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Funding & Alternative Lending

Revolutionizing Real Estate Financing for Communities

The Rise of Modular Bridge Financing By Amy Martinson In today’s changing real estate market, challenges drive innovation. As housing costs rise, inventory shrinks, and affordability becomes a distant goal for many, a transformation is underway. This shift offers a practical response to our current issues. In the realm of modular housing, a new solution is emerging with the potential to change how we view real estate and its financing. Navigating a Complex Real Estate Landscape The post-pandemic world has created a complex landscape for developers, investors, real estate agents, brokers, and loan originators for three main reasons:  »         Inflated Money and Higher Interest Rates // Affordability takes a hit as money inflates and interest rates rise.  »         Shortage of Available Inventory // Intensified scarcity and competition in the housing market combined with the inability for existing homeowners to move up into new homes.  »         Reduced Refinancing Incentive // Since interest rates are currently in the 7%+ range on long-term fixed debt and 9%+ on home equity lines of credit, property turnover is slowing. In August, the California Association of Realtors (CAR) reported that the median home price in California reached $859,800, a 3.3% increase from July and a 3.0% rise from the same month in 2022. However, the housing market faced challenges, including rising mortgage rates and a shortage of available homes. Despite these challenges, there was continued strong interest from potential buyers. Amidst the housing crisis, the real estate market experienced a notable phenomenon known as the ‘refinance boom’ in the years 2020-2021. This boom was driven by historically low interest rates, strong household balance sheets, and increased demand for housing. Homeowners who participated in this refinance boom either lowered their monthly mortgage payments or extracted equity from their real estate assets. Approximately one-third of outstanding mortgage balances were refinanced during this period, resulting in improved cash flow for many homeowners. However, this refinance trend started to wane as mortgage rates increased sharply by 400 basis points from their historic lows. The impact of this refinance boom is expected to have long-term effects on the mortgage market, improving the financial position of homeowners and providing potential support for future consumption. Addressing the Housing Crisis: Rise of Modular Housing A housing crisis that is marked by inflation, rising rates, inventory shortages, and reduced refinancing incentives, presents a unique opportunity. These challenges have sparked discussions on innovative approaches to make housing more affordable and accessible, and modular housing has emerged as a promising solution. Unlike traditional construction methods, modular housing involves building homes in controlled factory environments. This offers numerous advantages that set it apart from traditional construction methods. These include significant cost and time savings, facilitated by the controlled factory environment where homes are constructed. Furthermore, the streamlined modular approach simplifies permitting by shifting inspections from the city level to the state level, reducing bureaucratic hurdles. Additionally, modular housing minimizes the reliance on skilled labor, making the construction process more accessible. Lastly, it boasts a reduced environmental impact, aligning with sustainability goals by optimizing resource use and minimizing waste. The Growing Modular Housing Market According to industry projections, the market for modular-built homes is set to surge from its current $32.49 billion in 2023 to $40.70 billion by 2028, with a Compound Annual Growth Rate (CAGR) of 4.61%. This presents a favorable money-making opportunity for smart brokers, agents, and investors. There are five distinct target markets who can benefit from this growth:  »         Homeowners aiming to increase their property values and supplement their income.  »         Developers looking to lower production costs and shorten construction timelines to enhance profitability in their projects.  »         Investors interested in capitalizing on the growing demand for luxury modular homes and the potential for returns.  »         Property Owners of land who want to build anew, bypassing traditional construction challenges and costs.  »         Potential New Home Buyers who thought they could not afford a new home but are attracted to the affordability and benefits of modular construction. Bridging the Financing Gap for Modular Homes The enticing potential of modular housing is also creating financing opportunities that need to be explored for mass adoption. One of the key obstacles is the gap between production and placement. Modular homes are produced in factories but require bridge financing until they are permanently placed on a foundation. This transitional phase can lead to complexities in securing suitable financing options. Traditional mortgage financing models are often too inflexible in a world where technology and innovation are driving modular-building techniques. Challenges and Opportunities Ahead The journey toward mainstream acceptance for modular housing is not without its hurdles. Communication gaps among stakeholders, including manufacturers, builders, regulators, and government entities, can lead to confusion and slow down the adoption process. You may think navigating regulatory frameworks can be cumbersome and unpredictable, impacting the scalability of modular housing initiatives. However, for those who utilize proven processes and systems for proper due diligence, modular-built communities become easier to produce and more profitable. Potential Financial Gains through Innovative Solutions There is a silver lining in the form of potential financial gains. Modular housing’s adoption can yield substantial rewards for both the industry and local communities. By streamlining communication, advocating for favorable regulations, and fostering collaboration among stakeholders, the groundwork can be laid for factory-built solutions to address the housing crisis head-on. In conclusion, housing is a multifaceted issue that demands creative solutions. Modular housing’s capacity to reduce construction time and costs presents a compelling argument for its integration into the broader housing conversation. Replacing aged housing stock, increasing profitability for stakeholders and minimizing environmental solutions are just a few of the significant opportunities at the forefront of this industry now. Learn more about financing modular housing at https://www.modufi.net/

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The Role of Alternative Lending in a Shifting Terrain

Adaptability is the Key to Success By Ren Hayhurst and Virginia Bush In the ever-evolving commercial real estate lending landscape, adaptability is key to survival and growth. As lenders navigate the challenges and opportunities presented by the state of today’s lending market, alternative lending strategies have emerged as powerful tools for success. We will delve into five such strategies that hold the potential to transform the industry. Bridge Lending In today’s high-interest-rate real estate market, bridge lending acts as a lifeline for borrowers, providing prompt funds without the burden of long-term, high-interest-rate loans. Bridge financing allows swift access to capital without committing to extended high-rate loans. Bridge financing caters to this situation, which arose after a multi-decade period of low, stable interest rates. Bridge loans offer a flexible, short-term solution until more favorable long-term options arise. Bridge financing offers not just convenience but a strategic advantage. Its adaptability to specific project requirements, whether acquisition, renovation, or time-sensitive investments, makes it versatile in a competitive market. Streamlining bridge loans with automation simplifies document generation, review, and customization, reducing loan development time and errors, and saving lenders’ high legal costs. Competition in the bridge loan market puts pressure on lenders to have an adaptable automated solution that can address the many types of bridge loans with the speed and cost savings required today. Mezzanine Financing As banks tighten underwriting requirements and demand conservative loan-to-value ratios, commercial borrowers are turning to mezzanine financing to fill the gap in traditional financing and current capital needs. Due to stringent equity requirements, borrowers and investors now require alternatives and/or supplements to traditional loans. Mezzanine loans fill this gap, offering flexibility with reduced equity contributions, improved leverage ratios, and adaptable repayment terms. Mezzanine lenders play a crucial role by helping senior bank lenders meet stress test requirements and funding vital commercial projects, including construction. As banks lower loan-to-value ratio demands, mezzanine financing is a reliable solution to permit borrowers access to additional financing to make up the shortfall in capital requirements. Well-structured mezz loans provide vital secondary support for different loan types in today’s complex lending landscape. Automation streamlines the mezzanine financing process, providing quick access to capital in a high-demand market while addressing borrowers’ and lenders’ evolving needs. Automation also allows mezz lenders to produce a consistent product that satisfies the requirements of the senior debt. Construction Loans The current real estate market is experiencing a surge in construction due to low inventory, changing consumer preferences, and economic growth. Private lenders are witnessing an increased demand for construction loans. These loans enable financing for projects needing significant capital, enabling borrowers to compete in the market. As construction lenders adopt electronic draw processes for efficiency and cost savings, borrowers face more rigorous fund disbursement requirements. Lenders must also embrace a digital approach for loan document generation and draw procedures to accommodate these changes. Construction loans play a crucial role in funding these projects, but they necessitate meticulous documentation and compliance. Automation tools, like those offered by GoDocs, simplify construction loan management. They streamline documentation, reducing administrative burdens and ensuring efficient capital allocation. They can also be tailored to accommodate and complement digital draw processes, enhancing borrowers’ and lenders’ ability to meet the demands of the dynamic real estate market. Debt Fund Participation As borrowers seek diverse financing options, the traction of debt fund participation grows. Debt fund participation, offering capital access without conventional complexities, is now favored by borrowers for its speed and flexibility. Debt fund participation brings unique complexities, demanding an in-depth grasp of fund structures, legal agreements, compliance, and intricate documentation, necessitating lender collaboration among multiple stakeholders. Each debt fund may have distinct terms and conditions, requiring tailored approaches for participation. Lenders and borrowers need precision and efficiency in managing these nuances. Automation streamlines debt fund participation, simplifying documentation, reducing administrative burdens, and enabling efficient capital allocation. It empowers lenders and borrowers to seize opportunities in the alternative lending landscape. The customizable solutions offered by GoDocs enhance precision in managing the complexities of debt fund participation, facilitating efficient and error-free transactions. Portfolio Lending Portfolio lending has gained prominence as borrowers and investors seek versatile financing options for large, complex real estate investments, often over multiple jurisdictions. With traditional loans often falling short in addressing specific project needs, portfolio lending has emerged as a strategic solution to create a single credit facility for a varied and diverse group of investment properties. Portfolio lending brings unique intricacies, with lenders navigating complex financial and legal terrains across different jurisdictions, assessing the diverse risk profiles of various assets within a portfolio. Each loan may have distinct terms, conditions, and risk factors, requiring a tailored approach to underwriting and management. Precision and expertise are paramount in handling these complexities. Automation, exemplified by providers like GoDocs, streamlines portfolio lending by offering quality-controlled, legally compliant solutions for complex transactions. It empowers lenders and borrowers to navigate these intricacies consistently and confidently. Customizable solutions deliver the precision required to efficiently manage diverse loan portfolios, allowing lenders to optimize their strategies and expedite loan closings from weeks to hours in a competitive market. Adapt to Succeed In today’s ever-evolving commercial real estate lending landscape, adaptability is the key to success. The strategies discussed here offer lenders and borrowers unique opportunities to navigate this dynamic market with precision and efficiency. The judicious use of automation further streamlines these processes, ultimately expediting loan closings and securing success in the competitive world of alternative lending.

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Market Predictions for 2023

While Not Rosy, Still Fair Share of Opportunities Ahead By Erica LaCentra As we head into the fourth quarter of 2022, predictions for what the real estate and housing market will look like in the coming year are pouring in. As mortgage rates continue to rise due to interest rate hikes by the U.S. Federal Reserve as a means of combating inflation, the general consensus across the industry is that we must deal with the reality that the housing market is in decline and will likely get worse in 2023 before it gets better. Does this mean we are in for a housing market crash similar to what the industry experienced in 2006? That seems like a very unlikely reality, and thankfully, a dramatic price crash and subsequent financial crisis do not appear to be in the cards. However, the changes that we are likely to see in the market will be substantial for both homebuyers and investors alike. So, let’s dig into the major predictions for the housing market for 2023, and ultimately how to prepare for any fallout they may cause. The Future of Home Prices Two of the biggest ongoing. questions on anyone in real estate’s mind are will home prices finally go down in 2023, and if so, by how much? Since the pandemic, home prices skyrocketed due to housing supply shortages and historically low-interest rates with many outlets quoting that home prices are up 40% since just March of 2020. Even as we approached the halfway point of 2022, home price growth had not shown much sign of slowing down. According to the CoreLogic Home Price Index, “national home prices increased 18.3% in June 2022 compared to a year ago. This growth followed the highest 12-month increase in the U.S. index since the series began in 1976 when April saw prices jump 20.3%.” It does look like prices are finally starting to cool down and that is predicted to continue into 2023. And it will be at a very slow pace. According to forecasts by Fannie Mae, it will not be until “the end of 2023 when home inflation returns to the 5% pace seen before the pandemic.” And even then, it seems like the baseline for U.S. home prices which we have seen set over the last few years, are likely here to stay. Fannie Mae is further forecasting that the median price of a previously owned home will surpass $400k by the end of 2023 and the median price of a new home will end at a record high of $464k by the end of the year, about $100k more than where the price of a new home sat in 2021. All of this calls into question issues of affordability for homeowners, which has been an ongoing problem since the pandemic hit. Those individuals that have been waiting for the right time to buy a home will likely be in for a mixed bag in 2023, with a better opportunity to find a property, as long as they have the means to afford it. Predictions for Housing Supply Another major topic on everyone’s mind as we look towards 2023, is will housing supply potentially start to improve with the market cooling. With home prices not likely to drop significantly in the near future and interest rates rising, many are hoping that this will finally provide a window for more inventory to potentially come on the market, or at least allow inventory to stay on the market for slightly longer to allow buyers a better opportunity as buyer demand remains strong. While there is the expectation that more inventory will be coming onto the market, there is the concern that homeowners will be less likely to list their homes for the remainder of 2022 into the new year, and we are already starting to see those concerns come to fruition. According to one of Redfin’s latest reports, “new listings of homes for sale were down 20% from a year earlier, the largest decline since May 2020.” So, the flood of inventory that homebuyers have been hoping for is still not likely, and any inventory that does come on the market is still not nearly enough to be able to put a dent in the supply issues that have been long-standing in the real estate market. Another area of concern when it comes to supply is the low level of housing starts in the U.S. that is not showing significant signs of improvement. Ongoing issues with material costs and labor have negatively affected this area of the market throughout the pandemic and this trend looks like it will potentially continue into 2023. Even with the construction sector experiencing an unexpected jump in August for both single-family and multifamily starts, with single-family starts growing 3.4% month-over-month and multifamily starts growing 28% month-over-month, housing starts overall are still struggling to meet demand. The single-family space specifically continues to be an area of concern when it comes to supply versus demand with weak builder sentiment and a 15.3% year-over-year decline in permits that a small jump cannot even hope to make a dent in. Unfortunately, according to the U.S. Census Bureau and the U.S. Department of Housing and Urban Development “total building permits fell by 10% in August with single-family permits down 3.5% and multifamily dropping by 17.9%.” So, while the increase in starts in August was nice to see compared to the sad streak of declines earlier in the year, the drop in permitting likely spells trouble on the horizon as it is a clear indicator that builders are likely slowing down potentially as they see the housing market starting to slow overall. This spells trouble for inventory levels going into the new year as new construction is crucial to meet future market demand. A Seller’s Market or a Buyer’s Market Based on the predictions we are seeing around home prices and housing supply levels, the final question many in the industry are asking is, will

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WHY Fix-and-Flip Investments?

Bottom Line: Profits Will Be Easier to Claim By Dalton Elliott One of the biggest surprise movie hits of the year has been “Everything EverywhereAll at Once.” That phrase does not just make a compelling movie title, but it describes how the economy and housing market is changing now. What’s changed? Interest rates. Rent rates. Available inventory. Customer demand. Home price appreciation. And more. A lot more. So, what has changed? Basically, it’s everything, everywhere, all at once. We are in the midst of a radically different housing market than we saw just 9-12 months ago. But that does not mean that real estate investors should panic. Opportunities still abound in the markets as it stands today. These opportunities are just different than they have been the past two years, and savvy investors will adjust their strategies to ensure profits amidst the change. From mid-2020 through 2021 to the first quarter of 2022, investors experienced a market almost perfectly designed for rental portfolio accumulation. Interest rates were at all-time lows and customer demand shifted from apartment living in high-density areas toward single-family living in suburban areas. So, it is no wonder that real estate investors—from mom-and-pop types to Wall Street investment firms—tried to pile up as many properties as they could through purchases as well as build-to-rent developments. But starting with the Fed’s move on interest rates in March 2022, the real estate market started moving quickly. Now that we are six months or so past that initial interest rate shock, there is more clarity about how these changes are shaking out. Here are three takeaways that show why pivoting to a fix-and-flip investment focus can help investors succeed in today’s market. 1. Increasing Interest Rates Will Soon Outpace Rental Rate Growth We do not yet know when the Fed will decide enough is enough with interest rates, but it is clear that it will be a while before the Fed cuts rates. This means that building rental portfolios will be more expensive. Continuing to build portfolios has been sustainable for investors so far in 2022 because rent rates have also grown (as stats from John Burns and Zumper indicate). But we are now seeing rents start to peak in some major markets, which means future interest rate hikes will make cash-flow margins much tighter for SFR landlords. Investors who have portfolio financing locked in at low rates will see profits continue to flow. However, in the short term, it is going to be much more difficult to leverage equity in a portfolio to buy more properties that will cash flow. Consequently, investors need to be rock-solid on their numbers and have a trusted financing partner if they want to add rental properties with confidence. One option to mention is bridge financing. Interest-only short-term loans can allow investors to purchase properties quickly while pushing off long-term rate locks for a year or two. In an increasing rate environment, this is one way to add to rental portfolios while maintaining cash flow in the moment. 2. Demand Still Outpaces Inventory The current housing market still features a significant inventory shortage, which means that demand outpaces supply. Median days on market (measured by St. Louis FRED) still lies at about a month and a half, well below the pre-COVID norms of 70-80 days. This inventory gap is one reason behind the significant increase in home prices over the past two years (17.7% YOY appreciation two years running, as measured by the FHFA). While prices have peaked in most markets, demand still exists for homes and rentals. Real estate investors can be confident that demand is there for properties they put up for sale. While investors may not get the market max prices that early 2022 boasted, they will still be able to recoup cash far above home values even two years ago. Investors can complete fix-and-flips or new builds with confidence, knowing that properties are not likely to sit on the market unsold for a long period of time. 3. Distressed Investment Properties Should (Slowly) Become Easier to Find While inventory is tight, some of the artificial constructs that have kept properties from becoming distressed are disappearing. Eviction and foreclosure moratoria instituted during COVID have now expired just about everywhere. And with interest rates rising, some homeowners who are in adjustable-rate mortgages may find it hard to find long-term financing that fits their budgets. As a result, more distressed properties should be available for real estate investors looking to do fix-and- flip projects. This may look different than it has in the past. The massive HPA of the past two years means that most homeowners, even those who desperately need to sell, have enough equity in their properties to avoid foreclosure. But investors should be able to find motivated sellers willing to take cash offers for quick turnarounds—leaving room for profit after property upgrades. The Bottom Line: Fix-and-Flip Profits Will Be Easier to Claim in This Market These three takeaways indicate why many investors will pivot toward fix-and-flip projects in this housing market.  » Fix-and-flip-eligible properties should be easier to find than they have been the past two years  » Sale values for these properties remain stable and secure  » Interest-only bridge financing makes it easier to profit on a short-term project leading to sale than on a long-term hold dependent on cash flow By learning from these takeaways, investors can design a real estate investment strategy that works in today’s market while making the most of their personal experience and skills. As you design that strategy, consider joining many other real estate investors who have shifted their focus to fix-and-flips to profit in the real estate market that has changed so dramatically in the past few months.

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An Introduction to Non-QM Programs

Why it is a Great Alternative for Borrowers By Jennifer McGuinness In the current and ever-changing market environment, it is important to understand the different financing options available to borrowers. Non-QM Programs offer a wide range of flexibility and underwriting criteria. These loans are available for the financing of primary residences, second homes and investment properties, but many do not know what non-QM means or how to get started. What is a Non-Qualified Mortgage (“Non-QM”) A non-QM mortgage loan is a home loan that is not required to meet the requirements outlined by the Consumer Financial Protection Bureau (CFPB). In January 2014, the CFPB issued a set of guidelines to provide “safer and more stable” home loans for consumers called Qualified Mortgages. Qualified Mortgages are a “new” mortgage classification. Commencing in 2014, the concept was created to make it more likely that a borrower would be able to pay back the loan. Lenders need to assess the borrower’s ability to repay and borrowers need to meet a strict set of criteria. If borrowers do not meet those criteria, they will not be approved for a qualified mortgage. In these situations, a borrower may be offered a non-qualified mortgage. A non-QM loan does not conform to the consumer protection provisions of the Dodd-Frank Act but that does not mean that they are bad for the consumer. Applicants whose incomes vary from month to month or those with other unique circumstances may qualify for these types of mortgages. For example, if you have a debt-to-income ratio of more than 43%, a lender may not offer you a qualified mortgage. Or, if you have dynamically changing income and do not meet the income verification requirements set out in Dodd-Frank and required of most lenders, you may not be offered a qualified mortgage. A lender may instead offer the borrower a non-qualified mortgage. If a lender offers a non-qualified mortgage, it does not mean the lender is not required to do any verification or assessment of your ability to repay the loan. It generally means that you do not meet the specific criteria needed for a qualified mortgage. Interest rates on loans will vary from lender to lender, but you may find that a non-qualified mortgage will have a higher interest rate. The Loan Differences While there are differences in how a Borrower qualifies for a qualified mortgage vs. a non-qualified mortgage, there are also differences in the loans themselves. Here are some of the ways the loans differ. Dodd-Frank offered lenders issuing QM mortgages protection from certain legal challenges in foreclosure proceedings and other litigation. With a QM mortgage, lenders generally have shown that they have confirmed that the borrower had the ability to repay the loan, which provides the lender with certain legal protection from lawsuits that claim they did not verify a borrower’s ability to repay. However, if a borrower does not feel that the lender made sure they had the ability to repay, they can still challenge the lender in court. Additionally, only QM mortgages can be insured, guaranteed or backed by FHA, VA, Fannie Mae or Freddie Mac, so they are generally considered  “safer” for investors who buy mortgage-backed investments. BUT IS THIS TRUE? The non-QM share of total mortgage counts declined during the COVID pandemic and reached its lowest level in 2020, at 2% of the market. However, the non-QM share of the market has since almost doubled in 2022, representing about 4% of the first mortgage market (data is as of the first three months of 2022). Though the non-QM loan is a small piece of today’s mortgage market, it plays a key role in meeting the credit needs for borrowers not able to obtain financing through Fannie Mae, Freddie Mac or other government channels. Creditworthy borrowers such as self-employed borrowers, first-time homebuyers, borrowers with substantial assets but limited income, jumbo loan borrowers and investors may benefit from non-QM loan options. The three main reasons why non-QM loans originated in 2022 did not fit in the QM requirements are the use of limited or alternative documentation, a DTI above 43% and interest-only loans. Almost 55% of the non-QM borrowers used limited or alternative documentation, 26% exceeded the 43% DTI threshold and 23% of the non-QM mortgage loans originated were interest-only loans. Today’s non-QM loans are still high-quality loans. They are very different and less risky than the equivalent of non-QM loans originated prior to the housing crisis. The average credit score of homebuyers with a non-QM mortgage loan in 2022 was 771 compared to 776 for homebuyers with QM loans and 714 for government loans (data is as of the first three months of 2022). Similarly, the average Loan to Value Ratio (“LTV”) for borrowers with non-QM mortgages was 76%, compared to 77% for borrowers with QM mortgage loans. Finally, the average DTI for homebuyers with non-QM loans was 37% versus 33% for QM and 40% for government programs. Despite the higher DTI ratios, non-QM mortgages are performing very well. Both the non-QM and QM loans have low delinquency rates. In fact, the serious delinquency rate (over 90 days delinquent) for non-QM mortgages is slightly higher than the rate for QM loans (both being less than 1%) and significantly lower than for the government loans (almost 2%). To offset the risk of default, lenders generally set a higher interest rate on non-QM loans. Additionally, lenders are generally focused on borrowers with higher credit scores and lower LTVs, as this helps to offset the possible added risk from a high DTI ratio, limited documentation and interest-only on non-QM loans. How Do Lenders Verify Income for Non-QM Loans? While non-QM loans offer flexibility for lenders to offer mortgages to people who do not fit the criteria of QM loans, lenders still need to verify the information provided and document anything that supports the borrower’s ability to repay. That includes income sources, assets, or anything else that gives them assurances the borrower will be able to repay the loan.

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