The condition of the economy has gotten better within the last couple of months. Theoretically speaking the recession may be over; we might be building gross domestic product once more. But, regrettably, the recession continues. A lot of banks are extremely worried about further damage commercial real estate values and rising commercial mortgage delinquencies. They fear that more large proportion write downs of their CRE investment portfolios may be necessary damaging their statutory solvency. Banks on the edge are very wary about funding.
Other banks, even healthy ones, together with insurance companies are sitting on their capital as they wait the coming wave of new regulations out of Washington. Authorities are implementing existing rules more tightly than ever while ensuring even harder financing laws are on the way. Lenders will not loan in earnest until they know very well what the regulatory situation is going to seem like. While the government encourages lending with their words they are demoralizing it with their intense given actions.
For most borrowers the solution has been private lending. Privately funded, often called “hard money” commercial mortgage loans are financed by private individuals or privately owned businesses. These special lenders often secure the loans they write in their own investment portfolios instead of sell them to the secondary mortgage bond market. Private hard money lenders are not managed by the Federal or state Authorities so they enjoy much more versatility and can fund loans much faster than banks can. Multi-million dollar loans can close in less than ten days if the deal works for the hard money lender.
The disadvantage to private lending is that charges and points are much higher than bank interest rates and that much more collateral is required. Private lending almost always top 10% with at least 3 origination points and loan-to-value ratios hardly ever go beyond 65 percent
The credit crunch has resulted in many good loans to be declined by banks. Additionally, slipping property values cause it to be even more complicated to be eligible for a standard financing. Hard money lenders are usually able to fund transactions that banks are being made to turn away. Private lending is now an essential section of commercial real estate finance. Borrowers prefer to have a good, low interest rate financial loan with great terms and conditions, but that form of financing is not really easily accessible nowadays. Private hard money lending is now well-known finance and, for many striving investors, may be the only-game-in-town.