Mortgage Finance
Brokers should always be busy ... it’s just who they are talking to that may help
indicate the real state of the credit cycle in our economy that no statistic can show ... here’s
why ... it’s the “back story”.
When traditional lenders don’t listen, private lenders will. So, when
the quality of transactions being offered in the private market is consistently
at its present level, it suggests that institutional financiers may not be
answering their phones.
It also suggests that some high net worth individuals familiar with the
market believe that on balance, analysed risk return currently has an inverse
relationship in favour of direct lending rather than other forms of indirect
institutional cash investments ... in other words, alternative interest rate
returns are too low in proportion to acceptable risk in direct lending. Anyway,
we are not here to talk about that.
Then what are we here to talk about? To explain. The private mortgage
lending mortgage market may be at many levels, the “oldest profession”,
literally rather than figuratively speaking. In the private market there is
always a “back story” to any transaction offered. Typically it appears that
after saying “G’day”, the Mortgage Finance Broker (and any sales oriented
person in any sales oriented industry) has about thirty seconds to sell the back
story. It’s a bit like being a Lloyds Insurance Broker as I understand it,
where you go from Underwriter desk to Underwriter desk until someone is
prepared to listen.
So, the less complicated the back story, generally speaking, those of us
with the concentration span of a flea, are more likely to listen. More traditional institutional lenders tend to
shy away from these back stories, and Mortgage Finance Brokers often have much
more luck placing such deals in the alternative lender universe – the private
market, even though pricing is more expensive. The other factor may be that by
utilising the private space for a bridging period, it may be possible to
transition the back story into tidy conformity for the institutional system. That
is a very rational approach, whatever the state of the cycle.
Whatever the reason, it is very noticeable that the back stories are a
lot less complex at the moment than is usually the case. There are excellent
private mortgage opportunities out there, meaning that the more conservative
end of that market is cherry picking. So, in a sense, many borrowers have been
shunted down the line – once your thirty seconds are up, you may have to move
into very “hard” finance, where the opportunity cost of not doing a deal has to
be weighed carefully against the cost of actually doing the deal. There are
some very expensive, yet seemingly popular loan packages available.
At some point in time, the back stories coming my way are going to get
longer. Does that mean we won’t do deals? No. It just means that the nature of
the market and consequently the credit cycle is changing. Banks will start to
answer their phones. Credit will loosen up. There won’t be enough deals to feed
all of the institutions, which will then provide ever more competitive product,
and the race is on again ... as the kids say in the back seat; “Are we there
yet?”
Well, no. Will we be there soon? Not likely. Sophisticated investors are
still looking for assessed yields proportionate to risk, and while the back
stories remain relatively short, the “oldest profession” will remain buoyant. When rational real estate lending returns to
the institutional market, the “Private” back stories will get longer, but it will
still remain the “oldest profession”.
Have to go now. My phone is ringing and I have a spare thirty seconds.
