Kevin Schmoldt’s Post

Private Lending (11) - Higher or Lower LTV? The principles of private lending are similar to other investments, in that risk and return are generally proportional. Under identical conditions, the closer a creditor is to the front, the lower the risk and interest rates; conversely, the further back a creditor is, the higher the risk and interest rates. Additionally, it's worth noting that when we talk about private lending here, we are referring to residential property mortgages, not the commercial real estate or joint development projects that are prevalent in the market. While those also fall under private lending, the collateral, risks (mainly developmental risks), and exit mechanisms are entirely different. Consequently, the returns and risks are also different, but average people won’t know the difference. So, for these development projects that involve construction, while it may seem like the interest rates are high, the associated risks are often disproportionate, so it's essential to clarify this. Having covered these basic concepts, let's return to the initial question: if this is a second mortgage application, is it better to have a higher or lower Loan-to-Value (LTV) ratio? It depends. If you're a lender, a lower LTV ratio is preferable! This means that a higher proportion of the homeowner's money is invested in the property, so if there are losses, they will be incurred by the homeowner first, making it safer for the lender. On the other hand, if you're a homeowner, you naturally want a higher LTV ratio so that you can borrow more money from the lender, leaving less of your own money invested in the property and thus reducing your risk as a homeowner. These are the most fundamental points to share. Now, how do you actually make decisions in mortgage underwriting? This breaks down into three main areas: whether to lend or not, how much to lend if you do, and how to structure the loan. Till next time! If you want to read all of the above content to start generating passive income immediately, subscribe to my Passive Income Newsletter https://lnkd.in/giuVh6eh , or by messaging me your email, or emailing me at [email protected].

3 auto lending insights post-Fed rate cut: I can’t remember the last time the auto industry watched a Federal Reserve meeting this closely. When the Fed cut the benchmark interest rate by 50 basis points last week—the largest in 16 years—it was a collective sigh of relief. Now, we’re looking at a new range of 4.75% to 5% But let’s be real – no consumer will jump from a budget car to full-size pickup over a 0.5% cut. Yet, that doesn’t mean the auto lending environment won’t change. Here’s what I’m watching closely — 1. Lenders will likely be slow to adjust. Why? Lenders want to maximize revenue by charging the highest possible interest rate while staying competitive and within the law. On top of that, lenders wait to see if lower rates will stick before making any moves. And while a Fed rate cut might not flood showrooms, it could nudge hesitant buyers into action. For now, the best shot at scoring lower rates is through automakers’ captive financing. Think Ford Credit or GM Financial, where deals are floating around at 2.99% - 3.99%. If automakers respond to the Fed, these could drop to a tempting 0.99% - 1.99% 2. A potential refinancing surge Refinancing a loan with negative equity or a delinquent history is nearly impossible. Yet – for borrowers with good credit and healthy loans, the savings on total interest costs from a lower rate could be meaningful. Prime borrowers will benefit the most, as lenders see them as less risky and more likely to repay the loan. But for subprime borrowers, refinancing is harder to secure and often involves jumping through multiple hoops to get approved. However, a boom in refinancing could have other side effects like… 3. Trouble for auto-backed securities (ABS) investors. ABS investments depend on steady returns from loan payments. But as borrowers refinance at lower rates, the yields on these securities shrink, reducing returns. This is a big deal for lenders, who rely on ABS issuance to maintain liquidity and fund new loans. And with both prime and nonprime ABS issuance rising—up 9.9% YoY for prime and 17.5% for non-prime—it’s clear that lenders are seeking more capital to keep up with demand. Here’s where it gets tricky – To keep ABS “healthy,” some lenders are taking drastic measures like extending loan terms or modifying loans to avoid repossessions. The catch? These modifications can increase risk exposure for borrowers who remain underwater longer, and interest continues to accrue on deferred payments. The bottom line: Auto loan rates will likely stay elevated until the Fed does a series of cuts later this year and in 2025. In the meantime, consumers now have cheaper options to tackle other forms of debt. But for now, the gap between sky-high vehicle prices and consumer budgets remains a major roadblock. Read the breakdown here, together with Cars Commerce: https://lnkd.in/gDmf83xh

As traditional banks tighten lending policies across various sectors, non-bank lenders are poised to fill the void. The Federal Reserve's senior loan officer opinion survey for the first quarter of 2024 revealed a tightening of lending standards across various sectors, reflecting cautious banking practices amidst varying demands for loans. Here’s a detailed breakdown by category: Commercial and Industrial (C&I) Loans: During the surveyed period, moderate proportions of banks (10%-20%) indicated that they had tightened their standards for C&I loans applicable to firms of all sizes. Notable areas of tightening included the maximum size of credit lines, the costs associated with these lines, the spreads of loan rates over the cost of funds, and the premiums charged on loans considered to be riskier. This suggests a cautious stance by banks towards business lending amidst an uncertain economic climate. Commercial Real Estate (CRE) Loans: There was a significant tightening in the standards for all types of CRE loans, as reported by over half of the banks surveyed. This tightening was most pronounced in the criteria governing maximum loan sizes and interest-only payment periods. The demand for CRE loans also showed variation; while there was a moderate decrease in the demand for construction and land development loans, the decline was more significant for loans secured by nonfarm nonresidential and multifamily residential properties. These trends point to a notable caution in the real estate sector, likely influenced by recent market developments. Mortgages: In the residential real estate sector, a smaller portion of banks (5%-10%) reported tightening standards for various types of mortgages, including nonqualified mortgage jumbo, non-QM non-jumbo, subprime, and QM non-jumbo non-government-sponsored enterprise-eligible mortgage loans. The demand dynamics varied, with a significant decrease in demand noted for subprime and non-QM mortgages, whereas the demand for other residential real estate (RRE) loan categories saw a moderate decline. Additionally, the demand for home equity lines of credit also weakened moderately, indicating a broader slowdown in the mortgage market. Personal Lending: The survey indicated an overall tightening in lending standards across all consumer loan categories. This was particularly significant in the case of credit card loans, where a substantial number of banks reported stricter standards and increased minimum credit score requirements. For auto loans and other consumer loans, the tightening was reported by moderate to modest shares of banks, respectively. Overall, the survey highlights a trend of tightening lending practices across various loan types, driven by cautious bank policies in response to weaker loan demands and evolving market conditions. #cre #cref #bankloans #economy #nonbanklenders https://lnkd.in/gFR_5THj

Mortgage Lending Industry: Let’s talk about more potential changes heading our way. What’s going to happen to Non-QM lending under Trump? He and those around him are talking again about taking the government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac private. IMO: While the overall impact would depend on the specifics of the privatization process and subsequent regulatory changes, non-QM lending will most certainly face increased uncertainty and potential challenges in a privatized GSE environment. First up, as with most change, I believe that privatizing the GSEs will lead to increased market volatility initially, as investors and lenders adjust to the new landscape. This could impact the availability and pricing of non-QM loans. What happens next is that the regulatory framework surrounding non-QM loans could change. For instance, there might be a push to redefine the limits of the GSEs’ activities and the regulatory framework surrounding private-label securitization. Let’s consider access to Capital, as Non-QM lenders might face challenges in accessing capital if the GSEs’ role in the secondary mortgage market is reduced. This could lead to even higher interest rates for non-QM loans as lenders seek to mitigate increased risks. Do we NOT think that Government Guarantees are all that important to our industry? Well, I think that the absence of an explicit government guarantee could make mortgage lending a lot less attractive to investors, potentially reducing investment, but what do the experts think?  Mark Calabria, the former Director of the Federal Housing Finance Agency (FHFA) is still arguing that privatizing these entities would reduce their risk to taxpayers and create a more market-driven housing finance system. Mr. Calabria also suggests that this move could help address underlying inflationary issues, potentially leading to lower mortgage rates. Calabria has emphasized that much of the groundwork for this transition was laid during his previous tenure, making it feasible to continue without needing new congressional approval. David Stevens, the former president and CEO of the Mortgage Bankers Association (MBA), was opposed to the privatization of government-sponsored enterprises (GSEs) without significant reforms. He believed that simply recapitalizing and releasing them back to the private sector “as is” would be irresponsible and could lead to repeating past mistakes. Mr. Stevens argued that the GSEs needed substantial operational and structural reforms to ensure they could operate safely and effectively in the private market. He emphasized the importance of a sustainable and vibrant secondary mortgage market, which he felt could not be achieved without these critical reforms. How do you think this might impact the housing market?

Private Lending (13) - How to Calculate? Continuing from the last post, if there is a first mortgage, it must not be from private lending institutions outside of the bank. Banks won't demand exorbitant fees every step of the way; However, non-bank private lending institutions are not of the same style. They can directly inflate the cost of a standard letter to thousands, and they send them out every day. As for legal fees, management fees, and various other charges, let's not even mention them. They can directly skyrocket the relatively low LTV of the second mortgage. What was initially a safe LTV at the time of closing might become precarious during power of sale or foreclosure, potentially leaving the subsequent creditors with nothing. Therefore, if you're considering lending on a second mortgage, never lend to borrowers whose first mortgages are not from the major banks.   So, the first number in the formula is explained. As for the second number, for now, let's use the amount applied for by the borrower (this is the number that will ultimately be adjusted based on final result of the underwriting process). Now, let's focus on the denominator. The denominator is the market value, right? Generally, it's safe to rely on the conclusion of a third-party appraisal report recognized by the bank, isn't it? Doing things this way will make you cry afterward, because if you lose money, it's you who loses, not the appraisal company. This is another pitfall. After venting, let's get to the conclusion directly now. After encountering numerous pitfalls, our subsequent standard process involves only examining the details of the property in the appraisal report. We assess the value ourselves through paid data internally to create our own comps evaluation, preferably of the same house type on the same street. After all, they rely on producing reports for their livelihood, we, on the other hand, rely on underwriting deals properly for our livelihood. Additionally, we pay another third party for additional valuation. In other words, for any given property, we need to obtain three valuations, one of which must be our internal valuation. Then, we take the lowest of these three values as the denominator! It's not the average value or the number on the appraisal report; it's the lowest value! Alright, the LTV has been calculated for now. Many years ago, we could do up to 85%, but now we mainly stick to 75% or less. If the location is remote, we either don't do it at all, or we cap the LTV at 60% or even lower (this depends on factors such as the market value of the property, its liquidity, etc., details of which will be discussed later; for now, let's just outline the general framework). Apart from LTV, there are two other crucial algorithms. These two things are basically not calculated by anyone, because generally speaking, if the LTV is managed well, it's sufficient. Till next time.

For the first time in two years, U.S. banks have reported stable demand for commercial and industrial (C&I) loans, according to a recent Fed survey. Slow and steady: The second quarter saw unchanged demand for C&I loans, a notable shift after a prolonged period of declining demand. This marks the first instance in two years where demand neither weakened nor strengthened. C&I Loans: 17.4% of banks tightened standards for large firms; 14.8% for small firms. Demand steady for the first time in two years. CRE Loans: 38.2% tightened standards for construction loans; 30.9% for multifamily loans. Weaker demand reported across all CRE categories. Household lending: RRE loan standards were unchanged, but demand dropped—22.2% for non-QM non-jumbo loans and 18.5% for government-backed mortgages. HELOC standards held steady, with 6.2% reporting weaker demand. For consumer loans, 15.9% of banks tightened credit card loan standards; auto loans saw unchanged standards but a 16.7% decline in demand. Zoom out: Banks reported tighter standards across all loan categories, though they eased from last year. For C&I loans, 42.3% reported tighter standards, down from 2023. CRE loans saw 47.5% tightening, a drop from 56.4%. RRE loans remained tight at 37.5%, similar to last year, while HELOC standards slightly eased. Consumer loans, especially subprime, stayed tight. ➥ THE TAKEAWAY Rate cuts on the horizon: Strong loan demand fuels speculation on the Fed's next moves. Despite ongoing economic tensions, the stabilization in demand for certain loan categories and the easing of tight lending standards hint at a shifting sentiment among banks, potentially signaling a more favorable lending environment in the near future. Stay tuned for more updates on these exciting trends! hashtag#Colliers hashtag#Pittsburgh hashtag#MoreIn24 hashtag#ThriveIn25 hashtag#ClosersCoffee hashtag#ColliersCapitalMarkets https://lnkd.in/eix4qhjy

Equity release lending is a financial product that allows homeowners to access the value tied up in their property without having to sell it. This form of lending is particularly popular among homeowners aged 55 or over who may have significant equity in their homes but limited liquid assets. There are two primary types of equity release products available: lifetime mortgages and home reversion plans. Lifetime Mortgages A lifetime mortgage is a loan secured against the home. Homeowners retain ownership of their property, and interest on the loan can either be paid regularly or rolled up into the loan amount, meaning no repayments are required until the homeowner passes away or moves into long-term care. The loan, plus any accumulated interest, is repaid from the sale of the property at that time. Key Features: • The homeowner retains ownership of the property. • Interest can be paid or added to the loan. • The loan is typically repaid upon death or moving into long-term care. • Some products offer a "no negative equity guarantee," ensuring that the repayment amount will not exceed the value of the property. Home Reversion Plans Home reversion plans involve selling a portion or all of the home to a reversion company in exchange for a lump sum or regular payments. The homeowner can continue to live in the property, rent-free, until they pass away or move into long-term care. Upon sale of the property, the reversion company receives its share of the proceeds. Key Features: • To take out a home reversion plan you must be aged 65 and over. • Part or all of the property is sold to a reversion company. • The homeowner retains the right to live in the property, rent-free. • The proportion of the property sold determines the share of proceeds the reversion company will receive. • Typically, the lump sum received is less than the market value of the share sold. Regulations and Protections Equity release lending in Scotland, like in the rest of the UK, is regulated by the Financial Conduct Authority (FCA), ensuring that products are safe and fair for consumers. Additionally, the Equity Release Council (ERC) sets industry standards, including the "no negative equity guarantee" and the right to remain in the property for life. Prior to considering equity release to liquidate assets, homeowners must consult with a lawyer to discuss the options available to them. In the next of our Ask the Expert series, we give advice and guidance surrounding why you should consider equity release as a form of freeing up funds for another purpose. Our next session will be held on 9 July 2024 by our local expert Fraser Symon. To book a time with Fraser to ask a question about care homes and/or support at home contact us on: 📩 [email protected]. Our dedicated expert will be happy to provide initial advice, signpost you to additional sources of support or provide a fee quote for more in-depth assistance.

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The American auto lending industry is facing a perfect storm. A combination of economic pressures and logistical hurdles are creating a nightmare scenario for lenders struggling to recoup losses on defaulted loans. The Culprits: Plummeting Used Car Values: According to Kelley Blue Book (KBB), used car prices dropped by an average of 14.7% between Q2 2023 and Q2 2022 [source: Kelley Blue Book]. This means lenders are recovering significantly less money when they repossess vehicles and sell them at auction. Strapped Borrowers: Inflation, squeezing household budgets and pushing delinquency rates upwards. The Federal Reserve Bank of New York estimates that the delinquency rate on auto loans in the US reached 5.2% in Q4 2023 [source: Federal Reserve Bank of New York], a significant increase compared to the pre-pandemic level of 3.9%. Recovery Roadblocks: The decline in used car values has also impacted the repossession industry. Many recovery agencies have gone out of business due to shrinking profit margins. This logjam is leading to longer wait times to repossess vehicles, further hindering lenders’ ability to recoup their losses. The Result: Recovery rates, the percentage of the loan amount recovered through repossession and resale, have plunged to historic lows in the US. According to a recent report by Auto Finance News, lenders are only recovering an average of 65% on defaulted loans, down from 80% pre-pandemic [source: Auto Finance News]. A Similar Story Across the Pond: The situation in the UK mirrors the challenges faced by lenders in the US. While the exact statistics may differ slightly, the trend of rising delinquencies and falling recovery rates due to a combination of inflation and decreased used car values holds true. According to Fitch Ratings, the delinquency rate for subprime auto loans in the UK reached 6.11% in September 2023, a significant increase from 5.01% just three months earlier [source: Fitch Ratings]. The UK market also faces additional challenges such as rising interest rates, which can make auto loans more expensive for borrowers and further strain household budgets. Charting a New Course: Auto lenders need to adapt their strategies to navigate this challenging environment. Early intervention: Proactive outreach to at-risk borrowers with tailored solutions like loan modifications or hardship programs can prevent defaults before they happen. Digital Collections: Utilizing technology for automated communication and online payment options can streamline collections efforts and improve efficiency. Strategic Partnerships: Collaboration with repossession agencies through profit-sharing or volume guarantees can incentivize faster recovery times. Risk-Based Lending: Reassessing creditworthiness criteria to account for the current economic climate can ensure lenders are extending loans to borrowers who are more likely to repay. #debtcollections #debtrecovery #CreditAndCollectionsProfessionalsGroup