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Hmm. First, I thought that most real-estate-backed bridge loans were supposed to reduce the risk, by the very nature of backing it up with property (or home equ

Hmm. First, I thought that most real-estate-backed bridge loans were supposed to reduce the risk, by the very nature of backing it up with property (or home equity). This is in stark contrast with a zero-documentation no-money-down subprime loan -- only people who have spent a lot of time building equity will get this sort of a deal. My understanding suggests that the main time you, an individual, would do a bridge loan, is if you wanted to buy a house and use the home equity in the house you haven't sold yet as your down payment. If that's the case, you put the cash in the down payment, and aren't expected to pay it back if the house you've vacated is seized. Nothing about this process seems intrinsically unfair to anyone (yet) though the process is probably an expensive way to get that money. I'm not sure why you'd put them into bonds. Besides being freakishly irregular loans, they're generally designed to be very short-term, which it seems would be an impediment to securitization -- doubly so when you're talking about a business bridge-loan instead of a real-estate one. Are you sure your presumption is accurate? And, just for what it's worth, even payday loans can be very attractive if the alternative is worse (e.g. please give me a $500 payday loan so I can go pay my fine and retrieve my car from the impound lot so the city of SF stops charging me $65.75/day in fees. thanks.)

gregpilling 12y ago
it is assumed that properties will go for 75% of value at a quick-sale like an auction. Buildings are much more secure than businesses. source- buddy who is banker for 25 years
- chatmasta 12y ago
  What I am hearing from my banker friends is that these loans are financing way more than just real estate.
chatmasta 12y ago
Again, I am uninformed and this entire system is very complicated, and not documented in any authoritative legislation that I can find. In fact the Wikipedia page on "hard money loan" has one citation, a 404'ed Fannie Mae page. It's possible the entire idea of "hard money lending" is a bullshit concept executed differently by every investor. This may contribute to its apparently shady reputation. Because of its undocumented nature, it's difficult to discuss these loans and I am having trouble understanding the system. Despite that, let me try to respond to you: Your examples make sense when the loans are targeted at individuals who live in the home the loan is paying for. In that case the incentives can frequently align to decrease overall risk. However what I am hearing from mid level investors on the "ground level" is that most of these loans are not going to people living in the houses. They go to people renting or flipping the houses. This is creating misaligned incentives. Because flippers/landlords work at scale (more than one house) they naturally treat the loan as an investment vehicle and therefore need to create positive ROI. A single homeowner doesn't care about high interest rates because presumably they were the best, or the only, option to buy a house. However flippers/landlords need to "cash out" of the loan for the high interest rates to be viable. They can also use the equity in one house financed with a loan as the collateral for a second loan. A single default can have cascading consequences on multiple parties as it can lead to the foreclosure of multiple properties and a liquidity crunch for the lender who needs to then dump the properties. If suddenly twenty 3br houses within the same area foreclose and go up for sale, then the surplus of housing supply drives down the price. The increased risk of lending to landlords creates an incentive to consolidate funds to cover a larger risk pool. That is why blackstone and other PE firms are investing in large funds. The problem is that by investing in many landlords, black stone cannot properly assess the risk of every loan. If this sounds familiar it's because the exact same thing happened in subprime mortgage. Ultimately the problem is large funds are consolidating risk while decreasing the accuracy of risk measurement. This combines with the sudden influx of funding to create incentives for reckless lending. Put another way, multiple parties are making money without providing any service other than consolidating funds and passing risk tolerance onto the next lender. The system of banks > PE funds > brokers > landlords has too much exposure. Too many people lend the money without knowing the risk. As for why black stone would securitize into bonds, it is the economically rational thing to do. Unfortunately in this system the loser is the one left holding the check when real estate plummets and interest rates rise. There are many parallels to subprime 1.0, most notably the middle class lenders authorizing the loans with "someone else's money." Landlords are not funding the investment but they are assessing the risk. (Sorry for long reply. I have been thinking about this a lot.Also p.s. My original comment was wrong about Josh Adler head of b2r. I mixed up two people with names josh and Adler.)
- deleted 12y ago
  [deleted]

gregpilling 12y ago

it is assumed that properties will go for 75% of value at a quick-sale like an auction. Buildings are much more secure than businesses. source- buddy who is banker for 25 years

chatmasta 12y ago
What I am hearing from my banker friends is that these loans are financing way more than just real estate.

chatmasta 12y ago

Again, I am uninformed and this entire system is very complicated, and not documented in any authoritative legislation that I can find. In fact the Wikipedia page on "hard money loan" has one citation, a 404'ed Fannie Mae page. It's possible the entire idea of "hard money lending" is a bullshit concept executed differently by every investor. This may contribute to its apparently shady reputation. Because of its undocumented nature, it's difficult to discuss these loans and I am having trouble understanding the system. Despite that, let me try to respond to you: Your examples make sense when the loans are targeted at individuals who live in the home the loan is paying for. In that case the incentives can frequently align to decrease overall risk. However what I am hearing from mid level investors on the "ground level" is that most of these loans are not going to people living in the houses. They go to people renting or flipping the houses. This is creating misaligned incentives. Because flippers/landlords work at scale (more than one house) they naturally treat the loan as an investment vehicle and therefore need to create positive ROI. A single homeowner doesn't care about high interest rates because presumably they were the best, or the only, option to buy a house. However flippers/landlords need to "cash out" of the loan for the high interest rates to be viable. They can also use the equity in one house financed with a loan as the collateral for a second loan. A single default can have cascading consequences on multiple parties as it can lead to the foreclosure of multiple properties and a liquidity crunch for the lender who needs to then dump the properties. If suddenly twenty 3br houses within the same area foreclose and go up for sale, then the surplus of housing supply drives down the price. The increased risk of lending to landlords creates an incentive to consolidate funds to cover a larger risk pool. That is why blackstone and other PE firms are investing in large funds. The problem is that by investing in many landlords, black stone cannot properly assess the risk of every loan. If this sounds familiar it's because the exact same thing happened in subprime mortgage. Ultimately the problem is large funds are consolidating risk while decreasing the accuracy of risk measurement. This combines with the sudden influx of funding to create incentives for reckless lending. Put another way, multiple parties are making money without providing any service other than consolidating funds and passing risk tolerance onto the next lender. The system of banks > PE funds > brokers > landlords has too much exposure. Too many people lend the money without knowing the risk. As for why black stone would securitize into bonds, it is the economically rational thing to do. Unfortunately in this system the loser is the one left holding the check when real estate plummets and interest rates rise. There are many parallels to subprime 1.0, most notably the middle class lenders authorizing the loans with "someone else's money." Landlords are not funding the investment but they are assessing the risk. (Sorry for long reply. I have been thinking about this a lot.Also p.s. My original comment was wrong about Josh Adler head of b2r. I mixed up two people with names josh and Adler.)

deleted 12y ago
[deleted]