It may seem like an obvious standard, but the most credible lenders originate loans they know will perform. Confidence and an unrelenting commitment to realizing good outcomes are integral principles to incorporate across a business. This attitude has an impact not only in the origination stage, but it is also the key to reaching securitization.
Asset-based securities are becoming an increasingly important way to fund projects, but the process is not well understood. Brokers and originators need to know about this method as they seek the best way to fund projects for their clients. In general, these are financial securities backed by income-generating assets such as home equity loans and property loans, as well as student loans and auto loans. New asset-backed securities totaled about $85.6 billion in the first quarter of 2024. That was a 30.5% increase when compared to the first quarter of 2023.
Securitization in private lending is still relatively new. Unlike many tradable securities, hard money real estate lending is considered a higher-risk investment due to the mechanics of fix and flips, new construction projects and the sheer number of variables involved.
Traditionally this makes sense, as the real estate investment market is subject to more unpredictability than 30-year mortgages and student loans, for example. Considering the bar for entry into securitization in this industry is high, lenders must elevate their standards to achieve it. So, how can companies prime themselves for securitization?
Know the details
For originators wanting to work with private lenders involved with asset-backed securities, they need to seek out leaders in the field. This requires they find lenders who are growing their capital, as well as their reputations.
Lenders should think of each borrower as representing an opportunity for a long-term partnership. To make good loans, lenders need to have internal teams in place that are as devoted to each other as they are to their borrowers. Workers take notice when organizations act openly, with 86% of employees saying that increasing trust and transparency in their relationships with an organization is “very or critically important,” according to a recent Deloitte report.
To reach the volume required to entertain the concept of securitization, loans must perform. The only way to guarantee that each project is viable for both borrower and lender alike is to dig into the details. This requires teams of underwriters, processors and loss mitigation specialists putting systems and strategies in place that can ensure each borrower is properly vetted, projects scrutinized, and post-closing issues triaged.
Having these teams fully in-house makes it possible for the necessary first steps to happen quickly and with supreme diligence. Through the life of the loan, keeping the lines of communication clear and open, from the pre-qualification stage through closing, proves as much dedication to borrowers and their deals as it does to the bottom line.
The true payoff for borrowers, though, will be realized after closing. Private money lenders truly shine when they provide white-glove levels of customer service to meet or even exceed expectations. By dedicating an individual for clients to reach out to, ask questions of and receive real-time information ensures problems don’t slip through the cracks, and keeps internal teams accountable. Committing to transparency and nurturing open lines of communication will set businesses apart and help foster longer relationships.
Develop a checklist
Private money lending often carries a negative connotation, and with each new borrower comes some level of skepticism that firms have to overcome. These reservations extend to Wall Street, where hesitations around risk are more challenging to dispute. The multinational insurance provider WTW found that 57% of senior real estate executives cite reputational risk as a top five threat to business, making building trust essential across the industry.
During the loan process, when a deal reaches an underwriter there must already be an established level of viability based on the loan officer’s examination. This allows the underwriting and processing teams to dig deeper into the story and hash out the particulars of rates and leverage with confidence.
Developing a “checklist” of sorts that is not set in stone, but rather flexible with some safeguards in place creates a dynamic approach to writing good loans. As a balance-sheet lender, there are some areas where it makes sense to onboard more risk than traditional banks and even other private lenders, like taking on a significant book of new construction projects.
Even though new construction may be in high demand, lowering its overall risk profile doesn’t mean every loan for every investor will or should be approved. With flexible lending programs comes the need to say no to deals that don’t reach organizational standards. Not every investor is prepared, and those who do not meet standards, must not move forward in the borrowing process. Lenders will inevitably turn down these under-prepared investors, but if that happens, it’s important to provide them with actionable next steps to better platform themselves for similar opportunities in the future.
Holding each loan to a high standard and implementing checks and balances throughout the lending process will make deals perform, and in turn, build industry reputation. If each internal team operates like an owner, considers the implications of their decisions and provides a high-quality level of service, the results yielded will be more impactful.
Consistency and values
Success is a byproduct of commitment to a certain set of values, and instilling these values from the bottom up produces positive results repeatedly. In private lending, this looks like a growing book of real estate investors, which in turn leads to a growing balance sheet of assets under management and growth as a team.
Existing relationships aid the securitization process because those buyers already understand the deep-rooted value a lender is bringing to the table. Forging ahead with these standards in mind also makes scaling, attracting new talent and originating loans more accessible.
Ultimately, this kind of momentum only reinforces performance. When new team members are brought in, they can see how this wealth of experience is reflected in investor relationships, and subsequently model that as they are further ingrained in the firm.
In a landscape where it is easy to cut corners to chase after volume, the ones who remain resolute to producing quality and high-performing loans achieve the most. Consistency does as much for a firm’s reputation as it does for building the right team to originate and close loans.
Focus on performance
With the securitization process comes a new level of transparency. The package, referred to as a specialized purpose vehicle, is printed publicly, allowing potential borrowers and investor groups to follow a company’s progress. Though this may only represent a portion of business activity, it demonstrates trustworthiness and reliability.
Additional stable liquidity is also an important benefit of securitization. The revolving line of credit the process provides will help firms reach more investors, fund additional projects and expand a lender’s reach. More lending capacity in turn accelerates growth, granting access to new areas of lending and the ability to take on larger ventures. Now more than ever though, it is important that lenders stand by their convictions. It’s easy to lose focus on what’s most important, but top-tier performance, especially when in the public arena, is imperative. Providing high-quality products alongside excellent service strengthens relationships with borrowers and solidifies the principles necessary to sustain a business to the next growth stage.
