The association releases first private lending benchmark survey results.

Although private lenders originate billions in loans annually, there is a lack of quantifiable data to support this aggressively expanding industry. From the outside, it makes private lending look smaller and less instrumental to the loan origination industry than it is. Internally, it means originators, fund managers, note buyers, brokers, and service providers operate in an analytical dark age when it comes to trends specific to private lending.

Due to the primarily business-purpose nature of their loans, private lenders are not subject to many of the consumer loan reporting requirements regulatory agencies require banks and other institutional lenders to complete.

This absence of many reporting requirements means that specific market research data is almost nonexistent.

Until now.

In early 2021, the American Association of Private Lenders (AAPL) invited private lenders across the nation to participate in the industry’s first benchmark data survey in exchange for complimentary access to the results report. The quarterly survey includes fill-in-the-blank numerical matrixes that poll portfolio volume, origination metrics, foreclosure and delinquency rates, loan terms, loan type, collateral location, and collateral type. It also includes scale opinion questions that gauge participants’ market confidence. The same questions are asked each quarter.

AAPL released its first Market Insight Report in July—two months after the closure of the second survey polling period. The report analyzed the inaugural two surveys that polled metrics for the Q4 2020 and Q1 2021 periods. As the association develops processes to analyze the data more quickly, future reports will be released closer to survey closure.

This article details a few insights from the inaugural 11-page report. To participate in the survey and receive full future reports, sign up at aaplonline.com/survey.

Results in Context

As we examine the first two periods polled, we must make special note of the context in which private lending companies completed the inaugural Q4 2020 and Q1 2021 surveys. These and the surrounding quarters marked a period of socioeconomic upheaval across the globe due to the coronavirus pandemic. While any information is helpful at this juncture, we caution level of inference until there is more supporting data.

A confluence of factors has led to the lowest housing inventory seen in decades. The inventory issue has in turn disrupted the housing market, with ripple effects now being felt more keenly among real estate investors and private lenders. These factors caused fewer profitable deals for real estate investors, which meant less demand for private lender loans. They also provide context for why we might be seeing surges from Q4 2020 to Q1 2021 in certain product lines, asset classes, and assessments of loan availability, even while we lack earlier comparative data.

Rising inflation, low unemployment, increasing wages, and the growth of the U.S. economy has historically resulted in rising home prices and lower inventory. Pre-pandemic, that trend was very much in effect, and COVID-19 pressures exacerbated the situation further.

The pandemic caused significant demographic shifts as both homeowners and renters left metros, fewer people moved into cities, and many people near retirement age advanced those plans early, according to the Wall Street Journal in April. This led to increased demand in outlying areas that priced out real estate investors because homebuyers purchased properties normally in investors’ purview.

Meanwhile, homeowners in suburbs and rural areas were cautious about listing their homes due to uncertainties surrounding job security, how the pandemic would play out, and whether they would be able to find a subsequent home to move into. According to Money.com in April, this caution meant normal home turnover stalled, even as demand was high.

Due to the shelter-in-place orders, many homeowners started home improvement projects, according to the Joint Center for Housing Studies at Harvard. While the U.S. economy shrank 3.5%, home improvements and repairs grew more than 3%—and that trend is increasing in 2021. This may keep many of these homeowners in their homes longer, especially as more of the projects were DIY, which tends to create more attachment.

The federal foreclosure moratorium and availability of mortgage forbearance meant that the normal turnover of REO, short sale, and distressed homes was largely not present, as reported by the Federal Reserve in March. While some expect these homes will surge onto the market in the aftermath of the moratorium’s sunset, we urge caution: Continued political and stimulus action may mitigate some of this turnover.

Portfolio Volume: A Peek at Secondary Market Activity & Signs of Potential Market Expansion

Survey responses gave us an unexpected view into the involvement of the secondary markets in the private lending industry. Nearly half of participating companies retained at least some notes in their portfolios. It will be interesting to track this trend to see how post-pandemic market activity influences lenders’ retention of notes. Will we see more lenders hold notes to diversify in the aftermath of the capital markets freezing deal flow in the early pandemic?

Interestingly, the total number of funded loans in companies’ portfolios increased by an average of 23% in Q1 2021 and accounted for a corresponding 124% increase in total portfolio dollar volume. We will watch future survey responses to see whether this correlates positively with the note retention analysis above. It is otherwise too soon to tell whether this increase is a temporary uptick as private lenders recover portfolio volume post-pandemic or a harbinger of market expansion.

Regional Performance: Origination Volume

The Regional Performance section of the report also included analysis on company loan origination numbers, average loan amounts, total loans, and delinquency/foreclosure rates, which are not included in this article.

There is little correlation between regions in terms of origination volume, although expectedly, total origination volume tracks positively with average loan amount. All regions reported an overall increase in average origination volume over three months, except for the West.

• The West: The West decreased 5% in average origination volume per company.
• The Northeast: This region saw the greatest change, jumping 142%.
• The South: Earning the title of “most stable,” the South jumped only 16%.
• The Midwest: The flyover states had the smallest origination volume, but came in second place on change, jumping 94%.

Product Performance

This portion of the report also included deeper analysis into origination volume, number of companies extending the product type, and average loan term for the different products polled.

Average interest rates and percentage of originations held mostly steady—but all fell at least slightly—among the respective product lines, with most of the change traced back to different responding companies from quarter to quarter.

Rates fell across all products polled. Although more data from subsequent surveys is needed, here is our early inference as to why we might be seeing this:

• It is an indicator that private lenders in the market continue to mature from the post-recession boom and can more accurately and quickly adapt to market changes.
• The “pandemic premium” is slowly ending.
• With less demand from real estate investors struggling to find deals, lenders seek to underprice the competition.
• The exodus of less experienced real estate investors from the market has left the more experienced investors who are able to earn their way to lower rates.

Collateral Performance

This section of the report also included deeper analysis of metrics polled for each collateral class, including number of companies originating loans secured by each property type and average days to close.

The percentage of origination volume fell in Q1 2021 across all asset classes except commercial, which more than doubled. On the other hand, more companies originated loans secured by each property type. The explanation is a good thing because companies are diversifying their loan offerings, responding to borrower needs and housing inventory issues.

Lenders’ responses on average days to close correlates with the long-held understanding that although the industry has grown and matured, it is still compartmentalized from one business to the next. Average days from application to close not only varied among companies within each property type, but it also wasn’t stable from quarter to quarter—even among companies that responded both quarters. Although this may be explained by lenders’ flexibility and the complexity of different deals, it also bears watching to see if this is standard for the industry, or a calling card for pandemic-related delays in closing processes.

Closing Thoughts

The results analysis of the inaugural Q4 2020 and Q1 2021 surveys provide insight into one of the most unique periods in recent memory: the impacts of the pandemic on the private lending industry among preexisting stressors of low housing inventory, rising construction costs, and external socioeconomic factors. These contributing factors have led to disruptions in offered product lines, diversification of asset classes, and changes to foreclosure rates. We are curious to see if some of these trend indicators herald market expansion, with many “this bears watching” notations.