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Education Is Our Cornerstone

CONTRIBUTORS John Adractas Daren Blomquist Nema Daghbandan Jill Duke Charles Farnsworth Michael Fogliano Jason Jones Mark Jury

Sam Kaddah

Erica LaCentra

Rodney Mollen

Sean Morgan Keith Tibbles

Alan Tiongson

Shaye Wali

COVER PHOTOGRAPHY

Cali Argüello

PRIVATE LENDER

Private Lender is published quarterly by the American Association of Private Lenders (AAPL). AAPL is not responsible for opinions or information presented as fact by authors or advertisers.

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Meaningful and intentional continuing education is an essential tool enabling lenders to navigate challenges, mitigate risk, and grow their businesses—all while maintaining a high standard of professionalism and accountability.

AAPL has long recognized the role education plays in strengthening our community. There’s a reason our three pillars are education, ethics, and advocacy—with education placed first. We’ve significantly upped our game by releasing targeted programs to equip members and nonmembers with the resources necessary to make informed, responsible business decisions. This means going beyond theoretical “blue-sky best practices” to address the sometimes uncomfortable realities of day-to-day business operations.

Our Annual Conference is where many of these ongoing efforts come together and enter the spotlight. It is so gratifying to see a culture of collaboration become the foundation of this event. It shows itself in a shifting focus from same-old business development to intentional peer networking that grows mutual mentorship and partnership. Sessions are a melting pot of perspectives coming together to talk shop in ways rooted in practicality and a shared commitment to resiliency.

The numbers further prove our industry’s appetite for this kind of experience. Although our conference is the nation’s largest private lender event and grows year-over-year, 2024 unexpectedly represented an even more remarkable turnout; more than 830 attendees and sponsors arrived ready to create something electrifying together.

Although we closed out last year with this resounding success, as always, this quarter marks a fresh start to continue building on strong foundations. If there are topics you’d like to see more on or questions you need help with answering, reach out to contact@aaplonline.com or submit your feedback at aaplonline.com/comments. You’re not alone, and we’re here to help—or bring together those who can.

LINDA HYDE President, American Association of Private Lenders

DSCR: Conventional Lenders Edging Out Private Market?

As residential refinance activity declines, the origination-starved conventional mortgage industry has more than doubled its appetite for debt service coverage ratio loan products.

MICHAEL FOGLIANO AND SEAN MORGAN, FORECASA

Originations—both conventional and private—have been increasing annually since 2019, peaking in 2022. Current levels remain higher than those in previous years, and projections suggest even more originations in 2024 than in 2023. We are still above levels reached in the years leading up to 2022 and are likely to see more originations in 2024 than in 2023. May 2024 is the high watermark for both private lending and residential originations year-to-date.

Although we already know the movement in total originations, what do we know about the composition of these specific loan products? Understanding not only the volume but also the composition of business purpose loans is crucial for both

lenders and investors as they navigate the dynamic landscape of real estate investment.

TERMINOLOGY

To set the stage, it’s important to clarify what constitutes a business purpose loan. For this article, a business purpose loan is defined as any mortgage transaction in which the borrower is a business entity and the lender is a private lender or non-QM lender.

These loans are further divided into two types based on maturity terms: DSCR loans and RTL loans, each with distinct characteristics. A DSCR loan is defined as a mortgage with a maturity term of at least 25 years. An RTL loan is defined as a mortgage with a maturity term of two years or less.

The scope of the data in this article is specifically limited to private lending and

“Outside of the top 100 lenders, just 15% of private lenders originated a DSCR loan through the first three quarters of 2024.”

non-QM business purpose loans and includes data for the first three quarters of 2024 due to the completeness of public record reporting at the time of this article.

PRODUCT TRENDS AND DIFFERENCES

Examining loan product trends reveals strategic differences among lenders; some opt for diversification, while others specialize. It’s important to understand that not all private lenders offer both RTL and DSCR loans.

Some choose to broker DSCR loans to larger private or non-QM lenders.

As we dig deeper into loan product trends, it becomes evident that lender strategies and offerings vary significantly. Outside of the top 100 lenders, just 15% of private lenders originated a DSCR loan through the first three quarters of 2024. Since DSCR loans look and feel more like conventional residential loans, there are more capital market players on the secondary market for this product.

As illustrated in Figure 1, RTL loans continue to dominate the market. However, during the last four years, DSCR loans have steadily gained a larger market share. This increase has come mostly from non-QM lenders, as non-QM lending for DSCR business purpose loans has increased every

year since 2020. The number of DSCR loans in 2023 was more than double that of 2021, and the total number of DSCR loans through the first three quarters of 2024 is already more than the total of 2023.

Figure 2 provides a breakdown that illustrates both the increase of unique

non-QM lenders offering DSCR-type loans, along with the corresponding increase in loan counts.

CONVENTIONAL LENDING ENTRANTS

Alongside the growth of private and nonQM lending, there is a notable trend of increasing participation by traditional, conventional lenders in the business purpose loan market. Forecasa has identified several conventional lenders like United Wholesale Mortgage (UWM) and Guaranteed Rate that have started to originate business purpose DSCR loans. For example, UWM has had fewer than 700 business purpose loans in each of the last two years. Through the end of Oct. 2024, UWM has originated nearly 2,400 business purpose loans (see Fig. 3). Forecasa expects this trend to continue

through the remainder of 2024 and into 2025 because this shift allows conventional lenders to offset declining residential refinance activity by tapping into the demand for alternative financing options.

GEOGRAPHICAL VARIANCES IN LOAN ACTIVITY

Another key factor is the geographic segmentation of private lending markets: Borrower needs, lender availability, and product preferences can vary significantly from one region to another.

The U.S. Census Bureau categorizes the country into four primary geographic regions, each comprising specific states. This standardized breakdown enables consistent data analysis across federal and state datasets, facilitating easier comparisons of economic, demographic, and lending trends.

Among both private lenders and nonQM lenders, the Midwest region saw the largest growth in DSCR loans. Since 2021, the total number of DSCR loans there has more than doubled (+131%). Meanwhile, the West region was the only region to see an overall decrease in originations (-18%), but solely within the private lender category. Private lenders and non-QM lenders moved in completely different directions in the West: Private lending DSCR originations decreased by 46% while non-QM lending originations increased by 44% since 2021.

The largest non-QM lenders offering DSCR loans include LoanStream Mortgage, Amwest Funding Corp, and A and D Mortgage. Premier Mortgage Associates has been the fastest growing in this segment, producing more than six times the number of DSCR loans from 2023 through the first three quarters of 2024.

IMPLICATIONS OF RISING INTEREST RATES

Interest rates, which began to rise in 2021, also appear to have significantly influenced the shift in product mix. With an expectation of rates continuing to climb, an increased number of borrowers were motivated to lock themselves into a fixed-rate loan. This preference aligns with the growing proportion of DSCR loans in the overall loan count, offering insights into borrower strategies in response to market conditions. However, while RTL loans make up less of the business purpose loans by count of units than before, they present a larger share of the total origination volume due to larger loan sizes (see Fig. 4 on next page). Through the first three quarters of 2024, the average

FIGURE 3. UNITED WHOLESALE MORTGAGE DSCR LOANS, 2019-Q3 2024

FIGURE 2.

RTL loan amount was about $521,000; by comparison, the average DSCR loan average was about $315,000 (see Fig. 5).

In summary, the business-purpose lending market is undergoing a clear evolution, with both private lenders and non-QM lenders adopting tailored

approaches to meet borrower demand. RTL remains the dominant product overall, but DSCR loans have increased their market share and have seen distinct growth in certain regions.

We expect private lenders, in particular, to explore options to start offering

DSCR loans because it will help with client retention and borrower loyalty. To remain competitive with non-QM lenders and the traditional conventional lenders, Forecasa expects to start offering more business purpose loans to make up for the lack of residential refinancing activity.

at

responsible for product development and data analysis. After studying mathematics, Fogliano gained experience in several industries, always working with complex data.

Sean Morgan is the founder and CEO of Forecasa, where his primary focus is product and business development. With a background in oil and gas intelligence, Morgan and his team achieved a successful exit several years ago, before entering the lending analytics space. Morgan began his career as a CPA for PwC, cultivating a strong foundation in data interpretation and strategic insights.

FIGURE 5. BPL MORTGAGE VOLUME ($), 2019-3Q 2024

FIGURE 4. AVERAGE BPL LOAN SIZE, 2019-Q3 2024

MICHAEL FOGLIANO

Michael Fogliano is a product manager

Forecasa,

SEAN MORGAN

Distressed Auction Data Reveals Hidden Market Potential

New data shows fewer than one in four purchases at foreclosure and REO auctions involve financing, underscoring a substantial, untapped opportunity.

DAREN BLOMQUIST, AUCTION.COM

Nearly eight in 10 homes purchased at distressed property auctions are not financed by the buyer, representing a largely untapped market for the private lending industry.

An Auction.com analysis of 200,000 properties sold at foreclosure and bankowned (REO) auctions since 2018 shows that only 21% of foreclosure auction purchases and 24% of REO auction purchases are attached to some kind of financing by the buyer—either in the form of purchase financing at the auction or post-auction, stand-alone financing (see Fig. 1).

A “WIN-WIN”

“There are not very many lenders who will lend on trustee sale properties,” said Landon Cunningham, vice president of client relations at Inland Capital, a Spokane, Washington-based lender that provides financing for purchases at foreclosure auctions, also known as trustee sales in some states like Washington. “A lot of lenders would say that’s a lot of risk. …

We’ve been doing it for so long that we’re comfortable with the trustee sale process.”

Cunningham and his brother got comfortable with the foreclosure auction process by purchasing about 120 properties at trustee sales across the Pacific Northwest in the early 2000s. They eventually started a real estate brokerage and then Inland Capital to help other investors use leverage to purchase at foreclosure auctions.

“We just kind of know the process, what to expect, so we can walk the clients through,” he said, noting the lending side of the business now consumes most of his time.

“If we can provide the funding source for them, they can go in and renovate the property, improve the community, make a profit. It’s kind of a win-win.”

TRENDS

Inland Capital is the exception, according to the Auction.com analysis, which matched Auction.com data with public record data to identify when the buyer used financing.

Out of more than 135,000 foreclosure auction sales to third-party buyers on the Auction.com platform between 2018 and the first half of 2024, only about 6,700 (5%) had purchase financing tied to the auction sale. The majority of those purchase loans were short-term loans from lenders like Inland Capital that specialize in lending to real estate investors, also known as hard money lenders. An additional 21,000 (16%) were financed by the auction buyer postauction through a stand-alone mortgage, often in the form of a line of credit, commercial loan, or construction loan.

The trends were similar for properties purchased at REO auctions. Of about 67,000 properties sold via REO auction on

Auction.com between 2018 and the first half of 2024, only about 6,700 (10%) had purchase financing tied to the auction sale. An additional 9,200 (14%) were financed post-auction by the buyer.

Washington state, where Inland Capital is based and does much of its lending, had the highest share of foreclosure auction sales financed by the buyer of any state: 39%. Washington was followed by Colorado at 38%, New Mexico at 36%, Nebraska at 36%, and New Hampshire at 35%.

States where the share of foreclosure auction financing was below the national average of 21% included Florida ( 11%)

and Louisiana, Kansas, Montana, and Indiana (all at 13%; see Fig. 2).

RISKS

There are some good reasons why many lenders shy away from financing foreclosure auction and REO auction purchases. At the top of that list is the inability to inspect the inside of the property in many cases.

“If we can see inside the property … (we’ll lend) 85% of purchase plus 100% of rehab costs,” said Ricardo Sims, general partner at Constitution Lending, a Connecticut-based real estate lender providing fix-and-flip and long-term loans to real estate investors. “If we can’t see the inside of the property, the LTV at purchase would drop by at least 20 points.”

Most distressed properties sold at auction are occupied, preventing any interior access, and even if the properties are vacant, interior access may be denied by the bank.

“Of the bank-owned properties, 70% are occupied, and of the foreclosures I would say 90%,” speculated Cunningham, noting the additional risk comes with dealing with current occupants after purchase, a risk he believes has increased in the last few years due to occupants who are less likely to leave voluntarily. “People who have been foreclosed on: they just stay there.

“I didn’t do an eviction the first 12 years I was in real estate, but I’ve had to do multiple evictions (this year),” Cunningham said.

RISK MITIGATION: DUE DILIGENCE

With no interior access for foreclosure auction purchases, lenders perform as much due diligence as possible to mitigate their risk.

“We do a lot for our clients,” said an auction bid representative from a lender that provides foreclosure auction purchase financing in 15 counties across Oregon and Washington.

“We conduct due diligence in terms of title searches and that sort of thing. We have someone go out and take photos of the properties. We post notes about the condition of the property, links to MLS listings, tax records, and we bid at auction for our clients.”

Careful due diligence is necessary because of the volatile nature of a forced foreclosure sale.

“Urban legend in the foreclosure community has it that a property burned down the

night before a sale, so if it’s been more than a couple of weeks since we had eyes on a property, we do a drive-by before the sale to verify its condition,” said the auction bid representative. “It’s not that our buyers are averse to buying a property with fire damage or other issues… (but) they need to know the current condition, so they know what’s going to be involved in fixing it up to sell it.”

The unknown condition of properties combined with the volatility of the situation means that lenders often have to assume the worst when financing at foreclosure or REO auction, Sims noted. But it also means most of the buyers purchasing at auction are seasoned professionals well-equipped to handle surprises.

“It attracts pros and local real estate operators from that perspective,” Sims said. “Most people, and especially first-time real estate investors, are too wary of bidding without being able to get inside the property.”

RISK MITIGATION: LOCAL COMMUNITY DEVELOPERS

Most buyers on Auction.com are the professionals Sims describes: local community developers willing and wellequipped to take on the challenges that come with purchasing distressed properties at auction. Those local community developers represent relatively low-risk and repeat borrowers for lenders like Inland Capital, Constitution Lending, and Rain City Capital.

Cunnigham estimated that Inland has only foreclosed on five out of 3,000 loans over the years.

“They really have to be mismanaging the project (to default),” he said.

“

“If we can see inside the property … (we’ll lend) 85% of purchase plus 100% of rehab costs. If we can’t see the inside of the property, the LTV at purchase would drop by at least 20 points.”

- Ricardo Sims, Constitution Lending

According to Cunningham, Inland Capital qualifies foreclosure auction borrowers primarily based on three criteria: experience, ability to handle renovations, and exit strategy. He estimated about 80% of Inland’s borrowers renovate and resell while 20% renovate and hold for rent.

LEVERAGING INNOVATION: REMOTE BID

The typical down payment is 15% for a foreclosure auction purchase loan originated by Inland Capital. When a property is being sold through Auction.com, Inland leverages the Remote Bid feature on Auction.com to wire funds on behalf of their borrower when their borrower is the winning bidder. That has allowed Inland to expand its lending to markets where it may not always have boots on the ground to hand over cashier’s checks at the physical location of the auction.

“The remote bidding has been huge for us … our clients can bid on auctions without being there,” he said. “Auction.com kind of revolutionized the trustee’s sale process.”

and greater industry to provide value to both buyers and sellers using the

Blomquist’s reports and analysis have been cited by thousands of media outlets nationwide, including all the major news networks and leading publications such as The Wall Street Journal, The New York Times, and USA TODAY. He has been quoted in hundreds of national and local publications and has appeared on many national network broadcasts, including CBS, ABC, CNN, CNBC, FOX Business, and Bloomberg.

DAREN BLOMQUIST

Daren Blomquist is vice president of market economics at Auction.com. In this role, Blomquist analyzes and forecasts complex macro and microeconomic data trends within the marketplace

Auction.com platform.

Major Capital Exits, Freezes Signal CRE Market Disruption

Meanwhile, shifting demand from office space and traditional multifamily to mix-use development heralds a new wave of opportunity in commercial real estate.

SAM KADDAH, LIQUID LOGICS

As 2025 kicks off, commercial real estate (CRE) is buzzing with opportunities and trends worth exploring. According to one Deloitte report, the market size is tracking to be $412 billion. If you’ve been keeping an eye on the market, you’ve probably noticed that things are shifting, with several large capital and REIT providers retracting from the market as new entrants see an opportunity to capitalize. With federal interest rates hitting their ceiling and then starting to decline in the fourth quarter of 2024, capital availability is becoming volatile again.

CRE TRENDS

With the Federal Reserve adjusting interest rates downward, borrowing base costs have become a hot topic. Rates hit highs for the first three quarters of 2024 and then trended down by 0.75%. following two interest rate cuts in September and November. How did that impact CRE? The longer life cycle of loan approvals and terms in CRE lending insulated it from major fluctuations,

with average interest rates from private lenders remaining relatively stable at around 11.82%, experiencing only a modest swing of +/- 11 basis points.

Probably the most interesting phenomenon is the shrinking of available capital for CRE. A couple of major capital providers withdrew from the market and sold a couple of hundred million of their multifamily portfolio and commercial assets, in some cases at a loss to offload it. Those sales events pointed out the lack of rigor and loose underwriting practices for approving loans. In the second and third quarters of 2024, several smaller lenders relying on selling their assets found themselves without a capital source and outlet.

Other asset classes suffered another constraint in November and December.

One of the major institutional capital providers exceeded their capital allocations and expectations for 2024, causing them to run out of allocated capital and freeze loan buyouts for the last six

weeks of the year. This development created other capital constraints in the market and affected private lending overall, including the CRE class.

Although CRE private lenders enjoyed long-term stability, lenders need to stay on top of the changes because they can impact deals and how borrowers view financing options. Some projects that seemed straightforward a year ago might look different now, especially if the rates keep creeping up due to demand exceeding supply.

Are you re-evaluating your criteria for new loans? It might be time to do just that.

Speaking of projects, have you noticed how the demand for certain property and asset classes is changing? Although office spaces are still experiencing a bit of an identity crisis after the pandemic, multifamily and industrial properties are stabilizing. The estimated 4.5-million-unit shortage in 2020 has been reduced by almost half. Although the demand for multifamily still exists, multifamily is becoming more of a multifamily/mixed-use combination. Suburbs are seeing a resurgence as people seek more space and a different lifestyle. This shift opens fresh avenues and opportunities for private lenders. Ground-up construction for complete subdivisions dedicated to rental properties and larger developments are thriving.

We can’t ignore the role technology plays in this landscape. Analytics and AI are becoming the norm. The rise of remote work has led to a significant transformation in how we view office spaces. Many businesses are downsizing or reconsidering their need for traditional office layouts—a trend that’s likely here to stay. As a lender, you may want to ask yourself how this shift affects your existing

investments and what opportunities could arise from this evolving landscape.

STEADY OPPORTUNITIES FOR PRIVATE LENDERS

In today’s market, developers found stability and the highest reliable asset in the CRE class. Lenders and borrowers never have to rush into projects, professional firms often complete the feasibility studies, and the medium length of the project makes it attractive for larger institutional capital backers. The primary concerns in the market are fraud, arm’s-length transactions, and lenders seeking greater product flexibility. Institutional capital wants partners that can think creatively, which opens an opportunity for private lenders. Offering creative financing options—like bridge loans or even taking a chance on unique projects—can set you apart from the crowd. With traditional lenders tightening their belts, there’s a real opportunity for private lenders to fill the gaps and provide the solutions developers need.

Consider looking into mixed-use developments. These projects are gaining traction as communities embrace more walkable, integrated living spaces. As more people move to the suburbs, projects that combine residential, retail, and office space are becoming increasingly desirable. Your insight into local markets can help you spot those golden opportunities before others see them. Remember, being the first to act can often lead to the best returns.

RISK FACTORS TO CONSIDER

Fraud is becoming more sophisticated. Third-party arm’s-length transactions and risky underwriting plagued the industry last year. A couple of well-known large capital providers hastily exited the market

and offloaded a large portion of their multifamily and commercial portfolio.

The current market comes with its share of risks and tight capital supply. Even with the election behind us and the economic outlook turning positive, uncertainties loom in the commercial property classes— vacancy rates, tapering rent increases, and dwindling demand for commercial B and C space. It’s crucial to keep a close eye on these factors. Although some geographic regions are thriving, there’s a struggle to find tenants in others. If you finance a property without clearly verifying tenant commitments, you may wind up backing a rosy project that turns out to be more trouble than it’s worth.

Arm’s-length transactions are another risk factor that needs to be investigated. Ownership transfers and the creation of new shell LLCs with fresh lease agreements have been observed in the market, impacting the quality of loans and the saleability of those notes on the secondary market.

So, how do you protect yourself? First, do your homework. Dive deep into market reports and talk to fellow lenders and developers. Understanding their business plans and financial health can be a gamechanger. By doing your due diligence, you can make informed decisions and avoid nasty surprises down the line. Last year, the industry witnessed flashy new entrants with loose underwriting practices, enabling them to generate high origination volumes. The CRE market also experienced the collapse of entire divisions and the fire sale of $100 million portfolios. Don’t overlook the importance of strong local market knowledge. Hiring account executives in local markets and building strong relationships with borrowers

can provide valuable insights into their reliability and commitment as well as the true market demand, ultimately helping you assess the risks and soundness of CRE investments. If you notice any red flags, you can address them early, potentially saving you from future headaches. Remember, the private lending landscape is all about partnerships and rich local market knowledge. If you foster those connections, you’ll enrich your local market knowledge and create a network that benefits everyone.

Staying informed is your best weapon in this game. Although overall market characteristics appear to be stable, the local market is always changing. With the right underwriting mindset, you can navigate these shifts like a pro. Look for trends, focus on sound due diligence, and don’t shy away from calculated risks. The possibilities are endless for flexible, knowledgeable private lenders.

Sam Kaddah is the president and CEO of Liquid Logics. With his broad background in complex environments, he is skilled in building consensus, producing results, and streamlining operations. His career is characterized by leadership that meets objectives, efficiencies, and revenue while maintaining quality. Liquid Logics provides fintech and NextGen SaaS for the private equity lending space.

SAM KADDAH

| Stabilized Bridge | Miami Beach, FL

State of the Industry: Unanticipated Loan Activity Signals Market Shift

In 2024, private lenders are witnessing an unexpected uptick in bridge and DSCR loan activity, reflecting growing investor demand for flexible financing options amid market uncertainty.

Lightning Docs is a software company specializing in loan documentation for private lenders. The data gathered from the Lightning Docs system provides deep insights into trends shaping our industry, from interest rates and loan volume to regional activity and loan structures. Drawing on Lightning Docs data from 2023–2024, we can provide private lenders with insights to make informed, strategic decisions (see Fig. 1).

DEFINITION REVIEW

First, let’s make sure there is a clear understanding of definitions.

A bridge loan is a short-term business purpose loan that is generally secured by a 1-4 residential property. It has many names: fix and flip, NonQM, RTL (Residential Transition Loan), ground up construction, private lender loan, and even that ohso-dirty phrase “hard money loan.”

Technically, RTL is probably the most

“One of the most notable trends of the past year, and one that was quite honestly unexpected, is the sharp increase in loan volumes for both bridge and DSCR loans.”

accurate description because the asset is almost always residential and the purpose is transitionary in nature: improving the property to rent or sell (fix and flip) or obtaining short-term financing for a rental property hoping long-term interest rates go down, and obtaining permanent financing (true bridge). For this article, any loan with a duration of 36 months or less (usually 12

months) that generally contains interest-only payments will be considered a “bridge” loan.

DSCR stands for Debt Service Coverage Ratio. There are many ways to underwrite a loan. The traditional conventional credit market looks almost exclusively to the creditworthiness of the applicant by using FICO scores as well as the applicant’s ability to repay the loan.

1 REMOVE OUTLIERS

Removed loans less than $50,000 and more than $5 million

Removed loans with interest rates less than 4% and more than 20% 2 CONTROL VARIABLES

For volume data only, users must have signed up prior to the date period identified for that dataset

Ex: Before 2023 or before 2024

NEMA DAGHBANDAN, ESQ., LIGHTNING DOCS

FIGURE 1. DATASET AND METHODOLOGY

In traditional commercial real estate lending, however, a lender looks to the debt service coverage ratio of the property as the predominant underwriting factor. This formula divides the income of the property by the monthly payment obligation of the debt (including property taxes and hazard insurance impounds) and uses that number as the primary factor in determining the safety of the loan. For example, if a property produced $1,000 a month of income and the monthly debt service of the property was $800, the property would be a DSCR of 1.25 ($1,000/$800). Unlike bridge loans, which have a term duration of 36 months or less, DSCR loans are typically 30-year permanent financing products similar to conventional mortgage loans, except the end user is a real estate investor rather than an owner-occupant.

SIGNIFICANT RISING LOAN VOLUMES IN BRIDGE AND DSCR LOANS

One of the most notable trends of the past year, and one that was quite honestly unexpected, is the sharp increase in loan volumes for both bridge and DSCR loans. In 2024, the demand for these loans rose significantly, driven by real estate investors seeking flexible financing.

BRIDGE LOAN VOLUMES. When isolating out the same users from 2023 and 2024 (i.e., removing any new user who started using Lightning Docs after Jan. 1, 2023) we track 124 unique lenders. Their bridge loan volumes surged by 30% year over year comparing the first three quarters of 2023 and 2024 (see Fig. 2). This upward trend indicates real estate developers and investors are leaning on these loans to seize opportunities and meet project demands without traditional financing delays.

FIGURE 2. BRIDGE LOAN VOLUMES, 2023-2024

FIGURE 4. RENTAL LOAN VOLUMES, JANUARY-OCTOBER 2024

DSCR LOAN GROWTH. Even though interest rates remained fairly consistent in the first two quarters of 2024, DSCR loan volumes also saw substantial growth, with a 41% increase in volumes comparing first quarter 2023 with first quarter 2024 (see Fig. 3). When comparing the first three quarters of 2023 and 2024 together, there was a dramatic increase of 37% year over year. This spike reflects the growth of rental property investments; many landlords and investors continue to see these loans as viable options to scale rental portfolios, particularly amid rising rental demand and low housing inventory in several markets (see Fig. 4).

INTEREST RATES AND LOAN AMOUNT TRENDS ACROSS REGIONS

Interest rates for bridge loans vary across the country, influenced by local economic factors, property values, and demand levels.

HIGH-INTEREST LOCATIONS. The national average interest rate for all bridge loans across third quarter 2024 was 11.19%.

However, many counties exceeded the national average by a significant margin (see Fig. 5). Many lenders are surprised to find out that California, in particular, has some of the highest rates, with seven counties exceeding the national average in the third quarter. This makes California one of the most attractive markets for private lenders. Florida also had three counties with above-average weighted average coupons. Seven other states had one county that exceeded national averages during the third quarter of 2024.

NATIONAL BRIDGE LOAN AVERAGE.

The overall national average interest rate for bridge loans trended down from a high of 11.6% in January to 10.99% in October 2024 (see Fig. 6). States such as New York and Massachusetts also report higher-than-average rates. Nevada and California consistently rank among

FIGURE 5. COUNTY ORIGINATIONS WITH HIGHER THAN NATIONAL AVERAGE, Q3 2024

National Average: 11.19%

Data represents only those counties with more than 20 loans originated

states with loan balances over $500,000, indicating that higher loan balances are often correlated with higher interest rates.

DSCR RATES AND ALIGNMENT WITH MARKET AVERAGES. DSCR interest rates had significantly more volatility than bridge rates. In January 2024, the national average for DSCR loans was 8.3%; by October 2024, rates had plummeted to 7.12% nationally (see Fig. 7), with almost 50% of loans priced in the six-percent range, rather than in the sevens, representing a large psychological hurdle for many real estate investors.

UNDERSTANDING FEES FOR BRIDGE AND DSCR LOANS

Upfront costs and fees are important considerations for both lenders and borrowers. Average fees for bridge loans and DSCR loans in

“An analysis of loan structures reveals interesting shifts in preferences for bridge financing.”

2024 are shown in Figure 8 and offer insight into transaction costs.

In addition to fees, the vast majority of lenders also charge points. Points consist of the origination charge for brokers and lenders. Similar to drops in bridge and DSCR interest rates, there was a modest decrease in the points lenders charged. Bridge points were as high as 2.33%; in October, the average points nationally were 2.09%. For

FIGURE 7. RENTAL AVERAGES: RATES AND LOAN AMOUNTS,

DSCR, the high in 2024 was 2.43% with a low of 2.24% in October (see Fig. 9).

STRUCTURAL PATTERNS IN BRIDGE LOANS

An analysis of loan structures reveals interesting shifts in preferences for bridge financing. Pure bridge loans, those without any construction holdback, made up 38% of bridge loans in 2024, indicating a significant preference among borrowers for simpler, faster temporary financing structures.

Approximately 18% of bridge construction loans included prepaid interest, with an average reserve period of 8.2 months. This trend suggests that borrowers may prefer a cushion for interest payments during the early stages of projects, reducing immediate financial strain and allowing focus on property acquisition and initial development phases.

An analysis of 8,832 bridge construction loans revealed that 28% of those loans were able to charge Dutch interest (i.e., charging interest on the entire loan balance) versus 72% of those loans charged Non-Dutch interest in which the real estate investor is only charged interest on amounts actually disbursed to the borrower at the time of loan origination.

Looking at both bridge and DSCR loans, 73% of loans charged a default interest rate of somewhere between 15-24.99% as the default interest rate. The median default interest rate charged was 18%. Default interest remains a highly unaddressed area for private lenders and one in which unwanted regulation is likely to intervene without standardization. When looking at agency (Freddie Mac and Fannie Mae) investor loans, the GSE standard notes provide for a default interest rate that is 4% above the note rate (see Fig. 10). Our industry would be wise to take note and produce a coherent standard of its own.

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FIGURE 9. AVERAGE POINTS: BRIDGE AND DSCR LOANS, JANUARY–OCTOBER 2024

REGIONAL LOAN VOLUME LEADERS IN 2024

Regional differences play a key role in bridge and DSCR loan markets, with certain states and counties showing strong loan activity (see Fig. 11 and Fig. 12).

Los Angeles, Orange, and San Diego counties rank highly for bridge loan volumes. These California counties are followed by Fulton County in Georgia and Dallas County in Texas, illustrating how investment in major urban centers drives demand for private lending solutions.

For DSCR loans, Texas, Florida, and Illinois rank among the top states by volume. Strong economies and rental demand make

these areas ideal for investors leveraging DSCR loans to expand rental portfolios, as steady tenant demand ensures reliable income streams to meet debt obligations.

The variation in loan demand by state and county highlights how private lenders can adjust their focus to align with local market conditions. Markets like Florida and California, for example, provide favorable climates for lenders to target both bridge and DSCR loans, particularly in high-growth metro areas where real estate values and demand are strong.

What’s most important is understanding the market the private lender is operating in because rates, loan amounts, and

volumes vary dramatically based on geography for DSCR and bridge.

KEY TAKEAWAYS FOR PRIVATE LENDERS

This analysis of 2024 bridge and DSCR loan trends underscores several strategies private lenders can employ to thrive in a competitive environment.

Regional trends show the importance of adapting interest rates to market demand. Higher rates in California or Nevada reflect these markets’ specific needs and competitive conditions. By adjusting rates according to demand, lenders can maximize returns while remaining attractive to borrowers.

AAPL MEMBER SPOTLIGHT

Growth rates of 30% year over year for bridge lenders and 37% for DSCR lenders are not accidents. The organizations driving this level of growth have two disciplines that you must learn in order to compete. First, they provide an incredible customer experience to their real estate investors. They obsess over the minutiae of the process of obtaining construction draws and the ability to fund loans quickly. You must become the Amazon of private lending by providing an experience that involves the least amount of friction as possible.

Second, they have a diversified capital markets strategy, typically including a debt fund to fund from and to hold loans that are not appropriate for secondary markets, and then multiple institutional investor relationships, whether loan aggregators/purchasers or potential debt and equity investors.

Of the hundreds of Lightning Docs users, slightly more than 30 make DSCR loans. These 30 account for 40% or more of all volume on Lightning Docs in any given month. Assuming interest rates continue to decline, this product will become more

attractive to your already existing real estate investor client base. With an incredibly robust capital markets system built to take out these loans, private lenders are foolish if they continue to ignore this product.

In conclusion, understanding these trends in bridge and DSCR loans is crucial for private lenders who want to maintain competitiveness and profitability. The data points to an expanding market for private lending, where strategic adjustments in interest rates, fee structures, and loan flexibility can set lenders apart.

Purpose-built software for real estate private lending.

Daghbandan, Esq. is the founder and CEO of Lightning Docs, a proprietary cloud-based software that produces business-purpose mortgage loan documents nationally. Lightning Docs is the official loan documents of the American Association of Private Lenders. The documents are considered the gold standard for business-purpose loan documents. As a real estate finance attorney and partner at Geraci LLP, the nation’s largest private lending law firm, and the general counsel of AAPL, Daghbandan has unique expertise in understanding the needs of private mortgage lenders.

For more information about Lightning Docs, visit lightningdocs.com.

NEMA DAGHBANDAN, ESQ.

Nema

Unsung Underwriting Tools: Insurance Resoures

Property insurance not only protects loan collateral, it provides unique insight into underlying geographic, property, and borrower risk.

JASON JONES, NATIONAL REAL ESTATE INSURANCE GROUP

The availability of insurance and its cost can significantly impact the overall risk of financing an investment property, especially in regions prone to natural disasters or with complicated claims histories. By evaluating geographic and propertyspecific risks, understanding what to look for on loss run reports, and ensuring borrowers meet policy requirements, you can make informed decisions to protect your interests in investment properties.

Let’s explore the key factors that influence real estate investment insurance and how they can guide your lending strategies.

GEOGRAPHIC AND WEATHER CONSIDERATIONS

Considering regional risks is crucial when insuring investment properties. Both the high frequency of claims and the severity of claims directly affect the risk profile of a property and its associated insurance costs. Some regions, particularly those susceptible to natural disasters like hurricanes, wind/hail, and wildfires, have seen higher loss ratios, which can lead to increased insurance premiums and reduced coverage options. Understanding these risks can help you anticipate insurance challenges and assess potential loans.

some lenders may still consider financing properties in high-risk areas if the potential returns justify the increased insurance costs and inherent risks, especially if the borrower demonstrates a strong track record of owning similar properties.

In recent years, extreme weather events across the country have raised awareness about the increased risks to residential properties. Winter storms, tornadoes, hailstorms, wildfires, and hurricanes all contribute to the increased costs of property insurance we’ve observed in recent years. Many insurance carriers have pulled out of high-risk areas in recent years due to the escalating frequency and severity of claims. This withdrawal has led to limited options for investment property owners and increased the cost of coverage. Properties located in areas with a stable insurance market may be a better fit for some lenders’ books of business because these areas are likely to have more access to affordable coverage and less volatility in the insurance landscape. However,

PROPERTY-SPECIFIC RISKS AND LIABILITY CONCERNS

Beyond geographic considerations, the condition of the property itself plays a vital role in assessing risk.

Factors such as the type of wiring used and potential liability issues can significantly affect insurance availability and costs. Older properties, especially those with outdated wiring systems like aluminum or knob and tube wiring, present fire hazards that insurers are increasingly unwilling to cover.

As a lender, it’s crucial to consider the condition of the property as well as its systems. Properties that have not been maintained well or upgraded in many years may face higher insurance costs, limited coverage options, and increased

potential for loss. However, if an older property has undergone renovations to modernize its wiring and infrastructure, it can mitigate some of these risks, making insurance more accessible and loaning on the property less risky.

Liability issues extend beyond the property’s structure and condition. Properties in areas with higher rates of bodily injury claims (e.g., slip-and-fall incidents) can present significant challenges. Multifamily buildings or properties that have shared spaces such as lobbies and common areas may pose elevated risks for these accidents. Further, some areas of the country have complex tenant-landlord laws that contribute to frequent lease disputes, increasing the potential for claims and litigation. These factors can drive up insurance costs and increase the likelihood of issues occurring at a property in the area. Lenders must carefully evaluate properties located in jurisdictions known for litigious environments.

BORROWER AND PROPERTY LOSS RUNS

Due diligence is a crucial aspect of any business transaction, especially when assessing potential borrowers and the properties they wish to finance. Knowing a property’s claims history and a borrower’s insurance background can provide insight into the risks you would be taking. Requiring potential borrowers to disclose loss information for the past three to five years is considered standard practice and can be highly informative. There are two main types of reports you can request: the C.L.U.E. report and the loss run report.

C.L.U.E. REPORT. A Comprehensive Loss Underwriting Exchange (C.L.U.E.) report offers a detailed history of prior insurance claims associated with a specific property or an individual. For around $12, lenders can obtain the report, which outlines the types of claims filed and any applicable total payouts.

A C.L.U.E. report provides information on claims made at a specific property, regardless of the owner, over the last seven years. This is especially useful because

it can reveal issues that might lead to ongoing problems for your borrower.

A C.L.U.E. report can also detail an individual’s personal claims history over the past five to seven years. This can provide you with insight into a potential borrower’s track record with property management and potential risk factors.

» Note: Privacy regulations require that individuals can only request their own C.L.U.E. report. This means that if you need a report on a potential borrower’s claims history, they must be directly involved in the request process. Similarly, if you wish to obtain a C.L.U.E. report for a property, the current property owner (the seller) must request it. This ensures compliance with privacy laws while also giving you access to critical information needed for your evaluation.

LOSS RUN REPORT. If your potential borrower is purchasing the property from another real estate investor, the borrower will need to ask the seller to provide a loss run report from their insurance carrier. This report may take a few days

to obtain, and it contains the same loss information as a

C.L.U.E.

report.

You must be vigilant about reviewing these reports, paying particular attention to the frequency and severity of claims. Multiple minor claims or a single catastrophic event can signal increased risk. Additionally, if a potential borrower has incurred multiple controllable losses, such as those resulting from neglect or poor maintenance, that may be a more significant red flag than unpreventable, weather-related incidents. Recognizing these patterns will help you make informed lending decisions.

If a property has a history of claims, but it’s still a good fit for you as a lender, you may consider suggesting certain mitigation strategies. You can offer educational resources to the borrower that provide information on property maintenance and risk management for specific perils. For example, if a property has a history of water damage, you may recommend the borrower invest in water monitoring systems such as smart sump pumps or leak detectors. This approach empowers borrowers to increase the insurability of the property while also reducing the likelihood of future claims.

INSURANCE POLICY REQUIREMENTS

When financing investment properties, it’s vital to ensure that your borrowers adhere to specific insurance requirements to protect their investment and your stake in the property.

Ensuring borrowers maintain appropriate coverage amounts is essential for minimizing risk. Regardless of the property type or occupancy status, always require the borrower to carry insurance coverage that meets or exceeds the outstanding loan amount. The loan value must be the minimum of what the

“If a potential borrower has incurred multiple controllable losses, such as those resulting from neglect or poor maintenance, that may be a more significant red flag.”

Loan management that makes you your Borrower’s favorite Lender.

You’re not a commodity - you’re an asset. Optimize your efficiency and security while making borrowing easy for your Borrowers.

• Account & entity validation services

• Inspection and draw management

• W-9, insurance cert., & lien waiver storage

• Secure payments to Subcontractors

property is insured for. If the loan value is $150,000, under no circumstances should you allow the borrower to insure at any amount less than $150,000.

Your position as a lender needs to be secure within the borrower’s insurance policy through specific designations, including:

MORTGAGEE. Having yourself listed as the “mortgagee” ensures you are notified of any policy changes, nonrenewals, or cancellations.

LOSS PAYEE. This designation guarantees you are named on any insurance payout resulting from property damage or loss. This inclusion helps direct funds appropriately in case of a claim.

ADDITIONAL INSURED (AI). Requiring that you be listed as an “AI” helps provide an extra layer of protection, shielding you from liability claims related to the property.

As insurance and lending markets continue to evolve, staying proactive in your assessment strategies is vital. Maintaining knowledge of geographic and propertyspecific risks, leveraging tools like C.L.U.E. reports, and implementing comprehensive insurance policy requirements can help mitigate risks associated with financing

investment properties. These practices not only help protect your financial interests but also contribute to more secure, wellinformed lending.

Jason Jones is the senior vice president of risk management at NREIG. His insurance career spans more than 20 years, and he gained the bulk of his industry experience through his role as an adjuster handling property and liability claims. Throughout his time with NREIG, Jones’ various leadership positions have exposed him to almost every department, including service, claims, account review, underwriting, and risk management. Jones guides NREIG teams in maintaining carrier relationships, foreseeing and managing potential risks, and aiding in becoming a market leader.

Speed to close. Power to scale

JASON JONES

The Run Down for Effective Mortgage Rate Messaging

Avoid surprising your clients with mortgage rate and program changes by communicating consistently and transparently.

ERICA LACENTRA, RCN CAPITAL

Navigating a landscape in which mortgage rates continue to fluctuate can be particularly frustrating for investors, borrowers, and brokers. Lenders who communicate poorly can cause added frustration in such an environment.

Lenders have a duty to their customers to effectively communicate any upcoming changes in rates or program guidelines and to set expectations for how market influences might affect programs or rates in the future. This is especially true in an environment in which margins are razor thin and a higher interest rate can make or break a deal’s profitability.

As a private lender, what are the best practices you can employ to ensure your clients don’t face any unwanted surprises that could derail their upcoming investments?

ESTABLISH EXPECTATIONS

Depending on your capital stack, fluctuations in rates can have either a significant or minor impact on your business. Private lenders dependent on

capital partner relationships and selling their paper will need to think about how they are pricing their loans today to ensure profitability in the future.

One of borrowers’ biggest misconceptions is that if the Federal Reserve lowers rates tomorrow, then private lending rates will also immediately drop. Usually, this isn’t the case. Private lenders with capital partner relationships are often projecting where rates will sit for three to six months in the future as they are thinking of the impending sale. So, borrowers may experience unexpected rate adjustments, both positive and negative, when they are least expecting it.

This is why private lenders must have transparent communication with their clients. Rate changes should never come as a surprise to a lender; sudden changes should be the exception, not the norm. Letting borrowers know about any impending rate or product changes should be communicated ahead of time to allow clients to lock rates if applicable or, at the very least, not be caught completely off guard when changes are implemented.

It’s a good idea to establish a regular cadence of communication with your clients, whether it’s weekly, twice a month, etc. Doing so allows your customers to keep an eye out for regular communications, even if your weekly update is “rates are holding firm,” and allows them to plan their businesses more efficiently. Even if you don’t have a definitive date or time frame for when changes will be going into effect, providing the courtesy of a heads-up and saying you anticipate rate changes to affect certain programs in the coming weeks can help your clients get their businesses in order.

EXPLAIN THE WHY

As important as it is to notify your clients about rate and product changes, whenever possible, you also try to explain the reasoning behind those changes. For direct borrowers, providing a general explanation as to the timing of rate fluctuations, what is currently affecting rates and products, and consistency with messaging across your organization can provide greater understanding for your clients and allow them to gain deeper insight into the market, including market events that are not only affecting you as a lender but also affecting others in the space.

If you are a lender working with more of a wholesale audience, it is critical to the success of your broker and correspondent lending partners to relay why rates and products are changing, because these clients will need to relay the information to their own borrowers. Not understanding why changes are happening or being unable to accurately relay all changes to their clients can cause headaches, bad customer experiences, and unnecessary delays in their origination process. It is your responsibility as their lender to empower them with the knowledge they need to successfully

update their clients about any changes that could affect their flow of business.

You may also want to consider hosting monthly training with your customers to explain updates in more depth and give customers time for questions and answers.

BEST (AND WORST) PRACTICES

As you develop an appropriate cadence for your business to communicate rate changes and other product updates, it’s important to think about best practices for appropriately delivering messaging and what types of media tend to work best when communicating these updates.

First, there is no one-size-fits-all solution for every private lender. As you develop your strategy, consider the methods of communication your clients are already used to and also where they are most likely to see these updates. When it comes to announcing changes, whether it’s rate fluctuations or product updates, an elevated level of visibility is incredibly important. These updates need to be communicated through a variety of channels to achieve the greatest visibility.

If you communicate with your clients via email, sending out regularly scheduled emails that cater just to the topic of rate and product changes is a good place to start. Sending these updates on the same

days of the week at the same time and with the same frequency allows your customers to look for them regularly and gives them time to prepare for changes.

If you have a client portal your clients use regularly, you may want to also broadcast messaging within that portal so they can view rate and product updates when they log in. A client portal is something they would already be familiar with and, therefore, would be a logical place to include updates that might affect any new deal submissions.

If you don’t have a client portal but you know customers frequent your website to submit deals, include verbiage on various parts of your website (e.g., your loan

programs page and application page) noting upcoming changes to rates and programs.

Also, consider relying on your sales team to convey notice about rates and program updates. Including a note about upcoming changes in email signatures can be an easy way to alert clients and ensure the discussion comes up naturally the next time the sales team member speaks with their clients. Sales team members can also schedule a call with their clients to ensure they know about the changes and answer any questions, although this strategy typically only works for smaller pipelines. For larger pipelines, conducting recurring monthly training can be just as effective.

#GrowWithRenovo

“Sending out regularly scheduled emails that cater just to the topic of rate and product changes is a good place to start.”

Keep in mind that your communication should include not only what changes are coming or happening but also when those changes will take effect. Avoid the need to alert customers of changes that are “effective immediately” because you

delayed communication. There will likely be instances where changes to your rates or programs will need to be implemented immediately; however, whenever possible, give your clients an effective date that allows them to digest the information and ask questions so they can fully understand the potential impact before the changes officially go into effect.

Finally, avoid any scenarios in which your change implementation process completely halts your clients’ flow of business. In some recent instances, for example, some private

lenders have reacted to rate fluctuations by shutting off the ability to lock rates until they have reestablished pricing. There is no better way to drive your clients to look for another lender than by announcing they cannot submit a loan and rate locks are temporarily unavailable without any other notice. Whether you work with investors directly or wholesale partners, your business impacts their livelihoods; at a minimum, they deserve the courtesy of knowing what changes are on the horizon.

BUCKLE UP AND BE PREPARED

Rate fluctuations show no sign of calming down as we enter 2025. If you haven’t developed a strategy for communicating these changes to your customer base, now is the time to start. By providing your customers not only with notice of changes but also insight as to how shifts in the market are affecting your programs and rates, you can be a better lender partner and better prepare clients for what is to come. Doing so will help set them up for long-term success and strengthen your client relationships.

at RCN Capital, is responsible for planning, developing, and implementing the company’s marketing plan as well as overseeing the marketing department.

Joining RCN Capital in 2013, LaCentra led a strategic rebrand to position the company for nationwide expansion. Her ongoing efforts have rapidly expanded RCN’s customer base and elevated the company to a national brand.

LaCentra currently serves as a member of the American Association of Private Lenders’ (AAPL) Education Advisory Committee and is the marketing and communications chair for AREAA Boston. She holds a bachelor’s degree in advertising from Suffolk University.

With over 25 years of experience and over 500k filings under our belt, you can trust Cornerstone to handle all of your state licensing needs with speed and precision.

ERICA LACENTRA

Erica LaCentra, chief marketing officer

As we review a conference that blew our past events out of the water in terms turnout, collaborative education, and an invigorating atmosphere— well, our team is incredibly gratified. This event embodies our goals for both the association and the industry we support.

It is private lending professionals— many of them competitors— coming together to share knowledge and build each other up.

It is intentional networking that seeks real connection

It is accessibility that empowers lenders of all sizes to join the conversation and contribute to a melting pot of perspectives that strengthens our profession. So, why only one event each year? (If we had a dollar every time someone asked …)

A conference like this is worth making truly special in a way that elevates it to a can’t-miss event while ensuring participants showcase their very best. On a practical note, hosting once a year allows our team to celebrate

build the education, ethics, and advocacy initiatives that provide year-round support. Like so many of our members, we run a small, tight ship—but we have big plans.

We invite you to revisit #AAPLANNUAL15 with us through photos, testimonials, and key stats, and we encourage you to keep an eye forward. What’s next for you and your business? How can AAPL help you shape those efforts? Let us know so we can carry that into our upcoming Annual Conference and also serve up resources

“My team and I love this particular conference because all the top private lenders are here. We can connect. We get deals done. We appreciate AAPL for putting on such an amazing event!”

Damon Riehl – Loanbidz.com

EVENT STATS

“So, this is the 15th annual conference—our first. it’s definitely not our last. We’ve had an absolutely amazing time. The floor is filled with contacts and people that are going to help take our business to the next level. Outstanding! Thank you so much!”

John Litton - JGL Capital LLC

Eddie Wilson, AAPL chairman, and Bill Tessar, CV3 Financial Services CEO and president, discuss capital strategies during their main stage “fireside chat” session.

“We are a private money lender. We just started doing this and I’m looking to scale up. This is the best platform and conference for someone to do more business in this industry.

“It’s just amazing. It’s so big—it’s really mind blowing. This is what, 2024? I really wish my husband and I had come earlier.”

Ruqia Naqi – Links USA Investments LLC

AAPL KPI s

Education

2K+ webinar views

20K+ magazine reads

123K+ newsletter reads

280K+ pageviews

Advocacy

100% success rate continues

Proposed, passed CA SB 1146

Membership

No change in member rates for 11th year

785+ members (YOY growth continues)

224 members CPLA or CFM credentialled in 2024

Launched AAPL Jobs Board

Want in?

Help build our industry’s future.

Code of Ethics

COMPLAINTS AGAINST MEMBERS

9 complaints

5 found in members’ favor

2 on hold due to active lawsuits

(attorney/client privilege)

1 formal warning/mark

1 member barred

NEW COMPLAINT EVALUATION METHOD

Severity

How egregious is the alleged violation?

Affiliation

How closely related is it to our industry?

Recoverability How curable is it?

Intentionality

Was it willful?

Implicitness

Is it ingrained practice?

“As a first-time attendee at AAPL, I found it very helpful to connect with this community. They seem very open, and everybody’s very quick to communicate, get around and share their expertise. It’s been a really rewarding thing. ... It seems like a great community to work with and a very active, vibrant one.”

Kyle Gustafson – Partner Residential Consultants

John Bringardner, executive editor of Debtwire, during his keynote “Corporate Credit Outlook” speech.

Kevin Kim and Nema Daghbandan, partners at Geraci LLP, discuss how market securitizations will impact lenders of all sizes.

MORE KPI s

phone verifications >50% flagged as non-member

TRADEMARK ENFORCEMENT

29 members using incorrectly (fixed)

13 nonmembers complied with removal notice

8 noncompliant non-members (sites taken down)

9 scam site takedowns

3 permitted misc. uses

AAPL FRAUD STEERING COMMITTEE

The new task force will provide guidance to help lenders recognize, prevent, and mitigate fraud.

It must meet needs across various lender sizes, localities, and operational sophistication.

Answer the 3-minute survey to help set priorities:

We’ve been doing the AAPL conference for years. We’re an inaugural member. We love the people here, great quality people, great organization. We will continue coming!”

Lucy Hernandez – FCI Lender Services

“AAPL is great; it’s wonderful! You get to meet new people, new investors, new banks. I learned a lot in the sessions. Everyone should come and do this every year!”

Yvette Aiken – Dyamond Capital

“Great group of people, nice mix of professionals bringing all types of services, funds, and networking opportunities for everyone in attendance.”

Mitch Willet – SBS Trust Deed Network

“The conference has been lucrative for us; we’re meeting a lot of high-quality contacts and there’s a plethora of individuals from the industry. So, whether you’re a lender or a broker or just someone in lending software, it’s a valuable conference.”

Taylor Miller - Construction Inspection Specialists Inc.

2024 EXCELLENCE AWARDS WINNERS

It means something to be excellent.

Our annual Excellence Awards are the gold standard among industry professionals. These association-backed honors carry the weight of AAPL’s 15-year reputation for safeguarding the industry with education, ethics, and advocacy.

COMMUNITY IMPACT

This award winner improves their local community or our industry through volunteering, development programs, or civic efforts.

SCOTT WARD, PACIFIC PRIVATE MONEY

“I’m so thankful and filled with so much gratitude. I was absolutely shocked to win this award—and going against John (Beacham). I respect John so much; he’s been a guy I’ve looked up to for so many years. So, to be chosen for this award was really something, so special. I’m never at a loss for words, but I am really, really thankful.”

About Scott’s Nomination:

“Scott has distinguished himself through his exceptional ability to bring people in the industry together and connect them with the right companies. His expertise in linking brokers with funds and capital resources has been invaluable in getting loans approved and finalized efficiently. Scott is always ready to offer helpful information and support, ensuring brokers have access to the funding companies they need. His honesty, trustworthiness, and extensive industry knowledge make him the go-to person for anyone seeking guidance and connections in the mortgage sector. We look at Scott as the guy to know in the industry, and his remarkable efforts have significantly enhanced the professional landscape for many. His dedication to fostering collaboration and sharing resources truly sets him apart.” - Dru Barrios, Coast Life Capital

MEMBER OF THE YEAR

This AAPL member demonstrates expertise, unique value, and commitment to the industry.

JENNIFER WALTON, SERVICING PROS

“Super surprised. I’m usually a background player, so I like to keep in the background and be everyone’s go-to. But being recognized just means that what I’m doing is working, and it’s creating a difference for our private lenders.”

About Jennifer’s Nomination:

“Jennifer exemplifies excellence in many ways, specifically her vast knowledge of our industry standards and best practices at both high and detailed levels. She is able to execute corporate goals down to a simple task with the same energy and precision. Her commitment and work ethic—to herself, her company, her clients, and our industry are admirable. Jennifer would be an ideal recipient of this award.” - Robin Aldridge, Trilion Capital

RISING STAR

Rising Stars have accomplished outstanding growth in their companies during the past year.

KEN JACOBSON, CV3 FINANCIAL SERVICES

“This means a lot. I very much appreciate being recognized. I love this industry. I’ve really found a home here and I just really appreciate my team at CV3 as well as everyone who voted. It’s good to be recognized, and I really appreciate it. ”

About Ken’s Nomination:

“Ken’s ability to champion CV3’s capital markets division and earn the confidence of the secondary markets was vital to the company’s successful launch in 2023. His tenacity, dependability, and integrity have enabled CV3 to execute its capital and liquidity strategy to scale the company beyond expectations.

“Today, Ken is responsible for day-to-day pricing of a more than $300 million pipeline while managing daily financing, loan sales, and aggregation of CV3’s entire loan volume. His deep-rooted relationships and expertise in secondary markets for business purpose loans as well as his extensive experience in securitization financing position Ken as an inspirational leader who brings tremendous value both to the company and to the industry at large.” - Elizabeth Hillestad, CV3 Financial Services

A Solution for Every Problem

“I hate when folks constantly have problems with no solution, or worst yet, come up with problems for every solution.”

While Chris Fuelling, CEO of LendingWise, describes himself in terms of tenacity, gumption, and fortitude—all undoubtedly true—a solutions-first core and builder’s heart is where the real story is. It’s why he launched his first business and pivoted that business thrice over. And it’s ultimately what drives his expectations for himself, his team, and the private lending industry he serves.

At the Drafting Table

The year was 2006. Fuelling was in his 20s and working as a wholesale mortgage account executive at Alliance Bancorp in Florida, selling Alt-A and subprime loans. Frustrated by the inefficient methods brokers used to communicate loan details with lenders—namely phone, email,

and fax—he decided to build a platform designed to streamline these interactions. Via this mini web portal, essentially a broker-to-lender marketplace, brokers could send him their deals, and he could quickly review and price out scenarios.

“There had to be a better, more efficient way to communicate and partner with these brokers to handle their loans, inquiries, and other details,” he recalled.

“I had an epiphany to build some software to make my job easier,” Fuelling said.

“Fill out this information on a webpage and let me look at it. I’ll submit it back to you with a click of a button.”

There was just one small problem: Fuelling didn’t have a technical background. Not one to let “problems” stand in his way, he went hunting for a solution. He

This or That

Podcasts or audiobooks?

Virtual meeting or in-person meeting?

or energy drink?

SmartWatch or analog watch?

Online shopping or in-store browsing?

Touchscreen or keyboard?

found it in a developer whose expertise in software development was the perfect marriage with Fuelling’s extensive understanding of the mortgage industry.

Working together, the duo devised The Loan Post, the cornerstone of Fuelling’s vision for a more interconnected mortgage industry and one with greater transparency and efficiency.

“People were still used to doing desktopbased software back in that time. So, it was pretty innovative to roll something out over the cloud,” he said.

By 2008, the platform was being used by more than a thousand brokers and several hundred lenders who were eager for a solution to the tedious and timeconsuming process of loan brokering.

Change Orders

The runaway success of Fuelling’s first entrepreneurial effort wasn’t the only thing happening in 2008. The financial crisis was on a roll, and along with the nation, testing all Fuelling’s initial constructs. As the housing market collapsed, so did the relevance of The Loan Post.

To compensate, he pivoted the platform toward loan modification, short sale, foreclosure defense, and REO management software, rapidly remodeling his business structure in response to shifting market pressures.

“It was an interesting time,” recalled Fuelling. “It was a scary time, but I took

advantage of it. ... I took my existing software, I tweaked it a little bit, and I had a client base that wanted that type of service anyway.”

The remodeled platform aided distressed homeowners by connecting them with loan modification or short-sale-related services, eventually becoming a leading avenue to assist managing distressed mortgages through HAMP, HAFA, and other subsidized programs. Fuelling recalls that despite increased regulatory requirements in the aftermath of the mortgage meltdown, The Loan Post supported over a thousand loss mitigation companies and more than one million homeowners.

During this period, Fuelling said he learned valuable lessons. Chief among them were proactive compliance, including working cooperatively with regulatory bodies, and the importance of implementing rigorous user vetting procedures to maintain the platform’s integrity while subverting loan modification scammers seeking to use the platform to defraud vulnerable homeowners.

Perhaps the greatest lesson he learned was a personal one: His experiences during this time tested the adaptability and resilience he’d relied on since starting his business in 2006. This resilience became a keystone of The Loan Post’s DNA, helping it to thrive in a turbulent market.

Construction Phase

But by 2016, the housing market had finally stabilized and loss mitigation cooled.

“It was like, wait a second. No one needs my software anymore,” Fuelling said. “Loan mods? Short sales? What’s that? Who needs that? Everything’s back to normal now. The writing on the wall was coming, but I had built my software to be flexible and adaptable.”

He said he had to “do a little work” to tweak the software and seize the opportunity to build a platform that supported the regrowth of the loan origination side of the industry. LendingWise was born out of The Loan Post’s foundation.

The again-retailored platform aimed to provide custom solutions, this time for a private lender userbase.

“Having seen a lot of hard money and private money lenders actively involved in the short sale side of transactions, I saw an opportunity to build an LOS platform,” Fuelling said. Additionally, fewer regulatory constraints in the private lending market afforded LendingWise greater flexibility to bring new solutions to its clients without an additional

layer of complexity in coordinating lenders’ compliance requirements.

“Within a year of tweaking the existing loan management platform and a rebrand to LendingWise, we were able to go to market on Day One with a very robust, feature-rich professional software system,” Fuelling said.

LendingWise made its private lending industry debut in 2017 at AAPL’s 8th Annual Conference. “What a phenomenal way to meet all the major players in the private lending space,” said Fuelling of the event, “[It was] our first stop to make a splash.”

Finish Work

The goal at LendingWise is to give every lending company a solution that is both turnkey and flexible.

“It’s no easy task to fully adopt a system,” he said. “I have spoken to so many private

lenders that have been unsuccessful in their tech rollouts, whether it be off-the-shelf providers, custom Salesforce, or Hubspot, or true custom software from scratch. I would say there are more failures than successes with the build-your-own method.”

Fuelling understands that personally –the reason so many lenders have issues, he says, is also what makes building a turnkey platform like LendingWise such a challenge. Private lenders each set their own loan criteria and origination procedures so there’s no one-size-fits-all approach, but to Fuelling, there’s still a common thread. “The truly big problem for all organizations is creating a system that seamlessly connects each department,” he said. “Our goal is to give every company an operating platform that has an easy-touse and easy-to-configure framework.”

Among many features, the company meets these needs by serving up modules and

“What a phenomenol way to meet all the players in the private lending space. It was my first stop to make a splash.”

Color?

Burnt Orange

Musical genre?

Chill House

Favorite place for a vacation getaway?

Bali

Season of the year?

Miami winter season

Favorite book?

Atomic Habits

Relaxing weekend activity?

Boating and fishing

Guilty Pleasure?

Doomscrolling on social media—I’m trying to teach my wife it’s all work-related

fields with built-in on/off switches and other configuration options. Its community of more than 300 lenders and brokers can build their own workflows, templates, and reporting, all without coding.

At the heart of Fuelling’s strategy and dating back to The Loan Post platform is a client-centric approach. His method involves an active feedback loop where every client “has a voice.” Along with traditional communication tools like tickets and phone support, the company offers “upvoting,” which allows users to vote for features or suggest new features that all users can see and vote on. Additionally, Fuelling assembled a group of LendingWise’s top customers to form an advisory board that he refers to as his “angel clients.” They give the LendingWise team insights into the evolving needs of the industry and guide the platform’s solutions-focused development.

Drafting the Next Project

Fuelling envisions a bright and expansive future for both his company and the industry. His plans include broadening the platform to accommodate a wider array of features compatible with other vendors, but with a focus on each addition enhancing the collective functionality of the platform as a whole.

“I look forward to adding many more integrations that work with other platforms and thirdparty vendors like inspections, appraisals, due diligence services,

capital markets, and more,” he said.

“We chose the name LendingWise because it can handle everything related to lending. Lending is a big industry. We chose to focus primarily on private lending when we launched, but our big picture would be to cover more lending products outside of private lending.”

The Vision Behind the Build

Chris Fuelling’s career in the mortgage and private lending industry reflects the mindset of an entrepreneurial master builder: Visionary thinking, strategic problem-solving, focus on quality and longevity, and always looking ahead. From identifying cracks in the structure to redesigning strategies during economic shifts and expanding his plans to create comprehensive solutions, Fuelling is building more than a platform. He says he’s reshaping the evolving world of private lending.

“I’ve learned that I’m a true entrepreneur at heart. I love taking nothing and turning it into something, taking an idea and executing on it. The challenges behind that are thrilling and exciting. It gets me

up every day and keeps me going—and I couldn’t have it any other way.”

To keep himself productive and motivated, Fuelling works on developing habits that help him consistently plan, manage, and delegate.

“Since I started the business, I’ve done a lot and continue to do a lot myself,”

“We chose the name LendingWise because it can handle everything related to lending.”

he said. “As I transition away from managing and doing tasks in each department, I’m learning to let go. That leaves me more time for hearing and solving problems, and helping my team be more mission and goal focused.”

Fuelling drives his team to meet every problem with an idea for a potential solution, and then having the confidence

to implement that solution themselves.

“Part of truly leading is hiring the right people,” he said. “You’re inspiring the people. You’re motivating them. You’re coaching them, right? It’s not you doing the work. It’s inspiring them to do the work that you do. ... It’s funny, I talk about how important it is to create systems, standard operating procedures, KPIs,

etc., and I’m starting to realize how important it is to eat my own dog food and practice what I preach and teach.”

Our final two cents: While Fuelling says he hates being presented with a problem but no solution, he’s also made a career of building innovations that meet that need–and created a team that thrives in that mindset with him.

YOUR LENDER

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Partnering with CV3 gives you access to a wealth of resources and expertise that can transform your business. Let’s work together so you can offer the best possible solutions to your real estate investor clients:

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CONSTRUCTION COMPLETION

Enable your developers to access the funds they need to bring their projects across the finish line.

PORTFOLIO REFINANCE

Help your clients refinance their portfolio under one loan to improve cash flow and free up capital for new investments.

FIX AND FLIP

Leverage short-term financing to help your clients turn undervalued properties into profitable sales.

DSCR

Choose short-term interest-only ARM or 30-year principal and interest rental property financing.

JUMBO LOANS

With loan amounts up to $5,000,000 - give your clients access to more funds without the barriers of conventional.

Unlock Your Access to Bank Lines of Credit

Follow this roadmap for how to assess bank sizes, meet LOC criteria, and forge productive banking relationships that support your goals.

MARK JURY, ENTERPRISE BANK & TRUST

Finding the right bank to provide

a line of credit (LOC) for your private business purpose mortgage bridge originator (private lender) can be challenging. Just a small number of banks understand this industry, and navigating a bank’s structure to find the correct person can be difficult. Once you have accomplished that multi-layered task, the question still remains, “Am I the correct size for this bank, and are they the right fit for my private lending business?”

FINDING THE RIGHT BANKING FIT

Banks come in all sizes, ranging from small local banks that may have only a few branches to behemoths that operate in every major market. Depending on the bank’s size and structure, varying Total Credit Exposure (TCE) limits dictate the amount available to lend to any one counterparty. Similarly, opportunities too far below a TCE limit are also not a fit.

Once you find a bank that offers LOCs for your purposes, seek out the relevant banker to discuss limits. There is some variance across bank business lines, so

not every banker may know the limits specific to your specialty. Early on in your conversation with the right person, ask about the ideal line sizes for the bank and whether there are certain debt-to-equity ratios they target.

At a high level, banks can be broken down into four broad size categories in terms of how much they lend to a given relationship:

1 Small local banks: up to $10 million

2 Regional or small national banks: $10 million to $100 million

3 National banks: $25 million/$50 million to $250 million/$300 million

4 Wall Street Banks: $100 million/$200 million plus

There are certainly exceptions and gray areas, but these ranges can serve as a broad guide. If you zoom in on the banks that are regular providers of lines of credit to private lenders, only a few all into each size range; therefore, it’s important to speak with the banks that provide LOCs in the range that works for your lending business.

UNDERSTANDING BANK LOC RELATIONSHIP REQUIREMENTS

Bank LOCs are not for every private lender. Knowing that banks have many regulations and requirements governing how they lend money, private lenders must determine whether they are willing to endure LOC due diligence, set up, and adherence to their ongoing process and covenants.

Although not all bank LOCs are created equally, they do share certain characteristics. If any of the following sound familiar, you may run into challenges finding a bank LOC if you’re a private lender.

RAISES CAPITAL THROUGH SENIOR SECURED DEBT INSTRUMENTS (E.G., PROMISSORY NOTES) THAT CONFLICT WITH THE WAY BANK LOCS ARE COLLATERALIZED. Diversifying investors is more important than diversifying how capital is raised because having too many different structures can be confusing for institutional capital and make it difficult for the private lender to manage capital. Raising capital through secured senior debt is in direct conflict with the bank, so that type of capital cannot be counted as capital nor in the debt-to-equity ratio. Private lenders can still raise capital that

way, but they will need to qualify for a bank line with their other capital structures that do not conflict with the bank’s.

TYPICALLY ORIGINATE UNCONVENTIONAL LOANS. These categories include:

» Second liens

» Owner occupied

» Related party loans

» Maturities exceeding 24 months

» Very high Loan-to-Value (LTV)/ Loan-to-Cost (LTC), approaching or exceeding 100% for as-is LTV and LTC and exceeding 80% for LTARV

» Large concentrations in individual loans or borrowers

» Off-the-run asset classes like land, hotels, or cannabis.

Banks will typically limit any single loan or borrower to 10%-15% of the line capacity, so if the lender specializes in very large loan amounts or has only a few borrowers that originate most of their volume, those could represent concentration concerns for the bank and be limited on the line. Unconventional loan types would generally be ineligible on a bank’s borrowing base, so lenders would need to have sufficient collateral that would be eligible to effectively use

the LOC. Lenders should keep the loan products that have made them successful, so continuing to originate these types of loans is not an issue, but sizing the line should take into consideration the portion of their production that is eligible for the line of credit.

PRODUCES MANUAL AND INCONSISTENT FINANCIAL REPORTING AND LOAN TAPES.

There is no formal metric here, but a private lenders that is unable to produce timely financial reporting and loan tapes (within 30 to 90 days of quarter or yearend), loan tapes with sufficient and accurate information, or loan tapes and financial records that do not reconcile sends red

flags to the bank that the private lender is not managing the business well enough.

MAJOR DEROGATORY ITEMS ON

PRINCIPALS’ BACKGROUND AND CREDIT

CHECKS. Significant criminal records such as fraud and financial crimes of principals could present a notable risk to qualification. Liens and judgments are major concerns, and if they result in a bank or other financial institution losing money, they are probably also non-starters. Patterns of legal troubles and lawsuits, particularly if the private lender has a habit of being litigious, are major items as is very poor credit. Minor items include small credit dings, especially those in the distant

past or related to the Great Recession. One-off lawsuits or typical private lender lawsuits where a borrower sues to try to delay a foreclosure are also minor.

PROCESSES FOR PROPERTY VALUATIONS, INSPECTIONS, INSURANCE, TITLE, AND FINANCIAL REPORTING ARE ALL DONE INTERNALLY. This situation could potentially represent a conflict-ofinterest risk. Banks like to see checks and balances and third-party involvement. If the private lender controls too much of the process, there are opportunities for conflicts of interest and fraud.

The quality of involved third-party vendors also matters. They should generally

“Banks like to see ... third-party involvement. If the private lender controls too much of the process, there are opportunities for conflicts of interest and fraud.”

be reputable companies limited to involvement in arm’s length transactions (not a family member’s inspection company, for example). None of these are hard lines, perhaps other than typical bank valuation requirements stemming from the

Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) and the Interagency Appraisal and Evaluation Guidelines. It is more a matter of seeing the whole picture and how the private lender protects against potential conflicts.

There is some flexibility around each of the items mentioned, depending on the bank. Generally, however, these are strictly reviewed factors and are important to consider when contemplating your private lender’s eligibility.

Beyond underwriting criteria, every bank has nuances related to its loan terms. You must carefully consider those unique factors, but most bank LOCs have similarities, including:

» LOC size ranges related to their TCE limits.

» Direct pledging of mortgage loans through an assignment of the mortgage or deed of trust and an endorsement of the promissory note via an allonge.

» Advance rates based on outstanding loan amount, underlying property value, or some combination of the two, either on a loan-by-loan basis, or on a portfolio level.

» Financial covenants like DSCR minimums and total senior liabilities to tangible net worth maximums, commonly known as the debt-to-equity ratio (D:E).

» A non-use fee, which can vary; banks pay to have committed capital LOCs, so nonusage can result in a loss for the bank.

POSITIONING FOR SUCCESSFUL EVALUATIONS

It can be difficult to find a bank in your size range, locating the correct person inside the bank, and then presenting your private lender the right way. Attending conferences, joining organizations like AAPL, and asking attorneys, accountants, service providers, and other private lenders are all great ways to learn which banks may be compatible and how to connect with the key people within them.

When speaking with a bank in your size range, emphasize your experience as a private lender. Specifically, discuss your experience in originating and holding loans on your books (brokering, white labeling,

and servicing for others is not the same as managing balance sheet risk), managing troubled loans and borrowers, your core loan products and geographies, historical default rates and realized losses, and what differentiates you from other private lenders to keep borrowers coming back.

Think of a bank as a lender in the same way you are. There may be automatic deal killers, but in general, each LOC opportunity is a package made up of various characteristics and compensating factors. For example, one misunderstanding is that banks primarily care about origination volume. Although volume is an indication of how well you can source, underwrite, and originate loans, a more important metric

for banks is the balance sheet. Managing capital risk and working through distress are more telling than how many loans a private lender can originate and sell.

Using one of the covenant metrics mentioned above, assume most banks would like to see a D:E ratio of 1:1. So, if you have $10 million of equity on the private lender’s balance sheet, assume you could qualify for an LOC up to $10 million.

Banks look for more balance sheet than it would take to fund the remainder of the loan behind their advance rate because your private lender must be able to work through any distress and buy back any defaults should they arise. Banks want to

lend to private lenders that can solve their own problems with loans when borrowers become distressed, stop making payments, or raise unexpected issues. Private lenders need to have both the capital liquidity and know-how to buy these loans off the LOC to quickly and efficiently solve issues.

PREPARING AND ASKING THE RIGHT QUESTIONS

It is equally important to make sure the bank and LOC structure fit your private lending business. Ask these questions early in the process:

» Does your bank require shipping of collateral and assignment recording?

“Pursuing an LOC should be viewed as a long-term relationship with a bank, not a single transaction.”

» How are loans pledged, and do you reunderwrite or reject loans for reasons not explicitly stated in the loan agreement?

» What are the economics/fees beyond the standard legal deposit, origination fee, and rate?

» What is the draw process—how easily can a private lender access their LOC availability—and are there any requirements related to loan payoffs?

» Do you require full personal guarantees, audited financials, and a minimum deposit requirement?

» Does the private lender have to be set up as a fund, or are other structures permissible?

» Do you have flexible structures such as a working capital/cash management line, or are all LOCs borrowing base structures?

Pursuing an LOC should be viewed as a long-term relationship with a bank, not a single transaction. The time, effort, and expense are not worth the costs if the line does not renew. Similar to how many private lenders have repeat borrowers, a handful of which make up a significant portion of their origination volume, a bank looks for longterm, mutually beneficial relationships with private lenders who are easy to work with. The terms may not be the best initially, but as the relationship develops and trust

The Most Trusted Loan Management Software in Private Lending

builds, those conversations become easier, just as they do with your best borrowers.

Bank LOCs provide access to large amounts of capital at a cost typically below that of individual investors. For private lenders that have more deals than capital available, LOCs can provide rapid growth potential and wider profit margins. The key is having the foresight and willingness to invest in your private lender to find the right banking partner, engage in thoughtful conversations to ensure a mutually beneficial relationship, and complete due diligence, closing, and adjusting to the pledging process.

MARK JURY

Default, Delinquency: Aggressive Collections Not the Answer

Techniques that keep communication lines open and preserve brokerborrower relationships help lenders mitigate loss and win fans. ALAN TIONGSON, CONSTRUCTIVE CAPITAL

In mortgage lending, loss mitigation is a process where the lender, investor, and servicer work with a borrower struggling with monthly payments (a nonperforming loan) to avoid foreclosure, reducing potential loss to the lender. As our industry becomes increasingly competitive and more complex, the value of loss mitigation is growing. This review provides some potential insight into how you may address similar issues within your organization’s portfolio.

As background, loss mitigation options can include, but aren’t limited to, repayment plans, loan modifications, forbearances, deferments, short sales, and deed-in-lieu of foreclosure. Although borrowers must meet certain eligibility criteria depending on the hardship faced, the availability of such remedies also depends on all parties (lender, servicer, and borrower) coming to a mutual agreement.

THE APPROACH

Loss mitigation should be an ongoing daily part of your team’s priorities to prevent loss and minimize delinquency. Although loss mitigation review should apply to all loan types, this article will focus on some of the high-level particulars regarding DSCR rental loans, specifically. There are several key components to a lender’s loss mitigation strategy: effective underwriting guidelines, adequate communication, and awareness of fraud prevention.

As the investment property lending industry continually evolves, lenders should be prepared to frequently review and update lending guidelines as needed. Both sales and operations teams should regularly review these guidelines so everyone can collectively account for what shifts they’re seeing in the market. Through this constant, internal dialogue, lenders can quickly make necessary changes to prevent potential loss.

In addition, the need to constantly evolve fraud prevention and identification practices is critical to any lender’s overall success.

THE PROCESS

Loss mitigation means you will be interacting with borrowers about loans in distress, and the stereotypical, aggressive collections approach just repels troubled

borrowers from keeping communication open. Open communication, however, allows lenders/asset managers to gather necessary intel about the reason(s) for default, the status of the collateral, occupancy, and whether the borrower has a realistic, long-term solution to their issue(s).

Keep in mind that if your company generates business through broker referrals or partnerships, it is important to preserve the relationship between broker-borrower. You should allow communication to flow first through that channel before going directly to the borrower. Because the broker has had most of the communication during origination, they tend to get a much warmer reception than a third party with whom the borrower may or may not have had prior communication.

Often, we find that collaborating with borrowers is a much better approach than acting as a “collector” and being combative. The key to success within loss mitigation is keeping communication conversational and trying to understand each investor’s circumstances. Seek the root cause of delinquency and explore potential options, the current property status, and whether the issue is short or long-term. Any time you can reach a troubled borrower directly is a perfect time to address all concerns, questions, and potential workout solutions.

Once a loan enters delinquency, it is already known that additional fees, penalties, and default interest may become applicable, making reinstatement even more difficult for a troubled borrower. Assuming the borrower is still in communication, you should approach any potential workout as a negotiation process.

Depending on the loan type, investor, and/ or servicer, sometimes workout options such as payment plans, modifications,

deferments, or forbearances are allowed if the borrower has some sort of capacity to continue to make payments and typically the issue is temporary. However, if borrower insolvency is the issue, other workout options could include short sales and deed in lieu. In either scenario, a good amount of due diligence is necessary because both release the borrower of any potential deficiency balance that may result from the lender’s eventual liquidation of the property. In those scenarios, plan to minimize the length of time to reacquire the property or liquidate versus a lengthy (and costly) foreclosure process.

Being able to note your communications with borrowers and report those notes is critical when managing multiple team members who may have contact with that same borrower. This alleviates the need for the borrower to tell and re-tell their situation, plan, and timelines for resolution. Instead, they’re able to pick up where the last conversation left off and focus on whether the borrower is on track with their timeline for any proposed resolution.

EARLY INDICATORS OF INVESTOR PAYMENT ISSUES

Given the substantial number of loans and the many brokers and borrowers

you work with, you should learn to recognize a few specific “red flags” that might show a loan has risk. It helps you focus on those loans rather than having to review all your loans all the time.

Consider taking a deeper look at a loan or following it more closely if any of the following are true:

1 The investor is constantly looking to refinance.

2 The investor already has many loans on the book with you.

3 The investor cancels their ACH. ACH is often required for loan repayment, so when a borrower moves to servicing

and immediately cancels the ACH, it is a concern. You cannot prevent them from stopping ACH, but you can always ask why they did so.

4 The investor has any type of bounced payment.

5 The investor is so much as one day late on payment. The grace period for many loans is until the 10th of the month, so if it hits the 11th without payment, start looking into the issue.

FRAUD PREVENTION

used, transaction types, mathematically check credits/debits, starting and ending balances, etc. These benefits help alleviate the burden of underwriting to manually identify red flags. The key is to bring more company awareness to the potential red flags you face with misrepresentation— on applications, borrower behavior/ interactions, purchase contracts, credit reporting, asset documentation, rental leases, appraisals, and titles.

NATURAL DISASTER IMPACT

require borrowers to sign a certification that guarantees no damage to the property and that no insurance claim was filed.

Although improvements in technology have helped our industry, it has also led to increasing fraud in mortgage origination. As technology and software continue to advance, borrowers have better tools to provide false data or documentation to qualify for financing. In some instances, otherwise ineligible individuals can reverse engineer a lender’s underwriting guidelines to better qualify themselves as credible borrowers.

All a lender originating substantial amounts of volume each month can realistically do is develop strong practices and detection measures to prevent/minimize fraud. Detecting fraud is largely dependent on the originations team (primarily underwriting) to detect inconsistencies in financial documentation as well as the chain of property ownership. However, that review is dependent on the individual’s attention to detail and/or experience, leaving plenty of room for human error. To help combat this, consider adding an internal committee to review suspected cases of fraud.

Another potential solution is using software/ AI as a tool to help identify instances of misrepresentation in borrower financials. These technology tools can detect inconsistencies in financial docs, the font

Natural disasters can cause varying degrees of damage and create potential risk for lenders. Recent events such as Hurricanes Helene and Milton have shown us how frequently such catastrophes can occur. Every lender should have established policies and procedures to address potentially impacted areas as well as when FEMA officially declares disaster areas. Keep in mind: The assistance you can provide to borrowers depends on the degree of assistance, if any, agreed upon by the institution that owns the loan and servicer.

If a disaster is projected to occur and the potentially affected areas can be reasonably determined, identify the affected properties/ loans that have yet to close in these areas. Consider suspending lending in the affected areas until the disaster has cleared.

Following a FEMA disaster declaration, once a confirmed list of affected counties/ ZIPs is identified, cross-reference those areas with your active pipeline as well as recently originated loans and request postdisaster inspections/certifications. Having a vendor that can quickly complete these inspections is critical; no investor within the secondary market will want to include a potentially affected loan without being certain the subject property is unaffected. Following a natural disaster, you can

As the landscape of mortgage lending continues to evolve with new challenges, maintaining adaptability and a focus on robust loss mitigation practices will be key to minimizing losses and supporting borrowers in distress. Lenders, investors, and servicers need to stay proactive in their loss mitigation strategies. Embracing due diligence, open communication, and innovative technology use (e.g., AI and advanced software) can significantly enhance the identification of early warning signs and prevent potential fraud.

Alan Tiongson is the vice president of secondary markets and asset management at Constructive Capital, where he oversees his team, maintains relationships with investors, and oversees overall performance of the portfolio. He has more than 17 years in investment property lending with roles in origination, credit analysis, processing, underwriting, developing/overseeing lending operations, servicing, and portfolio/asset management. Before joining the Constructive team, Tiongson was the director of servicing and asset management with Finance of America Commercial. He graduated from Loyola University Chicago.

ALAN TIONGSON

Managing the Blind Spot

Operational risk is greatest during the draw management process when the property’s loan-to-value fluctuates and unforseen challenges crop up during construction.

JOHN ADRACTAS, TRUSTPOINT AI

The draw management process can help you defend again operational risks in construction lending. In particular, following draw management best practices help you gaurd against perils that can occur in some of the early stages of renovation.

The accompanying figure shows how a property’s value can rise during the various stages of renovation.

Unfortunately, during a renovation, expected property value does not rise continually “up and to the right.”

There is a danger zone where expected property value dips for some projects,

SERIES NOTE

This is the second article in a series about operational risk in construction and renovation lending. The series, written from the perspective of a chief lending officer, examines examples of operational risk, addresses common misperceptions, and proposes emerging best practices and recommendations for lenders striving to scale their portfolios responsibly. The first article, “The Blind Spot,” appeared in the Fall 2024 issue of Private Lender. It set the stage for why “operational risk” matters to construction or renovation lending.

typically from demolition through rough construction completion. This makes sense intuitively because the renovation involves destroying the collateral to build back better (hopefully). Beyond an implied instability in the loan-to-value ratio, there is a higher associated cost of taking back an incomplete property during that phase. Further, projects may face unforeseen circumstances at any time, ranging from unexpected requirements (e.g., retaining wall, sewer main repair) to events (e.g., extreme weather) that cause damage.

Loan-to-value is a dynamic concept in construction lending. Ensuring construction holdback capital is deployed proportionately through the project’s completion is a key operational risk mitigant and the responsibility of the draw manager.

WHAT IS DRAW MANAGEMENT?

Funds paid at closing are generally used for acquiring the “as-is” property; the remainder is retained in a “holdback” that is held back (true to its name) for use during construction, enabling the transformation of the property to its highest and best use or after-repair value (ARV). Holdback funds

are released from the total loan commitment as the project progresses via borrower draw requests, which the lender must approve.

Essentially, every draw in a construction loan is a “mini” underwrite, not of the sponsor but of the loan’s current state vis-a-vis the underlying property’s unique path to completion.

Let’s dive into four fundamentals of construction draw management.

#1. WORK IN PLACE BEFORE MONEY OUT

The “work-in-place” standard is a basic tenet in renovation and construction lending. It refers to measuring the project’s hard cost completion in terms of completed labor and materials that are physically installed on-site (i.e., “in place”). As a general rule, holdback releases should align proportionally with project completion.

Measuring hard cost completion involves inspections of progress (i.e., draw inspections). Inspections require detailed project context and expertise. Inspectors may perform their work on-site or remotely, potentially facilitated by technology that enables borrowers to submit photo or video evidence of progress. Consistent inspections and informed draw reviews allow lenders to identify potential issues early, mitigating risks before they threaten the project’s long-term viability.

To maximize operational risk mitigation, inspections should require a qualified inspector who knows the project’s current scope, budget, and starting state as a baseline. Sharing the appraisal with the inspector is a best practice that allows the inspector to reference photos of the property’s starting condition and the description of scope.

ILLUSTRATION OF SINGLE FAMILY HOME VALUE DURING RENOVATION

No inspector or inspection is perfect, of course; the goal is a reasonably informed opinion obtained through a reliable and systematic examination. Ensure an independent judgment that minimizes misalignment in the determination of completion. Sometimes inspectors can become too cozy with a borrower and, in extreme cases, even outright collusion occurs. Lenders with in-house inspectors ideally separate that role from the borrower relationship manager to avoid undue influence.

Avoid blurring the lines between what the inspector recommends and the lender approves so you are aware of significant variances in how your draws are approved compared to the project completion rate. Growing variances can mean holdback funds are being released ahead of sufficient completion and may

expose you to significant operational risk if you have to take back the property. Further, watch for completion numbers in inspection reports being “adjusted”; this may be warranted but should be documented and monitored to ensure approvals are achieving risk mitigation. Monitor for errors or fraud, especially if you allow borrowers to submit their own photos or videos. Known fraud risks include photos taken at a different unit or job site or photos taken of photos. Inspectors are also human and can simply make mistakes, including not noticing things or more egregious errors like inspecting the wrong location (or even being tricked into doing so).

There are two notable exceptions to the work-in-place standard.

One common exception is soft costs (e.g., architect fees and permitting costs).

Although no observable progress is made, soft costs are part of every project and necessary to completing a project. Most lenders allow draws to include soft costs, but they release funds only proportionate to the hard cost completion. Some lenders will release soft costs in full as incurred for repeat borrowers who are in good standing.

In either case, approving soft costs causes a rising variance in the lender approval versus hard cost completion. Again, this may be fine but it should be monitored.

Other common exceptions are material deposits or off-site storage, which present a unique challenge. In these cases, there is no observable progress in completion, and the materials have not been delivered to the site yet. However, withholding funds for deposits can delay the project if the borrower cannot cover the upfront costs. As such, some lenders will make a partial allowance for materials deposits, for example, up to 50% with proof of invoice and payment and the remainder once there is proof of invoice, payment, and delivery on-site. Other lenders are stricter and require the delivered materials to be fully installed before the remaining holdback funds

are disbursed. Even releasing funds after delivery is a challenge if trust is low, given the borrower could deliver materials like lumber or appliances to one property for the inspection and then relocate those materials to another property. Similar to soft costs, these exceptions create a rising variance too.

#2. BEWARE OF UNPAID WORK

Even if an inspection confirms work was completed, there is residual operating risk if the construction vendor or supplier involved was not paid. This creates the potential for mechanics’ liens to be filed, which could result in the lender being “primed” and losing lien priority on the property to these

parties. Lenders and their borrowers may not know about all vendors or subcontractors working on their project, but they are still subject to their mechanics’ liens.

Signed lien waivers are one mitigation tool for managing the risk of mechanics liens. These include conditional progress lien waivers prior to payment and unconditional progress waivers after payment has been made. If the right statutory form is signed by the right party in the right amount, these documents can help mitigate risk from vendors known to the borrower or lender. “Known” is a key word, however.

Requesting proof of payment for the invoices in a draw request is another mitigation tool. Ensuring funds were disbursed by the borrower or general contractor is critical, because funds sometimes are withheld for various reasons, ranging from exerting leverage over subs to contract disputes. Collecting conditional progress waivers and corresponding proof of payment is a respected approach. Lenders also can use title searches to check for any undisclosed liens or outstanding claims on the property. This search may be done as a stand-alone or in conjunction with signed lien waivers. Further, title endorsements can be obtained that provide the added protection of insurance but with additional cost and delays to the approval

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process. Renovation often involves only title searches, whereas new construction likely involves title endorsements and lien waivers (and doubly so for larger budgets and project complexity).

That said, be sure to tailor any risk mitigation to the situation. For example, asking for signed lien waivers from a self-performing borrower (i.e., no vendors hired) provides little to no protection since the lien claim filed by a borrower against his own loan would be unlikely to hold up in court. Similarly, accepting lien waivers signed by the borrower when there is an independent general contractor vendor or signed by the general

contractors for their subs’ or suppliers’ work does not mitigate lien risk either.

The bottom line is that lien waivers used inappropriately are unlikely to provide protection. Worse, they can damage the customer experience and your credibility in the market.

#3. MONITOR THE PROJECT BUDGET

Knowing the original construction budget size, its uses in terms of line items, its sources of funds, and any changes to it along the way is critical. The budget provides a proxy for measuring project scope, a baseline for measuring its progress, and insights into the borrower’s judgment.

Throughout the construction project, there are often requests to “reallocate” funds and sometimes expand the construction budget through change orders. These requests are invaluable signals about what is happening on the ground. While it’s tempting to say “not my problem” as a lender, these changes can become your problem quickly if they imperil a borrower’s ability to complete the project. Moreover, these changes can inform you about what is happening on the ground and may provide a reason to dig deeper into pending draws. For example, budget changes might reflect a dynamic scope of work, such as the addition of a bathroom

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or even an ADU. Changes often suggest the project requires more time, rendering the original schedule inaccurate. Changes could indicate shifts in the market; for example, the cost to build a fourbedroom house no longer aligns with the original plan or anticipated value. Remember, follow the money. Keeping an auditable history of the original budget and its evolution is foundational to managing the operational risks for active construction. Better yet, understand what the underlying drivers are, from replacing estimated numbers with contracted rates to unforeseen circumstances (e.g., hidden damage) to new requirements

“The budget provides a proxy for measuring project scope, a baseline for measuring its progress, and insights into the borrower’s judgment.”

from a code inspection (e.g., retaining wall) to expanding project scope (e.g., adding square footage or structures).

Second, include a contingency line item (often 5-15%) in the budget because renovation and even new construction

involves unknowns. If you include a contingency, keep track of which line items are growing and monitor them for excessive consumption that occurs too early in the project; that may indicate an inadequate budget or unforeseen circumstances.

Third, avoid approving overdrawn line items. But the money must come from somewhere. The source could be from contingency, reallocation from another line item, or additional borrower equity for an expanding budget. If you’re drawing from contingency, consider tracking as a reallocation so you monitor which line items are growing.

#4. COMPARE, COMPARE, COMPARE

Look beyond the current draw. How does the velocity of draws and project completion compare to the reported completion date and/or loan maturity?

Stalled projects without recent draws are often the projects with a higher operational risk. When borrowers are submitting draws, have them reconfirm or update their estimated completion date.

Lenders should anticipate consistent progress toward completion, making delays a clear warning sign of potential risks to meeting the loan’s maturity date.

Relatedly, before releasing final holdback funds, confirm there is a closed permit and certificate of occupancy, if applicable.

Keep in mind that a temporary certificate of occupancy (TCO) can be rescinded. If the project is not final, push to understand why.

Despite best efforts challenges will happen.

Lenders can bring valuable perspective and expertise to the table informed across a variety of loan types, project sizes, municipalities, and construction-related issues.

Automation and predictive analytics powered by software and artificial intelligence/ machine learning are increasingly in use and are changing the game for construction lenders in terms of productivity, execution speed, and customer experience.

Keep in mind, focusing on customer experience to an extreme exposes you to a higher risk of losses or losing capital providers, while focusing on risk mitigation to an extreme leaves you at risk of not attracting or retaining customers. Striking the right balance is an active sport.

Engaging early, often, and proactively increases your success and reduces losses, whatever path your loan may take. It is better to work out solutions while there is money remaining in the holdback or while the borrower has equity funds still available. In short, keep yourself in the conversation.

John Adractas is the CEO and co-founder of TrustPoint AI. A serial entrepreneur and founding product leader in vertical SaaS and enterprise analytics across five companies, he previously worked at Google and Simplee (now the healthcare division of NASDAQ: FLYW).

Adractas earned an MBA from Harvard Business School and a bachelor’s degree in mathematics and philosophy from the University of Pennsylvania.

JOHN ADRACTAS

Unrealized Potential: Examining Midstream, Abandoned Construction

Originating or refinancing an incomplete construction project requires an additional set of tools and expertise to manage financial, legal, and market risks.

JILL DUKE AND KEITH TIBBLES, LEVEL CAPITAL LLC

When you start a construction project from the beginning, you can meticulously plan details such as the target market, designs, budget, and phases, leading to fewer surprises. However, if you take over a midstream construction project—one that’s already underway – you may be faced with unexpected challenges and be forced to adjust, often increasing costs in both time and money.

When considering financing midstream or abandoned construction projects, assess your risks before committing capital. These risks, which span financial and legal uncertainties, market conditions, environmental concerns, and project management challenges, can all affect the project’s viability. Understanding them and conducting comprehensive due diligence is critical for making informed investment decisions and structuring financing in a way that minimizes potential losses. Traditional risk mitigation strategies are now enhanced by incorporating artificial intelligence (AI). Let’s take a look at the potential risks of a midstream construction project.

FINANCIAL RISKS

Midstream construction projects frequently face cost overruns due to uncertainties

in completing the remaining work. Issues like previous mismanagement, unexpected delays, or inflationary pressures can drive up costs. Outdated or inaccurate original cost estimates make it difficult to forecast the financial resources needed for project completion. This uncertainty raises the risk of needing to inject more capital than initially planned, impacting the return on investment.

In addition, stalled projects typically experience cash flow disruptions when initial funding runs out. Cash flow for these projects often relies on reaching specific milestones, which may be delayed due to incomplete work or other challenges. Financing these projects involves considering the risk of not receiving timely payments or returns until the project resumes and becomes operational.

Financing delayed projects could tie up your capital longer than expected, potentially creating liquidity challenges if you need to reallocate resources. This risk is particularly significant for financial institutions that need to manage liquidity to pursue other investment opportunities or meet obligations.

Often, the original developer abandoned the project due to insolvency or financial distress.

This means you may inherit the credit risk of the original borrower or need to evaluate the creditworthiness of new developers stepping in. The developer’s past financial struggles might indicate potential mismanagement risks or uncover unexpected hurdles that caused project disruption, leading to additional financial issues.

LEGAL AND REGULATORY RISKS

Partially completed construction projects may encounter legal issues such as expired permits, zoning changes, or updated regulations. Securing new permits or amending existing ones can delay progress, increase legal costs, and heighten noncompliance risks. It’s essential to consider the potential need for additional regulatory approvals, which can be costly and time-consuming.

Stagnant projects often involve multiple contractors, suppliers, and stakeholders. When a project halts, disputes over unpaid invoices, incomplete work, or contract breaches may arise. Understanding the legal landscape is crucial, as you could be drawn into litigation or required to settle outstanding claims to resume construction, which would increase legal costs and delay timelines.

Establishing clear ownership of project assets can be complex, especially if multiple parties have claims against the property. Financing these projects carries the risk of inheriting legal disputes, which can be costly and time-consuming to resolve. Ambiguities in ownership can pose substantial legal risks.

MARKET AND ECONOMIC RISKS

Projects planned during times of economic growth may become less viable due to changing market conditions. Financing midstream or abandoned projects requires an analysis of current demand for the completed project. A downturn in real estate markets, shifting consumer preferences, or new industry trends can reduce expected returns, making the project less viable.

Likewise, inflation, interest rate increases, and changes in economic policy can raise construction, labor, and financing costs. Abandoned projects are particularly vulnerable to these challenges because delays expose them to changing economic conditions. For example, rising interest rates increase financing costs, straining the project’s financial feasibility.

Also consider that if new projects were completed while your project was stalled, increased competition may affect potential profitability. An oversupplied market or newer developments can make it more difficult to sell or lease the finished property.

OPERATIONAL AND CONSTRUCTION RISKS

Accurately assessing the remaining work in a partially completed project is challenging and often requires careful due diligence. Unknowns like material deterioration or the subpar quality of completed work can lead to unexpected costs, potentially causing original investment projections to fall short.

Restarting a project often necessitates hiring new contractors, suppliers, and

project managers. Integrating these new participants can be challenging due to differences in work culture, unfamiliarity with existing conditions, and the need to align project goals, potentially leading to delays and miscommunication.

Reestablishing relationships with suppliers and contractors disrupted during a project’s pause can be difficult. Additionally, changes in the global supply chain may affect your ability to source materials at the original costs, potentially impacting timelines and budgets.

ENVIRONMENTAL AND SOCIAL RISKS

Previously abandoned projects may pose environmental risks, such as contamination or erosion. Restarting a project often requires compliance with updated environmental regulations, addressing any environmental damage, and ensuring standards are met. Failing to address these issues could result in fines or project stoppages.

Some midstream projects face community opposition, especially if they have become eyesores during the hiatus. Financing these projects may require managing community relations or dealing with protests that could delay or complicate construction.

Investors associated with projects perceived negatively by the public may face reputational risks. Community members might view the project as irresponsible or inconsiderate, leading to negative media coverage or opposition that could impact your standing in the market.

RISK MITIGATION STRATEGIES

To reduce risk on a midstream construction project, conduct comprehensive due diligence to understand project risks. This includes legal assessments, market evaluations, inspections, and financial analysis to identify potential issues early.

Artificial intelligence can help analyze proposed budgets by comparing them to historical data. Machine learning models can identify patterns, allowing you to avoid projects with unrealistic budgets.

AI also can assist in evaluating market conditions that affect a project’s feasibility. By analyzing market data, AI provides insights into regional economic growth, demand trends, and demographic changes. This information can help you assess whether the project will sell or rent quickly or if the market is oversaturated, impacting profitability.

AI tools, such as drones and computer vision, enable real-time monitoring of construction sites. This allows you to verify that work matches timelines and to identify delays or potential issues early. Don’t hesitate to collaborate with developers who have a proven track record with troubled projects to reduce risks. Experienced partners bring expertise in regulatory navigation, construction optimization, and community engagement.

Importantly, use specialized insurance, like builder’s risk insurance, to protect against financial losses associated with delays or unforeseen issues, providing a financial safety net.

In conclusion, navigating the complexities of midstream construction projects demands a clear understanding of associated risks and the strategic application of risk mitigation techniques. Comprehensive due diligence, enhanced by the latest AI technologies, is essential for assessing financial, legal, and market conditions effectively. By embracing these advanced tools and strategic insights, investors and lenders can better manage potential pitfalls and capitalize on the opportunities presented by midstream construction investments.

Jill Duke is the chief operating officer at Level Capital LLC. She has more than 20 years of experience in mortgage and construction lending, including correspondent, wholesale, and retail channels. Throughout her career, Duke has led teams in operations, risk, quality control, post-closing, and product development for regional and national banks as well as national non-bank mortgage lenders. She studied political science at the University of North Texas.

Keith Tibbles is a co-founder and partner at Level Capital LLC. He has more than 30 years of experience in mortgage and construction lending, serving as a director of Pacifica Bank, president of Washington Mortgage Lenders Association, and as an advisory board member for Fannie Mae. Tibbles also served on several task forces for the Mortgage Bankers Association. Tibbles majored in business administration and finance at the University of Washington.

JILL DUKE

KEITH TIBBLES

Hyperlocal Due Diligence: A Look at the New York City Tristate Area

A combination of factors has led to high inventory levels in this consequential market, but could market demand be rebounding?

RODNEY MOLLEN, RICHERVALUES

As we always reference, the adage “location, location, location” invokes three important realms of evaluating potential real estate deals: local, hyperlocal, and unique diligence factors.

The third installment in this series focuses on the New York City Tristate area, including the boroughs and surrounding markets. NYC is arguably the nation’s most consequential primary market. The area’s

This series examines due diligence factors in markets representative of their region:

1 Local factors are broad and evaluate the market’s type and size (i.e., primary, secondary, tertiary, rural, remote), economic drivers, size of the buyer pool, and typical buyer profiles.

2 Hyperlocal refers to a specific neighborhood, its submarket, investment dynamics, and other neighborhood-level intelligence.

3 Unique diligence factors are specifics to check to ensure the environmental health and safety of the property.

massive population and economic activity continue to drive real estate and lending activity, and its market dynamics remain unique. Mortgage rates spiked, remote work increased and stabilized, and COVID migration continued, a combination of factors that caused inventory levels to increase throughout much of the market. Particularly in Manhattan, actively listed inventory reached some of the highest levels of anywhere in the country, causing its own market story to play out since then.

LOCAL

NYC is perhaps the nation’s quintessential primary market, with significant population size, innate demand, and powerful economic engines within the geographic market. However, migration trends have been generally net-negative, with a greater exodus of people versus incoming migration, particularly among higher-income earners who have more freedom to work remotely. In the NYC Tristate area, where space has

been at a premium for decades, restrictions on short-term rentals are common. As a result, adding units or accessory dwelling units (ADUs) for long-term rental is more prevalent here than in other markets. Here are some important trends we’re seeing, based on aggregated data from all properties analyzed (but not necessarily purchased) by lenders and

“NYC is perhaps the nation’s quintessential primary market, with significant population size, innate demand, and powerful economic engines.”

investors on RicherValues, either by clients conducting their own analysis or by ordering our evaluation reports.

MARKET DEMAND COULD BE

REBOUNDING. The market demand scores in the NYC area were some of the lowest levels in the country, and they remain lower than most real estate markets where we see high lending activity. Much of this is led by high inventory levels, which often create price pressure on the markets as well as longer sale times for transactions. However, we can see that although market demand declined in the third quarter of 2023 and remained low, one year later it climbed back above 60 for the third and fourth quarters of 2024. This is partly driven by a healthier correction of inventory levels and doesn’t necessarily mean the markets absorbed the previously high inventory. Instead, sellers could simply have canceled their aspirations to sell, bringing active inventory levels to lower levels currently (see Fig. 1).

REACHING BETTER PRICE STABILITY AND PREDICTABILITY? In a different look at our FSD score graph (see Fig. 2), we think the FSD scores for NYC tell a different story than in other markets we’ve analyzed. Although inventory levels were higher and market demand lower from fourth quarter 2023 to second quarter 2024, this seems to have led to higher price volatility within each market and hyperlocal neighborhood. This is due to greater unpredictability by both buyers and sellers, with some homes selling at surprisingly low prices and others selling at surprisingly higher prices. As inventory levels have moved down in third quarter 2024, so have the FSD scores, which seems to indicate that price predictability is being restored. For lending, this can be a great thing. You can think of the FSD score as a “reverse confidence score.” It measures the accuracy

of analytical models that were used to determine a property’s value. A lower score means the model has more effectively identified sales price drivers, yielding greater confidence in the valuation. A higher score indicates an area has greater variation in sales prices and it was harder for the models to determine what specifically is driving price; therefore, a human touch is likely needed to sort through the details and ensure valuation conclusions are accurate.

PRICE DECLINES CONTINUE AND SMALLER DEALS ARE REBOUNDING. In terms of deals that lenders and investors are analyzing through RicherValues, we’ve seen a general decline in average ARV (see Fig. 3) as well

FIGURE 3. AVERAGE ARV, 2023-2024

as a higher percentage of deals falling in the $400,000-$750,000 range (see Fig. 4), which historically has been a much smaller percentage of deals available to lenders and investors within the Tristate area.

To further emphasize the point about smaller deals, let’s look at buying power (see Fig. 5). For deals to push into the greater than $750,000 bracket within NYC, the age, livable area, and bed/bath counts remain at the smallest size compared to other urban markets in the Northeast. However, with the greater prevalence and accessibility of remote work and sustained demand in more surrounding areas versus Manhattan and the boroughs, the standard deals falling in the $750,000-$1.5 million bracket show NYC homes offer greater size than DC (although still lower than Philadelphia and Baltimore).

HIGHEST ACTIVITY IN LONG ISLAND. In most MSAs, there’s a constant fluctuation between deals in the inner core (urban/ suburban) areas versus outer areas (lower density suburban and outlying). NYC sees its share of fluctuation trends as well. Looking at the top 12 ZIP codes where we’ve seen the highest levels of investing and lending activity, we see that eight of these ZIP codes are in Long Island (see Fig. 6).

HYPERLOCAL

As with any MSA, it’s important to understand a specific location by gathering neighborhood-level intelligence in the immediate area, submarket, and investment dynamics. The metrics you search for should be measured to help quantify hyperlocal activity, supply/ demand balances, investment activity, and other factors. If you need help with that, RicherValues and similar software platforms can be a source of quantified data to evaluate hyperlocal supply/demand balances, neighborhood investment

activity, including construction and renovation activity, as well as other factors.

UNIQUE DILIGENCE FACTORS

As with most markets, common factors that can affect real estate and lending at the hyperlocal level include square footage, inventory and market demand, and neighborhood dynamics.

SQUARE FOOTAGE. Particularly notable in Suffolk County (Long Island) and other areas of the greater metropolitan area, square footage is often withheld from listings and is not available in public records. This means it’s crucial to perform extra due diligence, not only on the subject property but also on the wide array of sold and active listings in the immediate area. If you’re

performing your own valuation diligence, then roll up your sleeves and be prepared to spend more time. If you’re enlisting outside professionals to perform the work, make sure those firms are truly evaluating square footage across all the comps and not just on the few comps they may decide to use to determine your property’s value. This is critical to avoiding valuation skew or bias, whether intentional or unintentional.

INVENTORY AND MARKET DEMAND.

Due to the high amounts of inventory compared to most markets, pay attention to inventory levels, price trends, and pricing pressure. Look at active listings and potential competition.

NEIGHBORHOOD DYNAMICS. In urban core areas, scrutinize blocks, walkability, and quality. In boroughs

and outer submarkets, note “invisible lines” where prices seem to differ across arterial streets or other boundaries.

This short look into this quintessential MSA provides an example not only for lenders and investors who are active in the Tristate area but also for all lenders, regardless of their market. This market-based approach provides the opportunity to break down the thought process and to see how local, hyperlocal, and unique diligence factors all play an important role in understanding prospective deals.

Rodney Mollen is the founder and CEO of RicherValues, a software and valuation services provider that delivers high-quality, comprehensive intelligence for lenders and investors on any residential asset nationwide. Mollen has more than 20 years of experience, including acquiring, managing, renovating, and selling over $1.2 billion in REO and NPLs nationwide from 2008 to 2013 as COO of an Arizona-based investment firm.

Mollen has previous experience with small-cap to Fortune 50 companies as a consultant with Sibson Consulting in Los Angeles. Mollen has also acquired and managed his own private real estate deals for infill residential redevelopment. He began building the technology prototypes for RicherValues in 2017, with a commercial launch in January 2019.

FIGURE 4. PERCENTAGE OF DEALS BY ARV VALUE, 2023-2024

FIGURE 5. BUYING POWER, NYC VS. DC, PHILADELPHIA AND BALTIMORE

FIGURE 6. DEALS, INNER CORE VS. OUTER AREAS IN LAST 90

RODNEY MOLLEN

LOAN DETAILS

Lender // 1892

Capital Partners

Borrower // Miller Investments, Jody

Miller Construction

Location // 2841 Emerald Street, Milton, Washington

Architectural Style // Automated car wash

Square Footage // 4,200

Year Built // 2024-2025

Loan Amount // $6,225,000

Interest Rate // 12%

Length of Loan // 9 months

Anticipated Rehab

Costs // $6,225,000

Borrower Experience // First car wash

but experienced commercial builder

A Car Wash with a Purpose

Milton, Washington’s newest car wash combines cuttingedge technology with environmental goals, supported by a loan that meets both lender and borrower needs.

CHARLES FARNSWORTH, 1892 CAPITAL PARTNERS

The Glacier Car Wash project is a 4,200-square-foot state-of-theart facility, which will feature cutting-edge water reclamation technology designed to minimize wastewater discharge and optimize resource use. Clean water used during the vehicle wash process will be stored in multiple reclaimed water tanks for further use in washing the underside of vehicles.

ECO-FRIENDLY DEVELOPMENT OFFERS NEW OPPORTUNITY

The loan will support the entrance into a growing industry with innovative technology and sustainability at its core. The opportunity for us was to engage into an asset class and niche that has growth potential and is underserved. Although the car wash sector is

“The loan will support the entrance into a growing industry with innovative technology and sustainability at its core.”

experiencing significant growth, a clear gap in financing options exists.

EXIT STRATEGY

Construction is expected to be completed by Spring 2025. The exit strategy is to refinance and hold.

FINAL CONSIDERATIONS

The project has a higher LTC than what a bank typically would have provided, but it was offset by a low LTV. As a result, the client was able to leverage their construction experience and finance more than 80% of the costs while providing the lender an LTV that was less than 50%. Both the needs of the sponsor and the lender were fulfilled. As a family office lender, conventional underwriting requirements and financial covenants were able to be overcome to build the project.

The project brings Milton a high-quality eco-friendly car wash that supports local economic growth and creates local jobs. It also promotes sustainability through water conservation and energy-efficient technology, contributing to the city’s long-term environmental goals.

Charles Farnsworth manages 1892

Capital Partners’ private lending. He has more than 30 years of experience in real estate investment, finance, and banking. After graduating from the University of Puget Sound, he founded a finance company, raised private capital, and served as vice president in corporate banking and private wealth management.

In 2008, Farnsworth returned to private capital, managing secured debt portfolios and real estate investments. In 2021, he joined 1892

Capital Partners to expand a real estate debt-secured lending portfolio for Corliss Management Group LLC.

Submit your Case Study!

CHARLES FARNSWORTH

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WINTER GUIDE

If you’re looking for a service provider with real experience working with private lenders, this guide is your starting point.

In each issue, we publish a cross section of specialties. These providers do not pay for inclusion. Instead, we vet them by reviewing their product offerings and talking to private lender references.

AAPL members can access all vendors online at aaplonline.com/vendors.

Caballero Lender Services caballerolenderservices.com (225) 328-1071

Products & Services

» Foreclosures

» Bankruptcies

» Real Estate Closing representation

Eric Feldman & Associates, P.C. efalaw.com (312) 344-3529

Secondary Specialties

Default & Loss Mitigation

Products & Services

» Commercial/residential real estate and note transactions

» Closing/escrow/title services

» Initiate Foreclosures and Evictions

» Protect creditor rights in Bankruptcy

» Litigation oversight nationwide

» Property violations, property tax appeal

» Due diligence, clerking, recording, document preparation.

sbstrustdeed.com (818) 991-4600 Products & Services

» Non-Judicial Foreclosures

Bankruptcy

Post Foreclosure Options for Lenders

Deed in Lieu of Foreclosure

Lender Solutions TotalLenderSolutions.com (866) 535-3736

Products & Services

» Non-judicial foreclosures

» UCC Sales

» Reconveyances

Chiarelli, Shuster LLP

acsaccounting.com (732) 713-6305

ATM Professional Services, CPA P.C.

atmcpas.com (301) 947-2860

» Education Auction.com

auction.com (212) 983-0262

Axylyum Charter LLC

axylyum.com (212) 983-0262

DSI Inc.

defaultservicesinc.com (512) 382-0366

iServe iserverealestate.com (858) 486-4213

Noble Capital noblecapital.com (512) 492-3818

Service Link

svclnk.com (800) 777-8759

Geraci LLP geracilawfirm.com (949) 379-2600

Products & Services

» Foreclosures

» Real Estate

» Corporate

» Securities

» Litigation

» Banking & Finance

» Bankruptcy

» Consulting

» Asset Protection

Cohn & Dussi, LLC cohnanddussi.com (781) 494-0200

Hajjar Peters LLP legalstrategy.com (512) 637-4956

Hartmann Doherty Rosa Berman Bulbulia LLC hdrbb.com (917) 902-9617

Law Office of Marc Weitz weitzlegal.com (323) 600-4805

Nemovi Law Group APC nemovilawgroup.com (760) 585-7077

Private Lender Law/LaRocca Hornik Rosen & Greenberg privatelenderlaw.com (212) 536-3529

Scheer Law Group, LLP scheerlawgroup.com (949) 263-8757

Syndication Attorneys, PLLC SyndicationAttorneys.com (904) 504-4055

Western Alliance Bank www.westernalliancebank.com (602) 952-5462

Products &

Law Offices of Lawrence Andelsman PC andelsmanlaw.com (516) 625-9200

Products & Services

» Real Estate Transactions

Activist Legal activistlegal.com (202) 869-0804

Private Lending Meets Innovation

In a trailblazing entrepreneurial journey, a former investment banking analyst channeled his expertise into a groundbreaking venture with the goal of transforming the private lending landscape with innovative technology that empowers lenders.

SHAYE WALI, BASELINE

In 2014, I was at a career crossroads.

My first job as an analyst at Morgan Stanley after graduating from Tulane was interesting, but I couldn’t shake the feeling there was something more purposeful out there for me.

Around that time, firms like Blackstone and Tricon Capital were making waves in the real estate world by acquiring singlefamily rental homes—and I noticed. I had a cursory interest in real estate; starting a company in the space seemed compelling.

My brother was making his own transition into real estate, buying distressed singlefamily homes. Watching him launch his business provided a tangible example of what was possible, and I began to think real estate might be the right path for me too. After some research, I decided to dive in.

Soon after making the leap, I discovered private lending. Unlike the large-scale institutional investments I was familiar with, private lending offered a unique

intersection of real estate and finance that allowed me to apply my strengths in asset analysis and capital raising. It seemed like a perfect fit. I took the plunge again and launched my private lending business. I grew quickly, learned from my investments, and built connections in a way I never could in my old corporate job.

As my business scaled, I noticed technology was becoming a game-changer. Some newer private lending companies had proprietary technology that made their processes faster, more efficient, and scalable. These companies were pushing the envelope, and I realized that local lenders like me might fall behind if we didn’t adapt. I wanted my business to keep up, so I decided to build my own technology.

My vision for this system was clear: It needed to provide an exceptional experience for my customers. I wanted a platform that would allow me to focus on the bigger picture while maintaining a high

level of accuracy and professionalism. The system I developed allowed me to build trust with my customers and signal that I was running a professional operation, setting me apart from other private lenders. I developed a reputation for reliability and professionalism.

Eventually I noticed other private lenders struggling with the same challenges. Many were still relying on outdated methods and processes that hindered their growth and limited their ability to scale. This realization sparked a new idea: If my technology could help my business operate more effectively, it could do the same for others. I decided to offer the technology to other lenders. That’s how Baseline began.

Now my goal is to contribute to the growth and modernization of the entire private lending industry by providing the tools that enable other lenders to operate more efficiently, scale their businesses, and deliver exceptional service.

NOV. 10-11 2025 | LAS

VEGAS

2 DAYS 50+ SPEAKERS 70+ VENDORS 800+ ATTENDEES

Join us for the 16 year as we bring together owneroperators, executives, and decision-makers for the industry’s premier education and networking conference.

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Networking Reception | After Party