Tuesday, December 17, 2013

Why Do Hard Money Lenders Fail?

This vital pillar of our economy almost vanished when the economy and the housing market tanked about four years ago. Private lenders were left holding large inventories of real estate whose values were eroded by between 30% and 50%. Consider this scenario: A $200,000 mortgage loan balance, originally secured by a property valued at $285,000 (Loan to Value 70% [LTV]), was suddenly under-secured as the securing property value dropped by 40% to $171,000 (Loan to Value 117%). Conventional banks suffered somewhat similar consequences, albeit on a smaller scale. The difference was due to the credit analysis methods that were practiced prior to the collapse of the property market. On one hand, conventional lenders subjected credit applications to more stringent analysis that included borrower's credit history, character, income, collateral, ability to repay, stress testing, terms and economic conditions. On the other hand, Private lenders or hard money lenders, as they are popularly known, were mostly concerned with the value of collateral, paying very little attention to the borrower's ability to repay. This has now changed to a large extent. Many hard money lenders are applying more or less similar credit underwriting standards as the conventional lenders. The only setback for most of the hard money lenders now is lack of prudent underwriting skills. However, the good news is that they can outsource the underwriting role to professional loan underwriters, right here in the United States, at an affordable cost. Remote loan underwriting firms, whose teams consist of highly experienced ex-bankers, are well positioned to provide the most current loan underwriting techniques in the industry.

Here are a few roles that a hard money-lender can outsource to improve delivery times and credit quality:

1. Creating loan package - Application (Fm. 1003), Income, Credit, Asset documents, Policy of Title Insurance and Property Profile Report

2. Gathering and reviewing title information

3. Ordering and reviewing an appraisal

4. Loan underwriting for a private investor

5. Creating final documents and coordinating settlement or closing

Prudent credit underwriting, whether for conventional lending or hard money lending, should follow these simple underwriting guidelines:

1. Know your customer, character and credit history

2. Read the market conditions well

3. Ensure that a borrower has a reasonable stake in the deal

4. Understand borrower's indebtedness and sources of income or losses

5. Obtain adequate and easy - to- sell collateral

6. Test the borrower's ability to repay the loan

7. Impose simple and achievable loan conditions. Be aware of the prevailing environmental and economic conditions.

Franc Jo is a Senior Underwriter at Loans Underwriting LLC, the leading provider of outsourced Credit Underwriting support to lenders and funding solutions consultant to small businesses throughout USA. He may be reached at 3330 Pkwy Suite 324-178 Acworth, GA 30101, Phone 1-800-858-8593, and Website: www.repaircash.com

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