Banks told the Fed that they would tighten lending standards if short-term rates rise above their long-term counterparts, the central bank said in results of an October survey of senior loan officers. Asked how an inversion of the yield curve would impact lending practices, a “major share” of banks in the survey said they’d become less profitable and more risk-averse (Bloomberg). As the treasury comes close to inverting, banks have started reevaluating their risk appetite of new loans. What does this mean for the economy? How will lending change over the next year? What should you do? Do you have a backup if a bank pulls the plug on financing? How can Fairview help?
What is a yield curve inversion? What does it tell us about the economy?
What does an inversion mean? If you plot short and long-term rates on a graph in a growing economic cycle, as short term rates increase, long term rates should also increase. Long term rates are a gauge of long term economic prospects and as they increase they signify that the market anticipates future growth. If the short-term rates and long term rates invert (meaning short term rates are more expensive than long term rates) the market is warning that long term growth prospects are not good. The yield curve has accurately predicted that last seven recessions. Currently the yield curve is flat with predictions of an inversion imminent (Bloomberg published an article titled: Thanks to the fed an inverted yield curve is imminent). This is a clear sign that the market is not buying the long term economic growth prospects of the US economy and a warning that short term rates should not be rising as fast as they are.
Why are banks pulling back?
With a yield curve inversion looking imminent, banks are nervous about the long-term economic outlook. Bankers are a conservative bunch and do not want to be making loans at the peak of the cycle that could default after the economic cycle changes. Bankers also do not want to have the risk of having to “reserve” and tie up crucial cash for “bad loans” like in the last cycle. Cash is king when the economy heads south and bankers want to ensure they have plenty around this late in the economic cycle.
How will this impact borrowers?
Banks will be more conservative with their lending and pull back by further tightening of lending standards on both residential and commercial loans. If a transaction is not picture perfect it likely will not get funded through a traditional bank. More transactions will fall out of traditional lending in 2019 due to the tightening bank standards.
How will this impact the economy?
As banks pull back the economy will also contract. Without financing business will not expand or buy the new equipment or software. This will lead to a cascading effect in the economy with less liquidity.
What is an alternative to traditional bank lending?
With banks pulling back and more transactions falling out, it is critical to have a “plan B” to ensure a transaction gets funded. Fortunately, there are alternatives to traditional lending that can get deals done as banks tighten. One alternative is a hard money loan /private loan (these terms are used interchangeably). Hard money lenders are different than a traditional bank as they focus on the property as opposed to strictly the borrower. (here is a video on hard money lending) For example, if a borrower has great credit but might not show enough income because they are a small business owner and write off various business expenses, they likely will not be able to get funded through a traditional lender. A private lender portfolios their loans so they are not bound by the same rigid rules as a bank and would likely be able to fund this scenario based on ample collateral.
The Fairview advantages
Fairview is a hard money lender/private lender. We are the recognized leader in private lending/ hard money lending since 1975. Why choose Fairview:
- Privately funded portfolio lender and not bound by the rigid underwriting of traditional lenders
- When you call you talk directly to the decision makers, no middle man or loan committees
- Being a portfolio lending, we have the flexibility to structure a loan to meet your unique situation
- There are No upfront or due diligence fees
- No Appraisals, we not only underwrite in-house but also hold and service all our loans
- Flexible Terms as long as 10 years
- Simple one page application
- We have ample capital to close your transaction quickly without the headache of a traditional lender
- Fairview provides fast and honest answers quickly with closings on average in 5-10 days
As banks continue to tighten their lending parameters, call Fairview today to get an honest answer and get the transaction closed with a true portfolio lender. We look forward to working with you and your clients.
Resources/Additional Reading:
- https://www.fairviewlending.com/what-is-hard-money-3/
- https://www.bloomberg.com/news/articles/2018-11-13/curve-inversion-may-lead-u-s-banks-to-tighten-lending-standards?srnd=premium
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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in the Colorado Real Estate Journal, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
Fairview is a hard money lender specializing in private money loans / non-bank real estate loans in Georgia, Colorado, Illinois, and Florida. They are recognized in the industry as the leader in hard money lending with no upfront fees or any other games. Learn more about Hard Money Lending through our free Hard Money Guide. To get started on a loan all they need is their simple one page application (no upfront fees or other games).