Why are lenders beginning to reduce their LTV parameters?
We have kept a 50% LTV requirement for our entire existence for fear of ever going underwater on any of our loans. In recent months other lenders are beginning to see what we have seen all along. The fear of another market downturn is forcing a market correction. No one wants their loans to go completely underwater during the next recession. It’s not good for borrowers’ brokers or private lenders.
Why do lenders fear the trajectory of the current market?
Job rates are rising. Reports say the economy is strong. But when you peal the facade back further you see a lukewarm economy susceptible to the winds of change. The Fed recently hiked up rates. In response, the market responded poorly halting further increases for the time being. Such events highlighted the precarious position of the economy and the exact reason that many lenders are decreasing LTV limits are falling. The Hard Money industry through often independent of most swings in the economy sees a major economic downturn as its single biggest threat.
As many of you very well know the Hard Money firms like other financial organizations can be hit hard by the recession. There is a reason companies much more established than anything in hard money were hit hard. If hard money lenders aren’t careful, they will and could be the next company claimed by an economic downswing.
After recent informal polling, we have found that LTV requirements are tightening. That is hard but also just part of the game. Do your best to massage the fears of your clients and let them know this may just be the new norm.
How do I explain the new normal to my borrower?
You likely won’t see widespread LTV limit decreases until later this year. Explain to your clients that the lower LTV means that they have more room to pay off a loan and less risk of foreclosure for them if they miss a payment.