NPLA Meeting Recap: State of Private Lending

Recap and Insights provided by Zach Wallin, Senior Director of Legal Operations at GoDocs

Fraud and the Avoidance of Fraud Member Discussion

Ezra Dweck, President of IceCap Group, and Eric Abramovich, co-founder of Roc Capital, participated in the second half of the panel discussion on fraud and the avoidance of fraud. The following is a summary of the discussion:

Ezra Dweck, President of IceCap Group, and Eric Abramovich, co-founder of Roc Capital, participated in the second half of the panel discussion on fraud and the avoidance of fraud. The following is a summary of the discussion: 

Jon Hornik: Fraud is the number one concern of every company we represent and everyone we talk to. Specifically, how fraud has increased in our space and how it’s taking more effort and energy to prevent fraud. Previously, Ezra discussed the due diligence they were doing and how deep you go into both the former owners of the property, and we want to go a little further with you on that topic. When you get a borrower name that you’ve not heard good things about, do you turn them away, or do you double up on your due diligence over at IceCap? 

IceCap: If I have a borrower who I think is a problem, generally, we will not take the time to dig in too far. We will move away from them unless we believe they will not be a big problem. Then, we will dig in further and do our due diligence. If we get a borrower that moves to us from RCN and we are offering the same deal to them, and they are not a great borrower, we will move farther away from them because we know RCN just rejected their deal, and the deal may have more hair than we are used to. We’re not trying to make bad borrowers look good. We are trying to find the one that looks good but is bad. 

Jon Hornik: Let’s go into standard due diligence before you make a loan, what are your flags in terms of fraud. What are you seeing and how deep of a look are you taking with respect to fraud? 

IceCap: We are going very deep. We are doing a lot of work on the property beyond what Title is going to do. We want to make sure that the property does not have its own issues, that this isn’t someone buying up shares of an heir of an estate, that there aren’t going to be environmental issues, that the sellers are not connected to the buyer, make sure the seller does not have some fraud issue that could come back to us at some point, so we’re doing a good deep dive on the actual property. Then we are looking at the borrower, looking everywhere else they’ve been transacting (pulling two reports on them: a TLO and a LexusNexus) and then we are doing our own deep dive as well. We are looking into their spouses, too, especially when there is a transfer from husband to wife. For example, when the wife is now on the Operating Agreement, it’s a refinance, and he is willing to sign the consent, and he went down to a 19% owner to avoid due diligence. 

Jon Hornik: We all are aware of the problem when the majority owner of the company doesn’t have an acceptable FICO score, or he doesn’t have the liquidity he needs, and they bring in the unicorn who will be the 90% owner who is only there to give the credit enhancement. How much of a deep dive do you do on that 90% owner? 

IceCap: For us, it is useless to have a guy with 780 credit but doesn’t own any real estate, and it’s not the person you’re speaking to. He’s not relevant, and you’re only going to end up trashing his credit, too. We are looking for the person who is actually running the deal. You want to have good quality paper at the end of the day and a healthy balance sheet. So, think about who you are going to call when the loan is late. If it’s not the guy with the 780 credit but the guy with the 610 credit, you are going to get the 610 credit response. So, we’re underwriting to the person who is doing the deal with us. 

Jon Hornik: Eric, what concerns you in the current marketplace with the kinds of fraud you’re seeing at Roc that you’re trying to catch and avoid? 

Roc Capital: Structuring around issues is a real thing, and our underwriters are highly attuned to that. If they are trying to put in a straw borrower or someone with higher credit to check the box, we look for things like that, but your system becomes less reliable. If I can meet the loan criteria and fit in the box, why are you even looking at the human element? Other issues we are seeing include obfuscating title history through entity-to-entity transfers. Unfortunately, the owners of entities are not publicly recorded, nor are the sales of entities recorded like deed transfers are, and that creates huge problems. Our underwriters are highly attuned to reading title reports as we need to thoroughly understand the history of every property. What is the story behind the property? 

We are also seeing a lot of document photoshopping, and we’ve developed tools to run the document through and see if it was photoshopped. Unfortunately, we’re in an environment where transaction volume is down on the consumer side for appraisers and title companies, so we’ve seen collusion between appraisers and title companies. On the appraiser side, we have created our own internal AMC with all sorts of rules, but most AMCs will allow Brokers to choose their own preferred appraisers, so we are trying to crank down and make sure we keep these things at a minimum. 

Jon Hornik: We’ve seen a ton of fraud come through title agencies, agents, and sub-agents who have a relationship with the borrower. Why do we continue to allow the borrower to choose Title and the appraiser? Why isn’t this chosen by the lender?  

Roc Capital: On the appraisal side, if your firm has sound valuation practices, you may not care as much where the appraisal is coming from because you’re not using it as the basis for valuation. You’re using your own internal metrics to determine the valuation of the property, and the appraisal is just a supporting document. It’s just a bad idea to have an appraisal come in through a friend of the broker. On the title company side, they are held to a higher standard, so it’s shocking to see that. Title is not something generally controlled by the lender. 

Jon Hornik: It’s something that can be controlled because of the golden rule: He with the gold, rules. Every lender can have a preferred list of title companies. In Florida anyone and their mother can write title. The further you get away from the national underwriter, the less license concern you have. These people do not care, they are in cahoots with the borrowers, and they disappear. It’s a very similar situation in Texas. If you’re not from Texas they don’t care. If they are in cahoots, you are going to get beat.  

Sam Kohn, National Equity Funding: The power of “no” is the golden rule. We will not let the broker choose the title and escrow company. We want to control the title, escrow, and appraiser if possible. We like to control everything, or we don’t do the deal. 

IceCap: It works better where you have magical money, and the competition is not as aggressive. It works better when they need you more than you need them, and you’re not just a commodity. We do have a do-not-use list for title companies, and we want to interact directly with one of the big five underwriters.  

NPLA: Something we discussed at the advisory council level that we are getting to roll out to all members: We will house lists from everyone who contributes, on an anonymous basis, of those individuals who have either committed bad acts or fraud on lenders, title companies as well as appraisers, so all NPLA members can check if who they are dealing with is someone they should be dealing with. Of note, there will be a form you fill out, and there must be a valid reason to be on the list, not just someone you’re mad at. It’s about time a fraudulent person who goes from one person to another to another gets stopped. This should raise the profile of the business.  

Jeff Fechter from HouseMax Funding made a very important point when he advised checking the CPL from the underwriter’s site for each deal that you do. They had an instance where they checked the CPL was legit and then continued to do deals. Months later, they assumed the CPL was still in compliance with that group, so now they look at each CPL on every single deal to make sure they are still working with that group.  

Jon Hornik: Scenario – The borrower and title company we’ve all dealt with did the first few deals, checked the CPL, and then stopped. Between deals 2 and 40, the agent was dismissed from the national underwriter, but the agent kept taking payments for premiums and closing the deals, and he ended up pocketing them and never bought title insurance on 38 deals. Jeff’s point is really important. For every single deal, you have to re-check the CPLs and confirm with the national underwriter that’s in effect because if you don’t, you are leaving yourself open to liability. 

Summary

This panel discussion highlighted the important topic of fraud and the avoidance of fraud. The NPLA plans to put this topic at the forefront and to be a resource for everyone moving forward. The hope is that collectively, we will be stronger than individually. The fact is that there is significant fraud in the marketplace we are all experiencing. Some additional methods being used to stay ahead of the fraudsters are pulling two reports on the borrowers, a TLO and a LexusNexus, looking into the spouses of borrowers, especially when there is a transfer between spouses, underwriting and doing due diligence on the person who is doing the deal and not the straw borrower put forward to provide good credit and check the box, reading title reports and understanding the history of every property, combatting document photoshopping with tools to detect this practice, controlling which escrow, title companies, and appraisers if possible are used instead of those provided by the broker, and re-checking the CPL on every single deal to confirm with the national underwriter that’s in effect that they are still working with that group. These tips, along with the collective NPLA list to identify fraudsters, will keep us all safer and impact the industry in a positive way.

The State of Private Lending

In the second half of this NPLA meeting, Glenn Hull, co-founder and CEO of SFR Analytics, a company that collects nationwide deed and mortgage data along with nationwide building permit and rental listing data, gave a report on the state of private lending. SFR Analytics works with a variety of private lenders, flippers, and single-family rental operators to provide valuable information on private lender market share and lender activity. SFR Analytics is an amazing product that publishes a lot of data and research at the CRL regarding private lending activity and other metrics.  

Overall Private Lending Market

Qualitatively, the private lending market is doing very well, with almost every lender they talk to being optimistic and gearing up for growth by hiring more loan officers. Most private lenders have been growing year-over-year. Hull reports that the biggest struggles they are seeing are with the largest flippers and single-family residence operators. At the very high end, the institutional investors, those who own more than a few hundred homes, are starting to shut down due to inventory issues and not being able to find the quantity of deals that pencil, but small to medium operators are still able to find attractive deals. There is not a huge amount of homeowner distress, and basically, no flippers are buying good deals off the MLS, so it is somewhat of a mystery as to how they are finding deals, but they are finding them somehow.

The majority of large private lenders are growing year-over-year. As evidence of this, Kiavi just had its largest month, and total private lending transaction counts are increasing about 5% quarter-over-quarter and continuing to grow.

Largest Private Lenders See Continued Growth

The twenty-five largest private lenders are increasing their volume with all but three of them growing year-over-year in the first quarter, with a few growing over 100% and the median growth being about 30-40%.

SFR Analytics reported that Kiavi is continuing to aggressively expand. They had their largest month ever in April of 2024 with about $588 million in origination volume. About 500 million of that was their core bridge product and they recently started a new construction and DSCR portfolio. Kiavi has a handful of borrowers doing over 100 deals a year with them, primarily in Southern California.

Volume by Market 

As for the top thirty markets by volume, about 65% of the largest markets are growing year-over-year. California is seeing a pretty strong resurgence, and a lot of that increased volume has been in large projects with $2-3 million dollar loan amounts. The second and third largest markets with growth have been San Francisco and San Jose, with an average price point of well over two million. At the bottom end, Atlanta, Jacksonville, and Austin had the largest decreases, with about a 30% decrease year–over–year in volume. 

Origination Volume 

Origination volume is continuing to grow year-over-year and pacing really well against 2021. 2022 was a bit of an anomaly with massive amounts of activity. In the first quarter of 2024 we saw about a 10-15% growth rate over the first quarter of 2023 and the early indicators of the most recent months have also been very strong. 

• Corporate buyers continue to use cash. About 2/3 of all purchases are from corporate buyers. About 10% of them are refinanced within about six months, but the initial acquisition was in cash.  
• Figuring out which loans are DSCR loans can be difficult to ascertain. Nothing in the underlying data in the public records will signify that it is a DSCR loan. SFR Analytics uses the rental listing data that they scrape to see if a person rented out the property after a private loan was originated. DSCR has very low penetration for non-owner occupied SFRs, with about 1% penetration.  
• Many of the largest borrowers use multiple lenders. Over half of the largest borrowers (who originate at least five loans) use multiple lenders. 

Markets Most Excited About

Large Markets: 

Salt Lake City is in the Top 10 cities for projected population growth over the next five years. There are a few large lenders operating at scale, and private lending as a percentage of corporate purchases is in the bottom 20%. So, you are seeing a relatively small percentage of investor purchases in Salt Lake City. 

Dallas/Fort Worth is in the Top 5 cities for projected population growth, with a strong market for both DSCR/bridge and added the most jobs of any metro market in 2023. 

Medium Markets: 

Des Moines has very low private lender penetration but surprisingly large investor activity. It’s strong for both bridge and DSCR, with a 10% projected population growth in the next five years.

Question & Answer

Q: Talk a little about SFR Analytics and what services you provide for lenders:

A: SFR Analytics really has two core pieces, market intelligence and sales prospecting.

Market Intelligence: for a given market you can see who the largest lenders are, their origination volume, their origination counts, you can drill into a specific lender and see who all their borrowers are, see which lenders that borrower has used over time, see which properties the lenders lent on.

Sales Prospecting: They have a large offshore team that will manually verify contact information for our lenders. They often see 80-85% accuracy in the phone numbers they find.

Q: You showed the largest lenders and their growth, and the general trend seems to be flat. Are smaller lenders getting squeezed out?

A: Yes, we’re seeing a 5% increase in volume for the total market, with the larger lenders having a 30-40% increase. The private lender who is doing 5-10 deals a year is really getting squeezed out.

Summary 

Overall, the private lending market is doing very well. The largest private lenders are growing at a rapid rate and even expanding their product lines and market share. It seems to be a case of the rich getting richer, with the private lenders with the most market share really flexing their muscles. In this low inventory environment, small private lenders are struggling to find deals with hardly any flipper deals coming from the multiple listing services. Most of the largest markets are growing year–over–year in both transaction count volume and origination volume. There are markets to be excited about, with Salt Lake City and Dallas/Fort Worth being two of them. Each has a high projected population growth over the next five years, good job growth, and a small number of large lenders operating at scale. The private lending market is poised to continue its growth as we ride out these uncertain economic times and move to more stability in the future. 

Author Bio:

GoDocs is an innovative leader in automated loan document generation, transforming the commercial lending process. With a fully cloud-based platform, GoDocs provides a flexible digital solution that makes commercial loans more cost-effective to document and faster to close, all while maintaining compliance in all 50 states. GoDocs is a Corporate Member of the NPLA.

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