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Funding

Six Keys to Finding the Best Funding for Your Investments

The Effort to Study These Factors Will Be Worthwhile By Rob Parsley What is the best source of funding for your real estate investments? Investors answer this question in different ways. Some prefer the security of working with banks. Some prefer the fast-and-loose style of local hard money lenders. Others prefer the proven processes and asset-based underwriting of private lenders. But many investors have had to set aside their preferences and find alternative funding sources for their investments because of macroeconomic changes, notably interest rates that have increased nearly 400 basis points in the last 24 months. The current economic environment has caused some funding sources to dry up and down the market, from large regional banks that made national news to national private lenders that were acquired by competitors to local hard money lenders. No single category of lending completely vanished, but no category was immune either. That makes the search for funding more important than ever. Here are six primary factors that investors and brokers need to vet when considering a lender: Rates and Fees Of course, investors look for the best deal they can find in terms of raw numbers. This is essential in a higher interest rate environment because deals need to pencil out, whether the investor is selling a flipped property or acquiring a cash-flowing rental home. In today’s market, rates can vary significantly because different lenders have different risk tolerances. And it is important for investors to also check fees—both at closing and throughout the life of the loan—to make sure that the total costs of financing work. Leverage In 2022, many lenders pulled back on loan-to-cost and loan-to-value percentages to protect themselves against potential declines in home prices that could turn deals upside down. But in the past 12 months, home prices have proven to be durable in most markets. This has allowed many lenders to stabilize the leverages they offer. Still, investors need to make their own risk tolerance judgment on how leveraged they want to be, just as lenders have done. An uncertain economic environment may not be the best time for an investor to maximize leverage and take on additional risk. Deal Structure Some lenders lead with rate and leverage, while including onerous terms in a deal that limit flexibility. Deal structure is especially important now because higher interest rates and record home prices have increased mortgage payments on investment properties, which challenges cash flow even with rents at all-time highs. So, investors need to find deal structures that will allow for refinances when the price of owning an investment property decreases. They can find this flexibility by asking questions:  »         What is the prepayment penalty structure?  »         What are the yield spread maintenance terms?  »         Is minimum interest included in the deal?  »         What are the adjustable-rate terms? Investors need to be able to refinance a deal if rates decrease and do so without paying significant penalty fees. Loans that preserve future flexibility—such as interest-only bridge loans or no prepayment penalty loans—are especially valuable now. Servicing and Draw Process The closing table is just the beginning of a project, so investors need to know how a lender will service their loans. Are the servicing rights sold, or will the lender service their loans in-house? If there is a rehab or construction budget attached to the loan, the draw process is even more pertinent. Does the lender process draws in-house, or will a third party handle them? How quickly will draws be released? The flow of these funds is vital to a project’s success. Capital Backing A lender’s source of funding, and the reliability of that source, are factors that investors did not need to worry about when money was cheap, and lenders could easily find funds to disperse. But as interest rates rose, and as some banks and lenders found themselves overleveraged, it was not as easy for lenders to find capital to continue originating. As a result, lenders of various sizes ceased lending. Investors need to do the research so they know their lender will be ready to offer funds whenever they find their next deal. Secondary Market Strategy Where will your loan go after it is closed? This is another factor that many investors did not worry about in the past, because the secondary market set up favorably for loans to be resold. But today’s environment where money supply is tighter has forced investors to know more about the secondary market. Secondary market requirements around credit quality, leverage, rate, and more impact how lenders structure their deals. Lenders who know which secondary market source will acquire their loans after closing will not change rates or leverages on a whim, because they can operate on the same page as their loan buyers and maintain a consistent loan offering. For example, at Lima One Capital all our loans go to our parent company, NYSE-listed REIT MFA Financial. We work closely with them to develop loan guidelines that help investors succeed while serving as sound investments, and we can stick to those guidelines to give our borrowers confidence. On the other hand, lenders who must find sellers for most or even all their loans are at the mercy of the secondary market and may be compelled to change loan guidelines on short notice so that they are not stuck holding loans, which would drastically limit their funds for future lending. Conclusion The search for the right lender can lead to multiple answers. Investors may find a small hard money lender with plenty of money on hand to finance multiple projects. Builders may find a well-capitalized local bank that is willing to offer highly competitive ground-up construction financing. And investors still have access to strong national private lenders like Lima One with dependable sources of capital that are willing to finance fix and flip, new construction, single-family rental, and multifamily investments. The hard truth is that it will take more work for investors to find the right lender in this

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Mitigating Risks to Prevent Funding Delays

Reach the Finish Line with Minimal Stress By Chris Branchetti In the fast-paced world of real estate transactions, time is of vital importance. Private Lenders are in demand for quick and reliable funding to support investor deals nationwide. Investors require cash for a fix and flip or for rolling proceeds from the first A-to-B transaction to the second B-to-C transaction. Delays in disbursing escrow can have a significant impact on the success of the deal, affecting private lenders and investors’ overall deal flow. Delays with funding escrow can have severe financial ramifications for all parties involved. Investors relying on timely financing may suffer penalties, and interest charges, or even lose out on their desired properties due to the failure to secure funds within the agreed-upon timeline. Such financial setbacks can have a substantial impact on the profitability and success of the transaction. As a stakeholder in the transaction, it is crucial to understand the requirements and challenges in disbursing escrow, such as title issues, good funds, late day closings, incomplete/missing documentation, and title insurance coverage. There are several key areas that can address any issues proactively through due diligence review, communication of important milestones, steps taken for wire fraud prevention, receiving lender approval to fund, and vetting out the title company for approval. Understanding the Challenge Complex Title Issues: // Title issues, such as liens, encumbrances, or competing claims, can complicate the escrow process. Conducting a thorough title search and resolving any outstanding title issues before closing is vital to prevent delays. Good Funds // When satisfying the terms of a real estate contract, good funding from the buyer is crucial for the disbursement of escrow. Good funds refer to funds that are deposited into escrow balancing that can be applied towards the closing figures. Good funds can come in certified funds such as certified checks, buyer wire transfers, or lender wire deposited into escrow. This requirement ensures a smooth and secure process, as it minimizes the risk of bounced checks or insufficient funds. By ensuring the availability of good funds, escrow can disperse the necessary funds to all parties involved, facilitating the successful and timely completion of the transaction. Late Day Closings // The earlier parties can sign the lender documents, closing statements, title affidavits, and perform a wire authentication on the day of closing, the better the chances the file will be funded the same day. Banks have a wire cut off ranging from 4 p.m. If a closing is scheduled for later in the day, it can be very challenging to get all the closing and escrow tasks completed before that wire cutoff time. Incomplete/Missing Documentation // Missing documents or signatures on loan or transactional documents can significantly slow down the escrow process. It is essential that all parties involved, including the title company, ensure that all required documents are completed and notarized accurately to meet funding conditions requirements in accordance with the Closing Protection Letter (CPL), Contracts, and Lender Instructions. Title Insurance Coverage // The timeline disbursement of escrow funds is crucial for the issuance of title insurance policies. In cases of funding delays, the property may remain unprotected during the interim period, leaving the title to property vulnerable to intervening liens. A title insurance company must ensure their underwriting processes are expedited to provide timely coverage. Mitigating Funding Delays Risks To mitigate delays and streamline the escrow disbursement process, all stakeholders should be mindful of the requirements to be executed and the expectations Private Lenders and investors have for a hired title company to represent the contract in satisfying escrow. The following strategies should be adopted: Due Diligence // Conducting comprehensive due diligence before initiating the escrow process is essential. This includes thorough title searches, property inspections, and documentation reviews. Communicating Milestones // Clear and transparent communication with all parties involved is crucial. Regular updates and prompt responses to all stakeholders can foster trust and ensure that everyone remains informed throughout the transaction process. Expect this from the title company. Preventing Wire Fraud // It is essential to seriously think about using a third-party platform to authenticate the wire information, such as account number, routing number, and name on account for a pass or fail initiation. Prior to closing the transaction, electronically verify wire information and call the party expecting to receive proceeds to verbally verify account information and ensure the person receiving the money is a real person. Lender Approval to Fund // Lender approvals will have specific requirements to meet prior to funding. Most requirements can be addressed by delivering the approved signed documents for their review and approval. Escrow is not permitted to be disbursed until the lender gives their official approval. Hiring a Title Company // When selecting a title company, it is essential to select one that holds the necessary license to issue titles and has a team of experienced escrow professionals capable of handling complex title matters. A title company must demonstrate an understanding of private lender requirements, investor expectations, and title endorsements required to be issued with the correct ALTA policy. Conclusion In private lending transactions tailored towards investor transactions, it is necessary to find a title insurance provider with the ability to disburse funds in escrow quickly and efficiently. Also, most national title companies today should be SOC2 Certified and have ALTA Best Practices. Private Lenders need to ensure that a specific title insurance company is approved with their company. It is critical for stakeholders in the transaction to be aware of all requirements included in disbursing escrow to mitigate risks associated with delayed escrow disbursement. Additionally, streamlined processes and workflows can effectively mitigate delays in the escrow disbursement process. Collaborating with a reliable title partner who maintains constant communication and offers thorough closing instructions is key. Considering that real estate heavily relies on referrals and repeat business, it is crucial to ensure that everyone involved in the transaction reaches the finish line with minimal stress and hassle.

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Private Real Estate Developers Build Communities

‘Here Comes the Neighborhood’ By Matt Rodak Since I founded the business that is now Upright, formerly Fund That Flip and FlipperForce, I have been beating the drum for the entrepreneurial residential real estate developer. I have long been convinced that local, private real estate developers play a vital role not just in our economy, but in the life of our nation and its neighborhoods. We recently published research that shows definitively how the work of individual developers not only has a positive impact on the local economy, but creates a host of social benefits, as well. The ‘Here Comes the Neighborhood’ report draws on multiple authoritative sources, as well as our own original research, The report paints a comprehensive picture of the positive impact that our active investors and others like them have, every time they build or rehab a property. We want everyone to recognize the vital role of private developers, so we have made the report available to download for free from upright.us/neighborhood. I can summarize the main conclusions in three points:  »         Communities and neighborhoods benefit economically from redevelopments, in both the short and long term.  »         There are many less tangible, but no less real, social benefits that in turn contribute to stronger community-building.  »         Private real estate developers play a vital part in solving our nation’s chronic housing shortage. The Economic Benefits of Neighborhood Developments Study after study bears out our lived experience — that new developments increase the value of comparable neighboring properties, thus benefiting the whole community. Our analysis across multiple zip codes where new developments or rehabs have taken place show an increase in the value of neighboring residential properties of between 4.8%-13.0%, outpacing their local markets. But that’s not all. Rehabbing properties and building new ones creates jobs, and not just the obvious construction jobs. Small businesses like shops and restaurants are more likely to locate themselves on attractive streets, without vacant lots or dilapidated properties as their neighbors. The economic benefits of this continue to be felt long after the developer has moved on to their next project. Our team conducted some analysis of the economic value our investors generated in 2022: $800M of income last year, plus an estimated $40M of income annually on an ongoing basis. On top of that, we created 8,500 jobs, with $486M in salaries, wages, and tax revenue. And that’s just our company. Versions of this happen across our industry. ‘The Mister Rogers Effect’ The positive economic impact of private real estate developers is beyond dispute. I have long believed that the effects of new developments go way beyond dollars and cents. While economic data are easy to come by, less attention is paid to the effect of the built environment on factors such as physical and mental health. We have uncovered multiple pieces of research that show the negative effects of living in a neighborhood with vacant lots and/or rundown properties. Vacant, rundown properties may lead to an increase in crime, are major fire hazards, and can be shown to lead to anxiety among those who live nearby. Transforming those eyesore or unsafe sites into attractive homes not only enhances the visual amenity of the neighborhood, but academic research suggests it also contributes to an improvement to the well-being of local residents. People in neighborhoods that have benefited from the redevelopment of housing are happier, safer, and able to enjoy better physical and mental health. We call this ‘The Mister Rogers Effect’, after the children’s television presenter who championed neighborliness. “There goes the neighborhood” is a typical response to negative developments, be that the shuttering of a local business, the boarding up of vacant buildings, or the building of an unsympathetic or incongruous property nearby. But it seems the opposite is actually the case. The development of attractive new properties, or the ‘saving’ of derelict or rundown properties through sensitive redevelopment, can contribute to the creation of a happier, healthier neighborhood. All the evidence suggests that every time a developer takes on and improves a property, they are contributing to ‘a beautiful day in the neighborhood’.  That is something we can all feel good about. But it is not even the most important contribution of private developers. Fighting to Meet the Housing Demand There is a well-documented housing shortage in this country of between 3.8M and 6.8M homes, depending on how you calculate it. But whichever formula you use, there is a huge gulf between demand and supply, pushing up house prices and locking many would-be homeowners out of the market. Our ‘Here Comes the Neighborhood’ report explores the many reasons for this situation. I am less concerned with how we got here than I am with what can be done about it. And this is where I once again see a vital role for private real estate developers. Much of the home-building in the US is undertaken by a small number of publicly traded companies. In 2022 the Top 10 builders accounted for 43.2% of new single-family home closings. But that still means around half of all single-family home closings are undertaken by people like our investors. Private real estate developers rehabbed around 400,000 residential properties last year, not counting new-builds. That’s huge. But here’s the thing: They would like to build even more. Our original research shows that what is holding back private real estate developers is not availability of suitable properties or land, but other factors like access to labor and materials and, crucially, access to funding. That is one area we can do something about, by making the case for more accredited investors to see the value of real estate investment and connecting them with active investors through the Upright platform. When we talk about ‘value’ in real estate, we are usually referring to monetary value. We are, after all, primarily concerned with maximizing returns for our investors. But our research prompts me to think about value more broadly: About the value of putting more roofs over

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Want to Succeed with Real Estate Investments in Today’s Climate?

Control your access to capital. by Don Wenner Uncertainty haunts the real estate market today. According to Redfin data, the median home sale price jumped 13% from September 2019 to September 2020. However, investors remain concerned that the economic damage caused by the COVID-19 pandemic will eventually spill over into the housing industry. One does not have to look too far for warning signs. A simple Google search will lead you to articles about an ‘overheated, bubbly market’. Additional articles discuss the divide occurring in the market, with rural and suburban single-family homes rising while multi-family and commercial real estate decline. We have not seen anything like the COVID-19 pandemic before. We do not know where it is leading. And this has made Wall Street and independent investors hesitant and even fearful when it comes to the housing market. How should you respond? The best thing an investor can do is focus on what they can control. Opportunities are out there in this market, and investors can continue to grow during these uncertain times. Specifically, what needs to be done is to take control of your access to capital.  Get Pre-Qualified So You Can Be Greedy When Others Are Fearful We have all heard the Warren Buffet quote: “Be fearful when others are greedy and greedy only when others are fearful.” Well, people are fearful right now. So, the opportunity for real estate investment is now. However, this does not mean investors should get aggressive. Stay conservative while making sure to jump on opportunities. Given the nature of this pandemic, you may have to adjust where you invest to best capitalize on opportunities. For instance, low housing supply continues to drive home prices up. As of August 2020, the monthly supply of houses dipped to 4.0 according to Federal Reserve research. This means it would only take four months to sell all the homes currently listed for sale. Knowing this, investors may discover through their analysis that better returns can be achieved through new home construction projects or fix-and-flip projects. There is a demand for more inventory. The investors who help provide more inventory stand to gain the most. To take advantage of such opportunities, investors must prepare capital well in advance. Get pre-qualified as soon as possible. Investors cannot take advantage of a good deal if they do not have the capital ready. What investors must do is partner with a real estate lender before doing market research and going after deals. With tightening borrower requirements and more conservative underwriting, loans are taking longer to process. Investors need to be 100% sure they have the cash on hand to complete the deal. In this market, the early bird gets the worm if they have the cash on hand. The first step is to find a source of capital and establish a solid relationship with that lender. Be Conservative When Making Assumptions Investors know that there are opportunities out there and how important it is to have a capital partner. However, financing during these uncertain times can be difficult. Real estate investors need to be conservative when making assumptions and should plan for the following: Longer processing times Higher rates Higher reserve requirements Reduced leverage Lenders have taken these precautions to mitigate risks. For example, on a deal today, a loan may take a few weeks longer to process, require 6-12 months of future payments, and have an interest rate that is 0.5% higher. Borrowers and investors must respond and prepare accordingly. Also, investors must be conservative with more than loan terms. Any deal analysis should be conservative as well. In 2020, lenders have reduced as-is and after-repair-values by 5-15%, which is why fix-and-flip investors should calculate this into their deal analysis. Also, plan for higher cap rates, higher delinquencies, lower occupancy, and less rent growth. By taking a conservative approach to penciling out deals, investors insulate and protect themselves from external risks. This increases the likelihood that the deal will be successful. It could even turn out much better than projected. Know Where Your Lender Gets Capital Observing the success of fix-and-flip investors, Wall Street has entered the private lending game over the past decade. They have done so by providing lines of credit to lenders. Wall Street’s involvement has also led to the securitization of private real estate loans. Why does this matter to real estate entrepreneurs? It matters because many lenders’ capital is tied to Wall Street. If you work with one of those lenders, you do not have full control over when and how you can access capital. For example, before the Coronavirus pandemic, private lenders had been originating loans and selling them to Wall Street at a 2-3% premium. Given the current risks, Wall Street will not pay that premium anymore. As a result, these lenders have had to stop or greatly reduce their lending since Wall Street is not providing funds. This has left many real estate investors stranded and unable to capitalize on opportunities. Always know how your lender is funded. If your lender works with Wall Street, market swings can directly impact your ability to access financing. That takes the investor out of the driver’s seat. Build the Right Culture To continue growing a real estate business during the pandemic, investors not only need full control over their capital, but also a strategy for using it correctly. That relies on having the right team culture. First, investors need a team with a vision. Be realistic, but also aim big. You cannot get anywhere unless you have big dreams. Second, set specific, measurable, achievable, realistic, and timely goals (S.M.A.R.T. goals). This ensures accountability and establishes clear expectations. Third, know your real estate KPIs. Without knowing their numbers, investors cannot make good business decisions. Finally, avoid common pitfalls in real estate investing. In addition to making certain you have adequate capital on hand, always: Stay consistent. Scaling your real estate investment business requires doing the right things repeatedly. Always perform due diligence. This

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Funding Strategies in an Evolving Market

Expert tips for developing your correct financial structure by Kendra Rommel Since the COVID-19 pandemic began, there has been an odd sense that we have been operating in some sort of time warp. Anything that happened before March feels like years ago, yet the fact that it’s October seems almost surreal.  Nothing exemplifies this feeling more than the roller coaster ride of the real estate market. The uncertainty created obstacles and accelerated the velocity of change, challenging investors, contractors, lenders and related businesses to address and adapt to a myriad of challenges and obstacles. Remarkably, even amidst the uncertainty, a health care crisis did not become a housing market crisis and the real estate market has continued to be strong. Thriving as a real estate investor, broker, or lender, today requires a sound and stable financing strategy. Having a consistent, reliable capital partner is perhaps the most important element to building a solid business model. This may evolve over time— from your start in business to becoming an experienced pro. Regardless of your strategy, there are a myriad of capital or financing options available to you.  Here are some tips for developing your correct financing structure. Types of Finance Private lenders. There are two types of private lenders:  (1) Individuals such as friends, family, accredited investors, etc. that are known to be syndicators or funds, and (2) Institutional private money lenders, sometimes called hard money lenders, who have their own capital as well as institutional capital partners, such as banks and Wall Street investment firms. A notable difference with private money is the fact that they base risk on the asset, rather than on the individual’s personal borrowing strength. This makes the loan process considerably faster and easier than conventional lending. Conventional Lenders. Banks, credit unions and mortgage lenders are common for investors who have strong individual borrowing strength. Interest rates with conventional lenders are at historic lows. However, LTVs are lower and down payment requirements are higher than private money programs. Qualifying for a bank loan on an investment property can be onerous, difficult and time consuming. Additionally, banks typically have a maximum exposure limit for the borrower which limits the amount of properties they can finance. Mortgage brokers. They do not lend their own money. Instead, brokers work to find you the right lender from all the options available. For this, they take a commission in the form of points on the loan, which are paid at closing. Real estate partnerships, Joint Ventures (JVs) or Equity participants. These are individuals or companies included in the participation of any one deal, (usually as a limited partnership or as a passive partner to the primary). It is standard for a prospective partner to want to review the investment strategy, summary, pro-forma and intended exit strategy. Warehouse Banks/ Bank Lines. These are banks that extend a line of credit to lenders at predetermined terms, such as type of assets, terms, pricing, and LTVs. This line enables lenders to fund less on their company balance sheet. Selecting A Capital Partner Circumstances such as the recent pandemic clearly illustrated the absolute imperative of conducting due diligence when choosing to align with a capital partner. It is important not to think merely in transactional terms—getting a good deal on one property—but rather focusing objectively on who will be your best capital partner as you grow and change through market shifts, both forecasted and unexpected. Capacity and Access to Capital. At the onset of the pandemic shutdown, many lenders had their warehouse lines leveraged and they were reliant on institutional capital partners buying their loans at a premium to remain profitable. Overnight, warehouse lines and institutional/Wall Street buyers froze. This forced many lenders into a compromised position of which they had to stop originating or funding deals. Experience. There is simply no substitute for experience—whether it is a sales associate, broker, or lender. They need to have a broad perspective and know how to deal with fluctuations in the market, handle challenging or creative scenarios, and understand what makes a mutually beneficial deal. The industry has been feast or famine over the past decade and those who have weathered the ups and downs can bring that expertise to bear for your benefit.  Options. One of the biggest rookie mistakes is to focus on rates. Keep your focus on the entire financing structure. This will ensure you do not miss crucial details in achieving the highest ROI possible. When evaluating a credible finance partner, they should strive to understand each unique strategy and exit plan to enable them to provide the best loan options to meet their clients’ individual needs and goals. True capital partners are problem solvers. Communication. Clear communication and transparency are vital for building a successful relationship with anyone, especially your capital partner. Funding Strategies It is critical that financing strategies and guidelines align with the specific investment opportunity. Financing solutions are not one-size-fits-all. Each sponsor or property likely will have a different strategy and disposition plan. Therefore, be clear on your intention with the asset(s) so you can determine the short and long-term objectives. Having a clear exit strategy in advance, including timelines, will help you find the right financing solution while maintaining the highest margins or returns: Fix and Flip. When you find a good deal, you have to be able to move quickly to acquire it. It is important that you have supported data verifying the neighborhood value range, the bottom and highest comps. Also, know what types of finishes or appeal warrants the high versus low end of that market. In today’s market, investors are optimistic that they can reap returns quickly, whether it is through simple cosmetic updates or more complex ones. Rehab Financing. When you finance your rehab, this portion of the loan is typically held in a control fund & issued in draws as a reimbursement when the work is completed. This is a great option to preserve your liquid position and be ready for

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How Long Will Rates Be So Low?

The recovery is dependent on employment and business growth, so rates will likely remain low for the foreseeable future. On March 15, 2020, in the wake of the coronavirus pandemic, the Federal Reserve cut the Fed funds rate to 0.25%. This reflects the rate at which commercial banks lend reserves to each other overnight, on an uncollateralized basis. The Fed’s goal is to encourage growth and spending. As the pandemic continued, the Fed maintained the target rate on June 10, 2020. Faced with increased unemployment and business closures, it is unlikely the Fed will raise rates during its July 28-29 meeting. Discount Window The Fed also cut the rate of emergency lending at the discount window for banks to 0.25%, and extended the loan terms to 90 days. The discount window plays a crucial role in supporting liquidity and stability of the banking system. It supports the flow of credit to both households and businesses. The discount window is part of the Feds as the “lender of last resort” to financial institutions. Its presence is to support bank’s liquidity needs. Banks generally reserve the option for extreme situations—exercising the right to borrow from the Fed can be an indication of financial distress. Quantitative Easing The Fed continues to make monetary moves to mitigate the economic turmoil caused by the pandemic. Pulling from its tactical bag of tricks, quantitative easing is being employed to purchase longer term government bonds and mortgage-backed securities. Purchasing securities increases domestic money supply and lowers rates by bidding up fixed-income securities. This measure is meant to lower borrowing costs and expands the central bank’s balance sheet. Mortgage Rates Mortgage rates will continue to remain low because of the low 10-year Treasury rate. There is a strong correlation between mortgage interest rates and Treasury yield. Coupled with the Federal Reserve lowering the target for the Fed funds rate to close to zero on March 15, 2020, mortgage rates will continue to remain below historical levels for some time. Average 30-year fixed rates, according to the Freddie Mac Primary Mortgage Market Survey, have been below 3.25% since the third week of May. For the week of July 9, the survey reported a historic low of 3.03% with 0.8 fees and points. Rates in the market have not fallen as much as anticipated, largely due to heavy demand for refinancing. Lenders get higher than typical margins on loans when demand is strong. Mortgage banks and companies are at liberty to set the rates to consumers. Banks and mortgage companies are also tightening credit standards in an attempt to hedge against borrowers losing their jobs and requesting forbearance. According to the Mortgage Banker Association’s Market Composite Index, mortgage applications are up 33% year over year for the week ending July 3, 2020. The Refinance Index is 111% higher than the same period one year prior. The market is largely recovered from the brief COVID-19 induced pause of spring and summer, and the rest of 2020 is on course for strong purchase and refinance activity. Prime Lending Rate In July, the prime lending rate is a low 3.25%, down 2.25% from the same time a year ago. This is reducing the cost to borrow for consumers. Auto loans, credit cards, home equity lines of credit and other short-term loan products are based on this rate. Banks use the prime rate, plus a certain percentage to calculate the loan rate, based on the borrower’s financial stability, credit score and other factors. Automakers chose to embrace the pandemic as a way to boost sales. Zero percent car deals, payment deferrals and incentives emerged in the spring and early summer along with contactless purchases. Although these deals seem attractive, with the economy as unstable as it is, there is the potential for future job loss and auto loan defaults. Lenders allowing 90-day payment deferrals at purchase cause consumers to pay more over the life of the loan. Also, with longer term car loans, borrowers are more likely to be underwater a good portion of the loan term. Auto loan delinquencies hit a nearly 5% past due in fourth quarter 2019, the highest 90 delinquency rate in seven years. Subprime auto lending has been on the rise for a few years. Performance on auto loans improved in the first quarter of 2020 but $7.8 billion in loans received forbearance in April, according to S&P Global Ratings. Car values are tied to supply, and an increase in defaults may further suppress vehicle values, especially in the event of repossession and auctioning of bank-owned vehicles. Banks are tightening credit standards for auto lending. As of May, more than 60% of originations were extended to borrowers with a credit score of 700 or higher. With forbearance policies and unemployment benefits, analysts forecast auto delinquencies may not rise until the third quarter of 2020. S&P placed 33 subprime ABS deals on Credit Watch with negative outlooks in May, an indication of a potential downgrade if delinquency ratings increase. Credit card issuers are offering attractive zero percent introductory offers and balance rate transfers, looking to retain customers and attract new ones. The Fed reported theaverage interest rate on credit cards was 14.52% in May, as opposed to 15.09% in February. In 2019, consumers were confident and using credit. For the final quarter of 2019, credit card debt balances rose to $930 billion. By February, credit card balances exceeded $1 trillion for the first time in almost three years. The economy was strong, and Americans were spending and carrying balances. The pandemic has had a surprising effect on revolving debt. Consumer’s outstanding balances dropped by $24.3 billion in May, leaving $995.6 billion outstanding, according to the Federal Reserve. Sequestered at home, consumers spent less on credit than before the crisis. The Federal Reserve Bank of New York’s survey of consumer expectations released in June reported that consumers were more optimistic about making debt payments than they were in the April survey. So How Low, How Long? The Federal Reserve will

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