Role Played by Private Lending for Real Estate

As the economy is receding from the 2007 to 2009 crisis level, increase demand for loans is a direct consequence of “bullish” investments. The problem, however, is that banks, financial institutions, other government recognized financing entities otherwise known as “public lenders” were characterized by series of defaults and foreclosures during said crisis period. The investing community, therefore, are left with no choice but to seek alternative means of financing to face competition or closed investment gaps despite existence of certain odds. In particular, private lending for real estate is such a big help to this hardest hit industry at a time when public lending is unable to cover said demand for loans.

In contrast to public lenders as stated above, “private lenders” are not covered by instituted regulatory provisions of the law and the latter’s business were not devastated by the economic crisis. They are therefore a perfect alternative and their presence during the onset of the crisis kept the economy afloat. Unhampered by the crisis, private lending for real estate is available, their goal is purely profit taken from levied interest and loan approval is fast. Private lenders are not bound by Federal Reserve Bank’s regulation therefore documentary requirements are almost nil there are those which thrived on the “apply now, cash later” scheme. Similar to public lenders, the scope of private lending for real estate is wide enough they include home loans, home improvement loans, home equity loans, mortgage loans, second mortgage loans, debt consolidations and other commercial property loans.

Ease and speed in borrowing is not without cost. Private lending for real estate slaps exorbitant interest on loan proceeds to cover for the risk. They justify high interest structure on the fact that money used for private lending comes from private individuals or entities. Public lenders have privileges of lending through State funds and the exposure risk is comparatively less. Public lending is highly collateralized set by banking and financing laws while private lending is “equity-based”. Equity based means that the collateral is solely the assignment of the property to which the private loan is applied and could cost less than the loan proceeds. Private lending therefore is generally not a secured loan although there are those that are engaged in secured lending. Public lending, on the other hand, is publicly known exclusively as secured loans thus the basis of a reasonable or lower interest.

To secure the loan further, public lending is very strict on the credit standing and the borrower’s capacity to pay. It pays particular attention to the borrowers’ personal background and business history. The equity-based private lending for real estate, despite the magnitude of the risk, pays attention to the clarity of the deal rather than the character, capacity and collateral of the borrower. It played a role in closing investment gaps despite the weakening credit ratings of borrowers who had undergone the rigors of a crisis. None of the public lenders faced the risk of low credit ratings but private lenders gave out loans to even to borrowers who had low credit scores.

Private lending for real estate came to rescue at a time when loans are needed most, at such a time of economic crisis. Where the crisis hit the hardest, private lenders are available and offered security-free loans. This has to be offset by high interest structure, though. The continued existence of private lending for real estate, despite the odds, played a role in keeping the economy afloat.