You’re Lending With A Handicap: Private Lending Data is Still in the Dark Ages

Insights» Technology, Upcoming Trends & Changes

November 1, 2020by Kat Hungerford, AAPL

Read the full November edition of Originate Report here.

Private lending has become more tech-savvy than ever, with numerous software options to market, originate, and service loans. These platforms enable lenders to transact loans faster and more efficiently while providing internal metrics that allow businesses to know exactly where a deal falls within their guidelines throughout the life of the loan.

All good things, and a huge leap forward from lenders’ capabilities even a decade ago. But where conventional mortgage companies have private lenders beat – and what causes lenders to continue to leave money on the table on Every. Single. Deal. – is industry data.

Even the most dialed-in, data-hungry private lending giants can still only guesstimate their true market share. And loan terms are primarily cobbled together from internal metrics, putting eyeballs on competitors’ published rates, and piecing out indirect data from REI and housing market research. Doing it right is time-consuming and – when purchasing data rather than relying on incomplete or secondhand accounts – expensive.

In short, unlike every other financial field, there is no industry-specific data. How many loans are originated? Unknown. What is the total loan volume? Unknown. What types of loans earn what portion of the market? Unknown. Average interest rate? Fees? Terms? Unknown. Unknown. Unknown.

We do not know our industry’s foreclosure or delinquency rates. We have no true idea of the supply or demand. And because we do not even know the broad, national numbers, we have not a statistically relevant clue of what’s happening regionally, or locally.

Comparatively speaking, private lending is still very much in the dark ages, even though the industry has grown (again, entirely guesstimated) into the billions.

While lenders have prospered in the past decade, filling a need as more stringent government regulation and banks’ own risk tolerance limited their ability to finance real estate investment activities, this prosperity has occurred despite a severe lack of data. Armed with reliable information based on hard data, the industry would arguably be far more advanced than it is today.

The case for better data

So what, specifically, are private lenders missing out on?

Capital Market Confidence: As many private lenders learned the hard way during the pandemic, Wall Street money lasts only as long as Wall Street confidence. In other words, it’s fickle. It can also hamstring a lender when everything they know about a deal says it’s solid, but it doesn’t fit into a capital investor’s buy box. As an industry, private lenders’ ability to pony up the data on the true risk of different kinds of deals brings with it the possibility of more money and expanded parameters. And as historical industry data builds and its stability is better understood, the capital market’s ability to tolerate vagaries increases in tandem.

Individual Investor Confidence: Lenders hoping to sell loans outside the capital markets will also find the same premises hold true on the individual investor level. While investors build confidence based on a lender’s personal track record and their own risk tolerance, being able to educate an investor about the industry and how the lender’s terms and deals fit into it will do much to sow confidence.

Borrower Confidence: Wow, data and confidence really just … go hand in hand, huh? At the American Association of Private Lenders (AAPL), we get daily calls and emails asking if a lender’s terms sound fishy. Yes, much of the time that’s because it’s a scam (a whole other story), but when the lender is legitimate, it’s also a hard question to answer. What is out of the norm? Why should they believe you that these terms are normal for the variables involved? Being able to back up your terms with external data increases a borrower’s trust in you – and the industry.

Small Lenders Fighting for a Piece of the Pie: While larger lenders may have the bandwidth, cash, and internal data to collect and extrapolate the available data to make informed decisions, small lenders are truly left in the cold. Knowing where you fit in the market and being able to compare your underwriting guidelines, terms, and foreclosure rates against a benchmark can tell you if you’re falling behind or ahead of the pack. Your gut feeling that things are going ok could become a certainty – if you had access to the information.

Decision-Making Gets Easier: The days of 10% and 2 points as standard loan terms are gone. At least, they should be. Private lender’s ability to react to changes in the market is only as good as their knowledge of that market. Regular, industry-specific data means better, faster decision-making and underwriting, reactions to adverse developments (both internal and external), and generally more money with less risk. Guesstimating what’s happening is what tied your stomach in knots during the pandemic. Data would have helped.

Keeping Government Out of Your Business: As an association, we talk to legislators to advocate on behalf of the industry. The most common reaction we get is surprise: “Wait … private lenders help affordable housing?” “There are that many small business private lenders?” “Those are the kinds of projects that private lenders are funding?” Regardless of what side of the aisle policymakers fall on, they start to lean in when they learn what our industry does and how big it has grown to be (which, thinking about how partisan U.S. politics has gotten, is kind of a big deal).

The downside is that what we have to say is backed up by … nothing resembling hard data. Trying to convince legislators that their plan is going to hurt our industry, causing loss of revenue to efforts or constituents they care about, is just not all that believable when there’s an asterisk beside everything we tell them.

Don’t leave me hanging without a solution!

No matter how you shake it, private lenders on both an individual and industry level could be scaling faster and smarter if they had a benchmark from which to measure. So, what’s the solution?

Today, the best a private lender can hope for is paid REI data or market report summaries, competitor research, and/or to pay the few companies that run private lender product surveys (loanbidz.com).

Tomorrow is a little brighter. As the industry has grown, so too has research-firm interest in the private lending market. While to date we know of no such outlet that is doing this research, AAPL receives calls inquiring about available data at a far greater rate than even two years ago.

Finally, it would be remiss not to mention AAPL’s own newly launched quarterly survey. Although data is not yet available (the first period surveyed will be Q4 2020), all respondents will receive aggregated and anonymized results. Learn more about the survey and sign up to respond at aaplonline.com/survey.

Kat Hungerford is executive editor of Private Lender magazine and project development manager at the American Association of Private Lenders (AAPL). Hungerford also acts as secretary for the association’s Government Relations Committee, which serves as AAPL’s advocacy arm in state and federal legislatures.

AAPL is the first and largest national organization representing the private real estate and peer-to-peer lending industry. Its three core principles – Ethics, Advocacy, and Education – provide a foundation for a new generation of real estate capital. The association serves as a catalyst for industry growth by fostering awareness, promoting best practices, and encouraging a standardized code of ethics for its membership. More information can be found at aaplonline.com. CONTACT: kat@aaplonline.com