e p r i v a t e l e n d i n g i n d u s t r y ’s l a r g e s t c o n f e r e n c e . T h i s y e a r, t h e COV I D -19 p a n d e m i c b r o u g h t u n i q u e c h a l l e n g e s , l e a d i n g A A P L t o l a u n c h t h e i n d u s t r y ’s f i r s t h y b r i d v i r t u a l a n d i n p e r s o n e v e n t .

2 D AY S

20+ SESSIONS & AC TIVITIES “AAPL has a deep history of firsts in this industry, even while continuing long-treasured traditions. This year amid many challenges for the nation, our industry, and the association, we brought people together both inperson and virtually to ensure no one who wanted the benefit of our top-tier educational sessions missed out. We were gratified to hear from attendees about the impact our efforts made to them and to their businesses, and we’re thankful for their support as they made this yet again the most well-attended event in the industry.” LI N DA H Y D E | Managing Director, American Association of Private Lenders

PRIVATE LENDER

175+ I N P E R S O N AT T E N D E E S

200+ V I R T U A L AT T E N D E E S

33 SPONSORS

2,500+ A PP CO N N EC TI O N S M A D E

Our popular Certified Private Lender Associate designation course returned

Socially-Distanced VIP Reception: This socially-distanced version of our

to Vegas this year, rebuilt from the bottom up to be more informative and

popular VIP Reception saw attendees seated four per table and spread

foundational than ever before. Our Certified Fund Manager course remains

throughout the conference space’s largest ballroom, where they enjoyed

available to members online at aaplonline.com/cfm, with the CPLA course set

complimentary plated hors d’oeuvres and beverages.

to launch online in 2021.

Eddie Wilson, AAPL’s chairman and CEO,

Our two inperson Excellence Awards recipients, each pictured standing between AAPL’s Managing

speaking during his stirring keynote about

Director Linda Hyde and Chairman and CEO Eddie Wilson. Pictured Left: Sam Kaddah from Liquid

preparing for the unknown and creating

Logics and winner of Service Provider Member of the Year. Pictured right: Ben Shaevitz from Civic

opportunities even during uncertain times.

Financial Services and winner of the Rising Star award.

Accepting virtually were Community Impact awardee Nema Daghbandan of Geraci and Lender Member of the Year awardee John Beacham of Toorak Capital. For more information about the Excellence Awards and its 2020 winners, please see pages 92-93.

WINTER 2021

CONFERENCE RE VIE W

R ay Sturm, co-founder and CEO of AlphaFlow, speaks for the third year in a row as Title Sponsor. Ray and his team joined this yearâ&#x20AC;&#x2122;s event virtually, while inperson attendees interacted with Ray from socially-distanced tables throughout the eventâ&#x20AC;&#x2122;s largest ballroom. We are excited that Alphaflow will be joining us as Title Sponsor for the fourth consecutive year in 2021!

COVID-19 guidelines mandated a smaller but more spaced exhibit hall. But we were delighted that despite these restrictions, sponsorships sold out for the fourth year in a row, and the exhibit hall bustled with activity.

PRIVATE LENDER

P aul Jackson (left), principal of Residential Capital Partners and Title Sponsor for the second year in a row, interviewed Jeb Mason (right) for his insightful “Year of the Buffalo” presentation. Jeb, principal and founder of Mindset, advises financial institutions across the country about trends in the private lending industry and on Capitol Hill.

AJ Poulin from the Mortgage Office circles participants during this special edition of Socially-Distanced Power Networking. Participants used the AAPL Annual Conference app’s “shake to connect” feature to exchange contactless business cards before diving into their introductions.

WINTER 2021

AWA R D W I N N E R S C O N G R AT U L AT I O N S T O O U R E XC E L L E N C E AWA R D W I N N E R S As the first and largest trade association for

p r o f e s s i o n a l p e r f o r m a n c e , k i c k- s t a r t i n n o v a t i o n

private lenders, we have pledged to champion the

a n d i m p r o v e t h e i r c o m m u n i t i e s . We a n n o u n c e

private lending indus tr y as a viable alternative

t h e w i n n e r s —b y p o p u l a r v o t e —a t o u r A n n u a l

to conventional f inance and to promote the

Conference.

i n d u s t r y ’s r e p u t a t i o n a n d f u t u r e g r o w t h . We b e l i e v e , a s p a r t o f t h a t m i s s i o n , t h a t i t ’s c r u c i a l t o recognize those in the indus tr y who look beyond their own businesses to elevate the private lending profession.

2020 s a w 20 n o m i n e e s , n a r r o w e d t o f o u r w i n n e r s . During the single month that online voting was o p e n , n o m i n e e s e a r n e d a c o m b i n e d 16 0 9 v o t e s . T h e 2020 a w a r d e e s a r e b e l o w, b u t f i r s t : 2021 nominations are now open at aaplonline.com/

O u r E xc e l l e n c e A w a r d s s h o w c a s e p e e r- n o m i n a t e d

a w a r d s . O u r 2020 a w a r d e e s w i l l a l s o b e f e a t u r e d

members who have leveraged their resources

o n t h e n o m i n a t i o n p a g e u n t i l 2021 v o t i n g o p e n s

to solve problems, advance the indus tr y and

o n S e p t e m b e r 1.

R I S I N G S TA R Rising Stars are members who have accomplished outstanding growth in their companies over the past year.

B E N S H A E V IT Z Bridge Loan Network

From Ben’s nomination:

What Ben had to say about it:

“Ben took over CIVIC’s wholesale channel

“The AAPL Excellence Awards are the pulse of private lending. Year

on February 1, 2020. Ben has played a

after year, they highlight the best of the best in our industry— those

major role in growing the company’s

who are not only pushing the envelope in their individual lanes, but

presence and partnerships in the private

doing so with a standout passion and dedication to our space. For

lending space. In just over six months, he

AAPL to recognize these leaders brings visibility to our industry as a

has led the company to achieve over $60.7

whole and the progress that we collectively continue to make together.

million in first-time fundings for new broker partners. He has also onboarded 676 new brokers in this short time, personally welcoming each new partner to ensure their path to success with CIVIC.” — William Tessar, Civic Financial Services

PRIVATE LENDER

To be recognized by AAPL is a true honor— especially alongside nominees I admire and respect. We all work so hard to push our industry forward, and this makes me so proud to represent Civic Financial Services, who has constantly supported me and given me every opportunity to succeed.”

MEMBER OF THE YEAR, LENDER This award goes to one lender and one service provider based on their deep expertise, unique value, and strong commitment to clients and growing the industry.

J O H N B E AC H A M Toorak Capital Partners

From John’s nomination:

What John had to say about it:

“John is the founder and CEO of Toorak Capital

“We are honored to win this year’s Lender Member

Partners and is a recognized industry leader who

of the Year Award from The American Association

has participated in AAPL webinars and its in-person

of Private Lenders. This win is an acknowledgement

events. John’s contributions to the industry have

of Toorak Capital Partners’ success in upholding the

had a long-lasting impact. At Toorak, he established

highest lending standards as we continue to institu-

a standardized set of underwriting guidelines and

tionalize the bridge lending markets in the U.S. and

credit criteria that have been adopted by much of the

the U.K. We are grateful for the partnerships that we

industry. This framework and insight improved and

have built with the top lenders in the U.S. market, and

institutionalized credit standards industry-wide.”

look forward to helping lenders around the country

— Emily Meringolo, Stanton Public Relations & Marketing

grow their business in 2021 and beyond.”

MEMBER OF THE YE AR, SERVICE PROVIDER

SA M K A D DA H Liquid Logics

From Sam's nomination:

What Sam had to say about it:

“Since 2014, Sam has driven the entire technology sector

“Thank you AAPL for this special honor. While it is a testi-

of our industry to the next level. His constant dedication to

mony for an outstanding team at Liquid Logics that asserted

providing education and connection to all has made him a

its leadership through continued innovation, it is truly

leader in the eyes of his industry peers. His contribution to

humbling and rewarding to be recognized as the industry

this industry has provided innovative insight to all, and he

leader. The bar is now higher to continue propelling fintech

has also shown in-depth knowledge and best practices that

in our space forward and adds to my responsibility to live

will be used in the industry for years to come.”

up and continue to contribute, provide mentoring and lead-

— Brigette Havard, Liquid Logics

ership for the association and our industry.”

C O M M U N I T Y I M PAC T AWA R D This award honors dedicated and innovative professionals and their commitment to bettering their local and/or private lending communities through volunteering, community development programs, or civic/legislative efforts.

N E M A DAG H BA N DA N Geraci LLP

From Nema’s nomination:

What Nema had to say about it:

“In a year of uncertainty and change, Nema has remained

“There are multiple trade associations which represent

dedicated to providing timely updates on legislation

mortgage lenders. However, American Association of

crafted to harm private lenders, including attempts to

Private Lenders advocates on behalf of a misunderstood

prevent foreclosures, require forbearances, and other-

industry with unique needs. It is an honor to partner with

wise prevent private lenders from enforcing their rights.

AAPL to forward an agenda of ethics, advocacy, and educa-

Nema has worked with AAPL to craft the industry-standard

tion on behalf of private lenders, nationwide.”

forbearance request template and has provided countless webinars, panels, and learning opportunities for members.” — Kevin Kim, Geraci LLP WINTER 2021

RESOURCE GUIDE

RESOURCE GUIDE If you’re looking for a service provider who has real experience working with private lenders, the Private Lender Resource Guide is your starting point. Each issue, we publish a cross section of service

KAT HUNGERFORD Private Lender Executive Editor

WINTER THIS ISSUE!

cation for future updates,

service providers do not

AAPL members can access

pay to be included. Instead, we vet them to ensure their expertise, talking to private

SPRING

D efault & Loss

D ata & Metrics

Warehouse Lenders

worked with, and reviewing

provider specialties. These

A ppraisers & Valuations

L egal

keep an eye on this publi-

their product offerings.

A ccounting Mitigation

lenders they have previously

L ead Generation N ote Buying/Selling R aising Money

all service providers online

and check out our magazine archive at aaplonline.com/ magazine-archive. Then con-

at aaplonline.com/resource-

sider joining AAPL to support

guide. If you’re not a member,

other association efforts!

SUMMER

FALL

D evelopment

Cost Estimates

E ducation M arketing P roperty Insurance

Funds Control I nvestor Reporting Portals L oan Origination Services L oan Servicing L oan Underwriting

Want in? Nominate yourself or a company you’ve worked with at aaplonline.com/resource-guide-nominations.

PRIVATE LENDER

ACCOUNTING ATM PROFESSIONAL SERVICES, CPA P.C.

COHNREZNICK

w ww.atmcpas.com (301) 947-2860 ervices // Advisory Services: Governance, Risk & Compliance; Business Services: Small S Business Accounting, Payroll, Part-time CFO Services, Audits, Reviews, and Compilations, Bank Financing, Business Valuation, Strategic Business Planning, New Business Formation, Internal Control Advisory Services; Tax Services. w ww.cohnreznick.com (818) 205-2622 S ervices // Advisory, Accounting and Tax Services for Private Lenders

SPIEGEL ACCOUNTANCY CORP ACQUAVELLA, CHIARELLI, SHUSTER LLP

w ww.spiegelcorp.com (925) 949-5687 ervices // Accounting, Tax, Fund Administration, Consulting Services S for Mortgage Lenders, Small Businesses, and Individuals w ww.acsaccounting.com (732) 713-6305

DEFAULT & LOSS MITIGATION NOBLE CAPITAL

noblecapital.com (512) 492-3818 Secondary Specialties // Loan Servicing,Note Buyer/Seller

S.B.S. TRUST DEED NETWORK

TOTAL LENDER SOLUTIONS

sbstrustdeed.com (818) 991-4600 Services // Non-Judicial Foreclosures, Bankruptcy, Post Foreclosure Options for Lenders, Deed in Lieu of Foreclosure www.TotalLenderSolutions.com (866) 535-3736 Services // Non-judicial Foreclosures, UCC Sales, Reconveyances, Education

WINTER 2021

RESOURCE GUIDE

DEFAULT & LOSS MITIGATION CONTINUED AUCTION.COM

DSI INC.

iSERVE

www.auction.com

d efaultservicesinc.com (512) 382-0366

(858) 486-4213

(949) 672-3668

i serverealestate.com

SERVICE LINK svclnk.com

(800) 777-8759

S econdary Specialties // Nonjudicial Foreclosures, UCC Sales, Reconveyances, Education

LEGAL ACTIVIST LEGAL

CABALLERO LENDER SERVICES

GERACI LLP

activistlegal.com (202) 869-0804 ervices // Legal services in the Areas of Real Estate, Mortgage, Banking and S Private Investor Transactions for Non-Performing Loans and Assets caballerolenderservices.com (225) 328-1071 ervices // Foreclosures, Bankruptcies, and Real Estate Closing S Representation for Lenders and Investors geracilawfirm.com (949) 379-2600 ervices // Foreclosures, Real Estate, Corporate, Securities, Litigation, S Banking & Finance, Bankruptcy, Consulting, Asset Protection www.hdrbb.com

HARTMANN DOHERTY ROSA BERMAN BULBULIA LLC

(917) 902-9617

LAW OFFICE OF MARC WEITZ

(323) 600-4805

PRIVATE LENDER

S ervices // Legal Representation of Private Lenders in Multiple States

www.weitzlegal.com ervices // Investment Recovery for Private Lenders With Investments From S Borrowers in Bankruptcy

LEGAL CONTINUED andelsmanlaw.com

LAW OFFICES OF LAWRENCE ANDELSMAN PC

(516) 625-9200

PRIVATE LENDER LAW/LAROCCA HORNIK ROSEN & GREENBERG

(212) 536-3529

SCHEER LAW GROUP, LLP

S ervices // Real Estate Transactions for Lenders, Developers and Individuals

www.privatelenderlaw.com ervices // Legal Services for the Private Commercial Real Estate Lending S Industry www.scheerlawgroup.com (949) 263-8757 ervices // Private Lender Representation in Litigation, Bankruptcy, S Transactional, and Compliance Matters

COHN & DUSSI, LLC

HAJJAR PETERS LLP

SYNDICATION ATTORNEYS, PLLC

www.cohnanddussi.com (781) 494-0200 S econdary Specialties // Default & Loss Mitigation https://legalstrategy.com (512) 637-4956

www.SyndicationAttorneys.com (904) 504-4055 S econdary Specialties // Education

WAREHOUSE LENDERS WESTERN ALLIANCE BANK

www.westernalliancebank.com (602) 952-5462 S ervices // Committed Revolving Lines of Credit to Established Private Lenders Specializing in Residential Fix and Flip, Commercial Bridge, or NPL/RPL Note Purchases. Loan sizes Typically Range From $10 million to $100 million.

WINTER 2021

L AST CALL WITH ANDREW DAMICO

NOW AND BETTER How I’ve worked with others has also defined my career path. by Andrew Damico

was born in Media, Pennsylvania, a small town outside

Philadelphia— Go Eagles! My

mom helped me get my first job, which was stocking shelves. Since I was from a family of five, the store owner wanted to keep my mom as a customer, so it didn’t take him long to hire me.

the bank and enjoyed watching people smile as software allowed them to work smarter and faster. After putting lots of smiles on the faces of bankers, I decided it was time to go work for a software company. I joined Lotus Development as one of the first six Lotus Notes sales engineers.

My passion to help communities adopt software started in college at the University of Delaware—Go Blue Hens! The college had just purchased its first IBM PCs. My job helping students and the U D community learn how to use spreadsheets and word processors was my first experience helping a community migrate from the old way (HP calculators and typewriters) to a new way (computers and software).

Since then, I’ve led teams at Radnet, IntraLinks, WizeHive, and iPipeline. At IntraLinks, we helped the M&A community move the due diligence process from stacks of documents in locked rooms (physical data rooms) to the cloud (virtual data rooms). At iPipeline, we helped the life insurance community migrate the life insurance application and underwriting process from paper and manual underwriting to online applications and automated underwriting.

My work at UD helped me land my first job at JP Morgan in New York City. At Morgan, I helped bankers, secretaries, the executive team, and anyone who had a PC learn how to be more productive. I worked with nearly every department in

I’ve been fortunate to have worked for some great companies with outstanding employees and awesome customers. At 58, I recognize the Lord has played a big role in mapping out each step of my career. I faithfully believe he led me to ProDeal.

PRIVATE LENDER

As I was transitioning out of iPipeline in late 2019, I was introduced to ProDeal by a former IntraLinks investor. After meeting ProDeal’s founder, executive team, and several board members, I fell in love with the product, developed a passion for the private lending industry, and was excited about the opportunity to help another community move from the old way to a better way. I joined ProDeal as an investor, board member, and CEO just three weeks before COVID-19 shut down the world. After nearly a year at ProDeal, I’m energized by the passion the private lending community has for meeting the borrowing needs of its customers and their willingness to adopt a new and more efficient way of closing deals, especially during the current global crisis. It has not been lost on me that in my journey to help others move from an old way to a better way, my career has consistently moved to new and better as well. ∞

Stay up to date while on the go with our twice-weekly podcast. Available in both audio and visual formats, the Think Realty Podcast is your source for the latest industry trends, hard-hitting insights and news. Vist thinkrealty.com/podcast to get your listen on now, or find it on your favorite podcast platform. WINTER 2021 99

YOU’RE

INVITED Join us for the 12th year at the largest national private lender event from the industry’s oldest and largest association. 2021 will bring you 2 days of packed sessions, 60+ exhibitors and 500+ attendees with whom to network and learn.

2021 CONFERENCE ACTIVITIES AAPL Certification Courses • VIP Nightclub Reception Catered Networking Breakfasts • 15+ Sessions & Panels Packed Vendor Hall • Speed Networking Networking Reception • AAPL Official After Party

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100

PRIVATE LENDER