Ahead of forecasted Fed rate reductions, are private lenders jumping the gun with market shifts and rate changes?

Lighting Docs is a software private lenders use to generate their short-term loans (bridge, fix-and-flip, construction, etc.) and rental loans (DSCR) loan documents.  During the last six years, Lightning Docs has been used for more than 73,000 loans totaling over $38 billion in loan origination, including more than half the top 50 private lenders across the country.  In August 2024, there were a total of 3,736 loan transactions totaling almost 2 billion in origination.  All the transactions are done by private lenders, providing unique transparency for an otherwise homogenous group.

Bridge Loan Volume On The Rise

Rather than segmenting according to loan type (i.e., fix-and-flip, non-construction bridge, residential transition loans, etc.), we specifically track any loans with a duration of fewer than 36 months and classify them as “bridge loans.”

A question many lenders want to benchmark and understand is their year-over-year and month-over-month loan volumes. For these purposes, we tracked the bridge loan volume of a cohort of 123 unique users. When comparing bridge loan volumes from Jan. 1-Aug. 31, 2023, to the same period during 2024, the volume of short-term loans increased by a significant 30% across those 123 users (see Fig. 1). The increase in volumes represents a real growth in the number of transactions, not simply an expanded share of the market, remfor a remarkably better year so far.

A Slight Decrease In Bridge Loan Interest Rates Nationally

Over the year, average bridge loan interest rates dipped slightly, from 11.53% in January 2024 to 11.12% in August 2024 (see Fig. 2). Loan amounts have generally been consistent, ranging from around $550,000 to $650,000. (When determining average loan amounts, we intentionally exclude loan amounts below $50,000 and above $5 million.)

When the data is segmented out by individual interest rates, 80% of short-term loans fall within 10.0% to 12.99%, based on an analysis of 2,092 loans that were generated in August. About a tenth of the loans were under 10% and nearly an equal proportion were over 12.99% (see Fig. 3).

Geographic Trends

In terms of loan activity, California, Florida, and Texas continue to hold the top three spots, in the same order, from 2023 to 2024, with some minor shifs in the other top 10 states (see Fig. 4).

When looking for deeper geographic trends, we see that Los Angeles and San Diego counties are in frst and second place, respectively, and Orange County is fourth among the top 10 most active. California dominates with four counties among the most active, outshining Texas, which has only one county (Dallas) that makes the top 10 nationally (see Fig. 5).

Significant Local Interest Rate Volatility

It is no surprise that in an industry that built its reputation as “local lenders servicing local real estate investors,” there can be significant volatility and differentiation of interest rates at the local market level. Although California is often believed to be a lower interest rate environment than states such as Texas and California, looking at the monthly data busts that myth. California not only tends to have higher average interest rates but also generally commands higher loan amounts due to increased property prices providing lenders with great opportunities (see. Fig. 6).

DSCR National Loan Performance

Many private lenders now also offer Debt Service Coverage Ratio (DSCR) loans. Unlike bridge loans, DSCR loans have a duration of 30 years and are almost exclusively sold to insurance companies and loan securitization parties; the primary value to the originator is receiving a gain on the sale of the loan.

We tracked 31 unique users in 2023 compared to 2024 (see Fig. 7). Their volumes increased 34%, comparing their volumes from Jan. 1-Aug. 31, 2023 and 2024, which was slightly beter than bridge loan volume growth. The trend lines for interest rates followed a similar patern to those for bridge loans: The average interest rate has slid from 8.30% to 7.93% from this past January to June. However, each month afer has seen drops of almost 30 basis points in July and August, with average rates in August at 7.38%, almost a full 100 basis points less than January of this year. Average loan amounts have varied between around $250,000 to $290,000.

Until recently, unlike bridge loans (which have significant local rate volatility), DSCR loans and their secondary market functionality tended to be more homogenous in their average interest rate

oferings, regardless of geography. However, with the significant shift in DSCR rates in July and August 2024, there is much more rate volatility than previously seen. In August 2024, 76% of loans were between 7.0%-8.99%, but a significant 23% of loans are now 6.99% or below (see Fig. 8).

There is significant opportunity in DSCR lending, which is demonstrated by loan volume increases as well as the interest rate movement in the right direction, which will translate into refinancing activity.

State And Local DSCR Trends

Through August 2024, Pennsylvania has held on to the top spot for rental loan activity. Florida has jumped to second from third, with Ohio in third from ffh, as compared California, Georgia, and New York are all in the top 10 states (see Fig. 9). None of them were in 2023, demonstrating that when DSCR rates move, the geographies where deals can pencil do too.

As you can imagine, activity at the county level is also highly volatile for DSCR lending because the interest rate environment moves more rapidly. Some notable movement is St Louis, Missouri, moving up 22 spots from 2023. Cuyahoga, Ohio, moved up four spots, while Baltimore, Maryland, moved down fve spots (see Fig. 10).

Key Takeaways

With the Fed indicating they will lower interest rates, the market has already chosen to react, mainly through the reduction in the 10-year treasury rate, which is used as a benchmark for many forms of fnancing. This pass-through has already started to trickle directly into the DSCR rates resulting in a signifcant jump in DSCR loan production. Meanwhile, understanding the dynamic nature of their local markets is imperative for bridge lenders. Originators will simultaneously not want to “leave money on the table” by making loans below 11% in most major metros, but in certain circumstances, they could be geting priced out by the competition.