Hard Money Loans - Are They Really that ‘Hard’ Compared With the 1980’s?

Question

Hard Money Lenders aren’t the “loan sharks” that the general public would like to assume from the use of the words, “hard money.” The term “hard money” brings to mind the idea of mobsters breaking the kneecaps of delinquent borrowers. The lender profile for a non-bank source of financing, is not one of a mobster nor is it the twenty something banker at Chase. A private money or hard money lender could be just about anyone, a businessman, a retiree, or an organized group that runs like a private bank.

For those who experienced the interest rates of hard money during the 1980’s in the U.S., the hard money interest rates of today are low in comparison. During the 1980’s it was typical to see over 20% per year charged on a hard money loan. Most hard money lenders these days charge an average interest rate of 13% which is obviously a lot lower!

To the consumers out there, look out for the “loan-to-own” predatory lenders. This type of hard money lender aims to structure the loan in a way that borrowers would induce them to default and thus allow the lender to foreclose on the property being used as collateral.

Mark Van Horn · Answer

Getting back to the original discussion.  A historic perspective is needed.  In the early 80's interest rates on mortgages were around 20% (most were fixed rate mortgages), about the same as the 
then current interest on credit cards.  Some people were maxing out their credit cards to put down payments on their first property or other investments.  At the same time unemployment was over 10% of the workforce and inflation hit 13% while high school and college graduates had a hard time finding work.

Variable rate mortgages were then seen as an alternative strategy, as interest rates started coming down in the Reagan years, so people had an incentive to refinance.  Now variable rate mortgages are called ARMs and people are refinancing to lock in lower rates with fixed rate mortgages.

Some things are now as they were then, unemployment is still too high, at 8% of the workforce and inflation is back.  Interest rates on credit cards have not come down for most consumers, while cash advances rates are well into the 20s and graduates discover it's hard to find work.

We have the freedom to make economic decisions in an uncertain present that is not much different then the early 80s.  This includes alternative financing, like private and hard money, as well as building our own real estate businesses.

Charles Morgan · Answer

I'm not sure but I think Predatory lenders used to get an absurb down payment like 30%, oh wait, that's what my bank wants for a commercial loan now, Hmmm.

Dion DePaoli · Answer

Jeff, you are correct there is, for the most part, no unjust enrichment.  Your comment made me think though in relation to the costs of foreclosure in a geographic sense and mentally compare to the discounts we apply when we purchase a non performing loans with no foreclosure start date versus LTV norms for HML.

There is a difference amongst states due to foreclosure proceeding times and being judicial and non-judicial.  Where those states with the longer on average time and greater cost to get to final REO sale warrant discounts up to 45% to 55%, the shorter states do not always warrant a step discount like that.  It is interesting that LTV ratios do not tend to follow the same or similar price trends that we see in trading NPN's.  In New York at 55% LTV, you could loose 10% plus not to mention some HML is 65% LTV, but in a state like Texas with short time and costs you do not see a higher LTV say up to 75% LTV.

All that said, it is not safe to assume that HML lender's take back the deed and sell the real estate for a gain.  The asset can be bought at sale and they might not get the asset at all, thus they only get what they were due.  Additionally, where HML includes rehab, ouch, unfinished rehab only stands to compound your expense and perpetuate the loss.  Even if there was a winning strategy for HML once in awhile, certainly the masses are net negative.

I guess in the boom, it could be argued that appreciation helped push up the potential gain but again that asset was probably more likely to be purchased at sheriff sale if sufficient equity was present.

Jeff S. · Answer

I shake my head in wonder every time I hear someone suggest that it’s in a lender’s interest to foreclose, as if there were a greater profit potential by doing so.  At best, foreclosure makes the lender whole.  There’s no unjust enrichment.

I certainly won’t say that there aren't creative lenders who have figured out a way to profit from a foreclosure, and heaven knows, someone here will confirm how they got ripped off, but I wonder how much of this is urban legend.  If not, would someone please explain in detail how this would work and still comply with all the rules?  No, I’m not trying to expand my repertoire :-).  It would enlighten and protect all of us.

Jeff

James Vermillion · Answer

Good point Karen...I have seen discussions about lenders charging 10-14% which is reasonable but they also throw on 4-6 points. Ouch!  I was but a wee lad in the 1980s, so I cannot speak to that, but it seems there are quite a few hard money lenders out there today with fair rates and no mafia ties!

Karen Margrave · Answer

Aside from the interest rates, there's the points, and that's where it gets dicey with some lenders.

Corey Dutton · Answer

oops

Dion DePaoli · Answer

On anther note...

"Hard Money Loans - Are They Really that ‘Hard’ Compared With the 1980’s?"

Yea that gave me a chuckle when I read it.  OK, I will stop with my childish humor reference.  That is all.

Corey Dutton · Answer

I recently posted about an article where private lenders in India are charging 5-10% per MONTH and I wrote that this must have been a typo in the article. Jon Holdman responded to say that it is indeed a monthly interest rate, and this is no typo. Hard to believe, but the area of private money lending is certainly ruled by supply and demand.

Bill Gulley · Answer

As I recall, the lenders in the 70s and 80s were all working for:

Jake, the black-jack, Benny the bat, Bobby the blade (now with BoA) and Mike the Mummy (who just retired from Wells Fargo).

As more entered the market more competition evolved IMO and while these guys all have relatives or were mentors to many in the business today, just like boot-legging, the business has become more respectable.

I suggest you find your own hard money lender, like grandma who gets 1.5% on her CDs.  ;)