One good reason to study politics/watch the news is to be able to make an educated guess as to how to grow and protect your nest egg. Of course, one could argue that it is almost impossible to predict the economy so you might as well flip a coin. It’s hardly worth the debate, but one constant is that the actions of government have a major effect and, of course, it is not always negative. It’s pretty clear that the impact of taxes and government requirements are the major concern.
What does this have to do with Trust Deeds? A lot!!
• You have all heard of the new Dodd Frank regulations and the implementation of the Consumer Financial Protection Bureau (CFPB). The CFPB is another regulator for all financial businesses to contend with. Changing the rules is one thing, but adding a regulator is simply duplicative and leads to increased costs for financial institutions. A case in point is a local bank with a perfect lending record since its inception in 2007 suffered its 1st quarterly loss because it had to significantly beef up its compliance department. The effects of this will be that the bank will shun more borrowers – just because they are not squeaky clean – to please the regulators and these near perfect borrowers will seek alternative sources of funding. That’s us – and the many Hedge Funds that are coming to our marketplace. Rates for private money will go down – at least relative to Prime. So better borrowers for us, but at more competitive rates.
• The owner occupied single family loan business has been regulated so severely that it may head for the dinosaur burial grounds. Most Private Money Lenders are currently avoiding them. It is very dangerous to make them or to even service them, especially in California. Some of the big banks have stopped using correspondent sources for the loans in order to better control their underwriting and avoid future lawsuits. Counties and States have brought ridiculous suits against the big banks and have received substantial settlements or judgments. There are a few Private Money lenders that have elected to specialize in this business because there is no competition. Most have shunned it. The result is that many, many great loans will not be made by Private Money Lenders or banks. No more “…steel worker falls off girder, can’t work for 1 year, Private Money lender makes him bridge loan and saves his home…” stories. That guy will now lose his house. Now the Real Estate guy will buy that house at the foreclosure (which will probably take two years to complete due to the Dodd Frank laws) and make
the money. So, no more loans for the hurt, divorced, unemployed, or elderly homeowners; just foreclosure and the profit goes to the real estate investor.
• The upside to all this regulation could be that alternative lending gets legitimized. It is stunning to me that the Private Money Lending arena is still very much unknown. It is not stunning that we still have a bad rap – the normal business model of the broker gets paid up front and good luck to Mr. or Ms. Investor, is outmoded. If the Private Money community would adopt more policies from the banking arena as far as controls and protection of Investor money, then everyone would be much better off. If the general public had as much faith in private money as they do a McDonald’s Big Mac, then our industry would draw a significant amount of money from CD’s and make common sense loans to good people. Right now, the small “in the know” private money investors are “used to” a 10% short term market. There could be a much more stable, legitimate and sizable 6% private market in this 1% CD world.