7 minute read
Opinion: It’s 2022, can technology replace the human touch?
Navigating the complex lending market!
Know where your money is coming from
The real estate market is changing rapidly so is every facet of this diverse market. The l; ending market has seen gradual changes over time in terms of policy, criteria, affordability, and accessibility to the mortgage market. The pandemic also played a huge role in expediating several changes across a range of borrowing needs, personal finances, employment statuses, and income-generating opportunities. Factoring all these issues, you find that the lending landscape has become extremely complex and the mortgage market even more so.
In retrospect, the pandemic has changed the normal course of our lives over the last two years, and the lending landscape was not spared. In fact, during this period, many investors familiarized themselves with many concepts of the lending market- loan processes and much- more than they ever did before the pandemic. Ever since the new reality, banks seem to be pushing their goalposts more frequently in response to the recent actions by the FED, and even before the FED stepped in, the market was already somewhat unique- due to the nearhistoric low rates. This increased demand for loans, and the banks had to adjust appropriately; now that we are experiencing increased rates, lenders are forced to cope with this new reality.
In the spring season of 2020, some lenders felt that the market was headed to the rocky ground, so most did ‘abandon ship,’ leaving active investors in a bind and closing their doors. Some even stopped lending just to understand the complexities of the market. Two years down the road, the market is still experiencing some dynamic changes, which is making many investors cautious, not to experience what they experienced in 2020. While we do not expect the rates to increase, many investors have taken their eyes off the real question: the possibility of
closing on a loan.
One thing that has changed quite rapidly is the underwriting criteria. Many lenders are not making many or any exceptions to the lending guidelines and lowering the loan to value midstream in the escrow process. Before the pandemic hit, capital wasn’t the main issue for many investors; the concerning part was getting through the underwriting process and getting approved to close. In fact, many investors were uninterested in what happened in the lending process as long as the money made it to the closing tables. This was the case for a while until lenders decided to suddenly turn off the spigot to cheap capital. This has since seen many investors struggle to save deals in any way, shape or form. In our last month’s issue (November Issue of the Power Is Now Magazine), we featured an article where we sought to answer the question of why many buyers and investors are preferring riskier loans, which is a trend we’ve seen pick momentum mostly in the second half of the year. Investors today are trying their luck with private lenders with their own capital to lend to the forefront in the hunt for leverage.
What you need to understand is that private lenders have more control. Many have strings attached to the capital they lend out, which are pulled by forces outside the lender’s control.
Large institutional lenders usually get their money from (oftentimes) lines of credit from banks or sell their loans on the secondary market. In both cases, an entity usually sets the rules of engagement, clearly dictating to them what they lend and the prices of the loans. These private lenders require a line of credit to stay open or the capital markets to continue purchasing loans. Hence, they have enough liquidity to keep new loans coming into the pipeline.
So what does this mean for the buyer? It means that at any one time, the rates and the terms you get may suddenly change, or the funding, in general, may be stopped at a moment’s notice. The only way that you can protect yourself from this chaos is by start asking questions about how the lender acquires their capital and diversifying lending sources based on where they get their capital.
Devising creative and innovative solutions to deal with the affordability crisis in the country
It’s an undeniable fact that many people today crave homes, which can be shown by looking at the current trends in the real estate market and the frenzy we witnessed in the last two years. Buying a place to call home and making memories will forever be a significant milestone in one’s life. You could own a home, but you would like to make a few upgrades to accommodate a larger family. Whatever your plans, you probably have noticed that securing property has become a big challenge.
Indeed, Americans are struggling not just to make a living but to find somewhere to live. The market has high demand, but very few houses are being constructed to meet that demand. In addition, the market cannot supply affordable housing across the country, which has left many buyers in limbo.
Numerous factors have contributed to this persistent housing shortage, exacerbating the country’s housing crisis. With every challenge comes to an opportunity for creativity and innovation, and the current market is forcing tech companies, entrepreneurs, and developers to think outside the box. Looking at the west coast, for instance, Tech companies are largely responsible for the high cost of properties as entire communities have become so gentrified that the average person is forced to look elsewhere for affordable properties.
Another factor we must consider is that the FED kept interest rates so low, which pulled in many buyers, ultimately pushing the prices higher. These two forces, among others, created a ‘crazy’ imbalance in the market, leading to the situation we are grappling with today- the affordability crisis.
Still on the west coast, because it seems California is the epicenter of the affordability crisis in the country, a report by Mckinsey concluded that the state needed to add about 3.5 million more homes by 2025, which means each year the state must add 350,000 units for the next seven years. But there are unique challenges that will make this
reality a nightmare. First, the current zoning laws do not support such a move, and second, there is land scarcity in the urban areas. These are some of the challenges that make achieving 350,000 units a year an insurmountable task. To move forward, California and the nation must look towards new innovative ideas.
REMOVING ALL BARRIERS AT THE LOCAL, STATE, AND FEDERAL LEVEL
This will allow the country at large to add more homes and apartments. To progress on this front, the local, state, and national governments must remove the barriers, especially regulatory barriers to building
homes. On that front, there are several policies being looked at in the private and public sectors to achieve better regulatory policies for housing affordability.
A case to mention is Symbium, a tech company in San Francisco that has developed a computational law platform that mechanizes the rules and regulations of planning code to assist all stakeholders in quickly establishing an Accessory Dwelling Unit (ADU) is allowed on a property. This is important and extremely helpful; it helps the industry automate the legal analysis for the planning code, and anyone can access what is possible in certain jurisdictions or on a given parcel which cuts the processing time from months to immediate response.
The computational capacity delivered through this platform helps break the administrative and regulatory barriers and demonstrates the potential for other processing innovations related to planning and zoning.
Other states like Minneapolis and Oregon have eliminated single-family zoning by breaking down the regulatory barriers that initially made this a challenge. Although 75 percent of the housing in Minneapolis was previously zoned single-family, now up to three units are allowed on any residential plot of land throughout the entire city.
“By rezoning lots that currently accommodate only one single-family house to allow duplexes and triplexes,” says Andrea Brennan, Minneapolis’s Housing Policy and Development Director, “Minneapolis effectively triples the housing capacity of some neighborhoods.”
In June 2019, the State of Oregon passed HB2001 with bipartisan support- legislation that effectively ended single-family zoning in the state. In fact, it gave power to the state to determine the legal authority to establish parameters for zoning at the local level. So far, the state of Oregon has made a bold move to assert that authority to encourage the local jurisdictions to allow more units to be built in their state.
