NPLA Conference Session Recap: Capital Markets — Exploring Economic Shifts in Private Lending

Where is the Fed going with rates?

The panel reached a consensus that, despite recent rate hikes, there may not be any additional increases in the near future. Acra and Roc Capital, among others, reported a healthy flow of deals, indicating that private lending is still going strong. However, the question remains: when will the other shoe drop? If the demand for capital falls short of the actual appetite for it, then raising interest rates is the only logical option. As a result, the consensus was that private lenders should be prepared to operate in a world with current rates for an extended period. Businesses need to manage their operations as if rates might increase by another 200 basis points and be prepared for any eventuality.

Are there specific areas private lenders are avoiding or leaning into in their lending strategies today?

In the context of private lending, it was observed that certain geographical locations present distinct challenges for lenders. The Midwest was noted to have an uptick in lending activity, while California was considered a tough state for private lenders. Additionally, states like New York and New Jersey were pointed out to have lengthy and complicated foreclosure processes, which could lead to higher delinquencies over time. To navigate these challenges, private lenders were advised to adopt a more conservative approach to underwriting, recognizing that different states may require distinct underwriting criteria.

For loan buyers, what is your ideal customer/partner in this current marketplace?

The session highlighted a crucial aspect revolving around loan buyers in the current market, primarily focusing on ideal loan customers or partners. The consensus was that the most preferred customers and partners treat the loans they sell to buyers as if it were their own capital. Lenders should regard themselves as partners with the buyers, and a crucial gauge for this partnership is whether the customer or partner would feel a sense of accountability if the loan were to face challenges or default.

To maintain strong partnerships, customers and partners must be mindful of appropriate loan-to-value (LTV) and debt service coverage ratio (DSCR) while lending. In an environment where the market is more competitive, and demand is lower, the reputation of lenders to those who purchase their loans takes on even greater importance. Therefore, making “good loans” becomes a top priority for lenders to maintain their reputation and build strong relationships with their customers and partners.