How The Fed Rate Hikes are Impacting Private Lending and What You Need to Know
The headlines are endless, and everyone knows that the monetary hawks are swooping in, getting ready to take flight with interest rates. Inflation is at a 40-year high, and the Fed is on a rampage to tamp it down, with seven or more rate hikes in 2022.
That said, private money isn’t levered directly to the U.S. 10 Year Treasury like consumer mortgages.
The Drivers for Private Money Rates are Opaque
Private money tends to fluctuate based on two-year credit default swaps. These are derivatives, that unless you’re a series seven securities company with access to those markets, you have no way to see the rates on a daily, or even a weekly basis.
However, we can get an idea by observing the U.S. 2 Year Treasury. In the last six months, it's gone from .26% to 2.17%, for a 1.91% increase. In just three months, it's gone up 1.48%.
Two-Year Swaps are Going Up
Given how two-year swaps are getting hit, you can expect private money rates to begin reflecting these rate increases over the next few weeks and months.
Another thing that gives additional color to private lending rates is securitizations. This is where private lenders sell off large pools of loans to Wall Street firms so that they can recapitalize. Over the last five years, Wall Street has been in love with these securitized pools.
However, recently two industry insiders have confirmed for us that several of the largest private lenders in the US have recently lost favor with Wall Street and their loan pools aren’t generating much interest.
In fact, one company had to completely restructure their pool to get a single bidder. Contrast that to a few months ago, when these pools sold faster than Usain Bolt running the 100-yard dash.
Also, before you panic, I want to say unequivocally...
The Sky Is NOT Falling
This is a normal market, and it is still a great market. The issue is we have not seen a normal market for a very long time. Many of us remember charging 12% interest in 2016 and 2017. Since then, rates have continued to drop. So, many in our industry know nothing but a decreasing interest rate environment.
The conversations back then were, “If we could just get to 9.99%, we could crush this market”. I don’t see us going back to 12% or 10% anytime soon, but I would expect rates to increase moderately, in the .75% to 1.0% range. So prepare yourself. It’s coming.
Lastly, keep in mind any rate increases are a drop in the bucket compared to what your labor and material prices have done over the last 18 months. Our loans accrue interest only on the drawn balance of your loan, and for construction loans the balance typically starts off very low. Therefore, any rate increases will mean very little to the overall cost of your project.
The good and bad news is demand for new homes is still at all-time highs. Our nation is still very much undersupplied, and we still expect prices to increase, though probably at a lower rate than we have been seeing. While there is certainly turbulence, the tailwinds continue to be at our backs.
If there’s any way we can help you through these challenging times, please feel free to reach out.
We hope to hear from you.
Robb Kenyon, CCO
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