Part of being able to help brokers is for lenders to have access to an adequate supply of cash
When mortgage brokers turn to private and non-QM lenders for large or challenging transactions, they want to ensure the lender has the capacity to take on the loan. For private lenders, this means having sufficient liquidity to demonstrate to warehouse lenders that they have enough stake in the transaction.
This was one of the topics discussed by industry leaders at the National Private Lenders Association (NPLA) conference in Atlantic City.
Justin Land (pictured top left), CEO of Merchants Mortgage and Trust Corporation, said there’s a couple of things to keep in mind when considering cash needed.
“I think there are a couple different situations that might result in a different answer,” Land said. “If you’re really using the balance of equity and debt purely as a tool to achieve the best financial return, and you or your fund or partners have additional cash that is available to put into the business. I think you can operate that on a pretty tight margin and try to get the best economic outcome.”
Land said that things might be different if there were a situation where a lender is unable to sell the loan and is forced to keep it on the books.
“If it’s more of a fixed fund, and you know that if there’s a covenant violation or a buyback of a loan, or there’s a situation where you can’t sell those loans, I think you have to build in a cushion,” Land said. “That has to be looked at on an individual kind of company-by-company basis. But if you want to feel comfortable that if you lose one funding source, or there’s some event that causes a need for cash, that you have some cushion.”
Figuring out how much cash you need
Marcia Kaufman (pictured top center), CEO of Bayport Funding LLC, said it’s important to figure out exactly what your company needs in the event of an emergency.
“Liquidity is your own money, your equity, your profit in your company,” Kaufman said. “You've got to figure out how many months do you need, just in case. Or years, just depending on what your performance is in case there's an event.”
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Kaufman said that if a company anticipates uncertain times ahead, erring on the side of more liquidity is one option.
“If you think there’s going to be an event, you go with liquidity,” Kaufman said. “Nobody has a crystal ball. If there are uncertain times like we have now, do you lean more into a position of liquidity, or do you take a little more risk? Because you can go to the partners and say, ‘Let’s do a capital call.’ That doesn’t always happen when we do it.”
Balancing cash with investments
Ruben Izgelov (pictured top right), founding partner and strategic advisor with We Lend LLC, said one of the biggest advantages they have is the ability to sell loans if they need access to cash quickly.
“It’s a problem that a lot of starting asset managers and private credit funds are dealing with,” Izgelov said. “I think for us, every loan we originate, we structure in a way where it’s sellable. In the event that there’s any type of shift in the market rate, we have the ability to sell the loans.”
A private lending company that friends and family investors have funded has a unique challenge when considering how much cash to keep on hand and how much money should be invested instead.
“One of the things that we were able to negotiate is, banks and private credit funds, they want to see you have liquidity,” Izgelov said. “Really, cash sitting in the bank and just creating a drag and burning money. To me, that was a big problem because my investors are friends and family. They are entrepreneurs able to hit higher returns somewhere else. So how do I balance that?”
Izgelov credited Jon Hornik, founding member and owner of the NPLA, with devising a plan to help balance those sometimes opposing forces.
“A genius idea that Jon Hornik provided me was to try to negotiate with these groups to be able to hold loans, make loans, and hold them on the balance sheet without any type of leverage. So that in the event you that you had to replace a loan off of your line, or you had to take a loan off, you have $4 million or $5 million of loans that’s not just collecting dust on time in terms of paper.
“It’s performing because someone is paying you 10% to 12% coupon, but you’re also able to then just replace those loans off the line and have that liquidity.”
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