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National vs. Local Lenders and the Promise of Fintech

Insights» Fintech / Newest Loan Programs

January 2, 2018by Originate Report Team

National hard money lenders are making it hard for local lenders to compete. Due to their institutional backing and easy access to capital, they are equipped with highly competitive rates. As they grow, they will become more difficult for private lenders. The solution is to galvanize and unify local lenders with tools that make them more efficient and nimble than national players.

When a national lender steps out of their geographic market or product type, they are open to heightened risk. Today, as national lenders aggressively expand, some of their lending choices are reminiscent of trends that brought about the recession of 2008. Looking closely at the market, we can see the warning signs that must be addressed.

Local is Better

The recent trend of national lenders is entering markets that have traditionally been serviced by local private lenders. This shift is causing systemic risks. First, national lenders lack local market knowledge. Data is great, but it isn’t enough to fully evaluate these submarkets. You need “boots on the ground” professionals who know the historical trends intimately as well as which borrowers to work with and which ones to avoid. Since most of these national lenders are headquartered in major metropolitan cities such as Los Angeles, San Francisco and New York, the lenders do not have a nuanced knowledge of every submarket in which they lend.

Next, when a loan goes into default, it’s much harder for a national lender without local relationships to handle a workout. Local lenders have relationships with local construction crews and other operators that can help in these situations.

The ability to navigate workouts at the local level is a key benefit of partnering or working with local lenders. When national lenders enter a new market, they don’t have existing borrower relationships, so to attract customers (which can be very expensive), they undercut pricing and increase advance rates. This adds risk to the entire system because it doesn’t just affect their deals, it becomes the new market norm in that area.

The lack of relationships with borrowers or the community at large also removes social pressure for a borrower to perform. When borrowers work with lenders within their communities instead of a large impersonal entity, the local lenders strive to meet additional social and reputational expectations.

Lastly, and in some ways most concerning, national lenders are usually backed by fickle capital from hedge funds and are prone to abandon the space when the market turns, when LIBOR increases, or another more enticing opportunity presents itself.

The United States witnessed the lending industry transition from a local context to a national one with the supersizing of banks, which happened at great cost to most Americans. Lending left its community focused roots, becoming impersonal and detached from the nuances and needs of neighborhoods. The private lending space is one of the few truly local lending paradigms left, and its work continues to transform communities for the better, one house at a time. Local lending should be supported and protected as much as possible. For these and many other reasons, local lending helps create a better and less risky system for everyone.

How Technology Can Help

With the rise of financial technology, local lenders now have access to the capital and technology they need  to compete against national lenders. Platforms such as PeerStreet offer to connect lenders with new capital sources and data and analytic tools that empower local lenders to strengthen and streamline their work. Fintech resources can take the mindshare of previously time-consuming tasks to help them be completed not only faster, but better and more efficiently. By offering tools for more back-end tasks, fintech platforms allow lenders to focus on what they do best: finding great borrowers and writing high quality loans. As more services proliferate to support local lenders, the goal is to expand the type of loans local lenders can offer so that lending can increasingly return to its community-based roots, without sacrificing quality or options.