Bank loans vs. alternative credit: Show me the money - by Daniel Calano

Are you tired of waiting for the Fed to lower interest rates, so you can fund that real estate project? Buy a home? Build a commercial building? I am. Even if it happens, will it make a difference? The Fed only can reduce short-term loans and you need 30-year funding. Consider these relatively new “credit options”: 

What is private credit, and how has it helped grease the rusty skids of traditional bank mortgage. Here are a few growing solutions, and how they make sense.

The first tried and true option is Credit Unions. Union borrowing rates can be lower, but the borrower has to be a member of the Union. As - another typical option, borrowers have relied on mortgage brokers who are intermediaries, pros who can research and find “best” loans. Most borrowers are aware of this option and have worked with brokers who are knowledgeable and current on available funding.

Newer and growing options are non-bank “private credit lenders”. These have ability to find creative solutions which are larger, faster, stream-lined, more flexible, less regulated. Many of these are new and have become investable through the stock market. Examples include lenders that have attractive names like Rocket Mortgage, Loan Depot, Better.com, Fairway, Guild Mortgage, etc. Younger borrowers in particular appreciate these options, which are based more on the property value, more so than borrower credit. These will become more understood and more utilized, then at this point.

On the less desirable side of private credit, interest rates from these lenders can be more expensive or may be variable, and/or with shorter terms.

Also, there are growing signs of caution, with some troubled signs of quality of credit. According to statistics, which suggests more than 40% of private credit borowers have negative cash flows that could hinder their payments. In some cases, some private equity can be sold to other investors, which may have ability to change original terms.

Nonetheless, private credit has grown dramatically, largely because investors are always searching for higher yields than typically available from U.S.bonds. As these creative options become more attractive, and more available, more borrowers will be able to build their project and/or buy their home. Those involved in real estate will find a way, as we are creative problem solvers!!

Daniel Calano, CRE, is managing partner and principal of Prospectus, LLC, Cambridge, Mass.