Hear how private lending is evolving in today’s fast-moving market as Nema Daghbandan from Lightning Docs & Fortra Law joins TMO’s Nathan Goodhart for a focused conversation on industry trends, challenges, technology, and what lenders need to stay competitive.
Highlights From the Conversation
How are private lenders adopting technology to be more successful?
You cannot build a business for scale without tools. Those who choose to use technology with a great Loan Origination or Loan Servicing software provider outperform their peers dramatically. The data supports it. They are choosing to take their business seriously; that’s the secret sauce. Lenders have to work hard; you are trying to keep your borrowers coming back. As rates come down, there’s lots of new market entrants from a competitive landscape, you must figure out: how am I going to deliver faster?
How much will you be saving long term by just investing in technology? There are a lot of different types of software programs, they have flashy features but then there’s the thing that needs to work, math. Lenders start to notice if something is breaking, it’s costing money. The message is: if you are starting out, get ahead of it. Don’t wait until something breaks to start. You can just start from day one doing the right thing, and that’s investing in the right technology.
What’s the latest industry sentiment on servicing in-house?
Years ago, people saw servicing as something that was difficult. Something they didn’t want to do and something that was often pushed on them saying, “Well, it doesn’t matter, you can’t service your loans anyways.” We’ve seen such a shift because it is a customer service-related business right now, that people are saying, “No, no, no. I have to own this part of my business to be able to provide the level of customer service that I want to my customers.”
With outsourcing, you’re pushing responsibility and liability onto someone else, which means giving up real control over your servicing. It’s good to own every part of your business. Some lenders have never even looked at trying to outsource because they need everything in-house. It’s the control. It’s being able to get money out faster. That is the way you are able to really compete with folks who are driving rates down.
How are lenders keeping up with compliance challenges as they grow?
We are seeing a transition of lenders that want to produce their own documents, and they may be in a state that they are comfortable in, but they are also being challenged by the industry, for example, to go into more states. There is so much unknowable risk, why risk it? Lenders can’t keep up with compliance on their own if every state has complicated, hidden rules they are not aware of. Lenders may not memorize these rules, which creates huge risk. Let the experts handle it, so you can focus on what you’re good at.
What advice do tech partners have for lenders?
Tech partners are true consultants in the industry, and lenders grow because they’re interacting with a team who has lender experience, who has technology experience, and who’s not afraid to say you’re doing it wrong and maybe you need to adjust the way you’re doing business and make it easier. Lenders are moving from Excel and spreadsheets because competition is coming in where you have to have fast-paced responsiveness to your borrowers. To think of it at the basic level, as an organization you are trying to create a consistent process. People may want to be creative and handle things their way but, does it actually add value to your business? This space is built with experts, and it’s exciting because there’s a real change in philosophy and a real change in mission. Lenders need fast-paced responsiveness to their borrowers and a consistent process.
What is next for private lending?
There will be a heavy commoditization of the RTL, fixed-and-flip type product. There’s this concept called the qualified mortgage or QM loan, and right now it feels like we’re starting the process of a private lender QM or a QM private lender loan with certain features, a minimum FICO score, certain minimum experience requirements, certain loan-to-values, effectively a formula of inputs. It’s a qualified private lender loan, and there’s going to be enormous piles of standardization of other stuff, loan products that trade at DSR levels, lots of liquidity, and anybody can scale it. That’s where a piece of the industry is heading. But that’s never going to include a second-position loan; they don’t do junior financing, and people need subordinate financing, so it still leaves a lot of place and space for creativity, which is the whole premise of this industry. No matter what’s happening on the capital markets side, go get a balance sheet, raise some funds so you can have a discretionary business that can’t be stopped, so you’re never beholden to what’s happening on the capital market side. The more discretionary capital you have, the freer you will be to make your own decisions and own your own destiny. This space has been resilient, and as long as there is a housing supply problem, this space of predominantly single-family residential assets is going to continue to do very well.