Peter Pays Paul

Jack M. Guttentag, “The Mortgage Professor” on Yahoo! Finance has written an article proclaiming the advent of good times for hard money lenders.

Like all disasters, the financial crisis has its share of beneficiaries who profit from it. The hard-money lenders, who lend strictly on the basis of collateral, have profited from the financial meltdown. These non-institutional lenders require a lot less paperwork than institutions because they don’t worry about whether or not borrowers can afford the payments, or whether or not they are creditworthy.

Read the rest of the article..

I would mostly agree with Mr. Guttentag. However, with the value of real estate hard to determine in a falling market it is also a potentially treacherous time for lenders as well. Making a loan at a high LTV on a property that is decreasing in value can be risky, because equity can be eroded quickly.

I can attest that we have seen an increase in the quality of deals that we are reviewing. However, many of the existing financing was underwritten at lower cap rates and higher values. (Remember that cap rates and values have an inverse correlation of each other. As cap rates rise value falls.)

Now with higher cap rates and lower values these properties are worth less than when the original mortgage was put in place. Without an injection of equity from the borrower many of these loans are unable to be refinanced.

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