Alexis Assadi: 5 Misconceptions About Mortgage Lending
Alexis Assadi is an investor, writer and entrepreneur. He also serves as the Chief Executive Officer of Pacific Income Capital Corporation, the general partner of Pacific Income Limited Partnership. These firms provide capital to entrepreneurs and real estate investors, often in the form of property-based debt funding. In this article, Alexis Assadi discusses five common misconceptions that people have about mortgage lending.
1: Thinking That a Mortgage Is a Loan
Many people believe that a mortgage is a loan. However, it is actually a legal instrument that prevents a property from being sold without first repaying the creditor. If the asset is disposed of, then all of the proceeds must be used to repay the secured lenders based on their priority. Only after that are made whole can the owner retain any of the profits. Thus, they are used to secure a debt.
For example, a loan might be issued through a promissory note or loan agreement. It would then be collateralized with real estate through the use of a mortgage. The loan documentation and mortgage documentation are separate items.
2: Assuming that a Mortgage Loan is Always Safe because It’s Backed by Real Estate
Although it’s helpful for a loan to be backed by real estate, there are several other important factors to consider. These can include the loan-to-value (LTV) ratio of the project, the rank of the lien (first, second, third, etc.) the local housing market, the economy and the borrower’s ability to repay the debt.
Real estate is not always a safe investment. It can fluctuate in price and even plummet, like it did during the Great Recession of 2008. It then follows that lien-backed investments aren’t always secure, either.
3: Assuming that Lending is Always Risky
In general, a risk of all private hypothecated loans is that they are relatively illiquid. Unlike a stock, the lender cannot simply log into an online brokerage account and click “sell.” These investments, especially for retail lenders, will often need to be held until maturity. That can potentially mean waiting years to recoup one’s capital. Unless, of course, one is able to sell the debt to an interested buyer.
However, that is perhaps the only hazard that applies (to varying extents) to every single deal of this category. Otherwise, they can range in risk profiles. Some take place in strong economies, with low LTVs and to borrowers with a strong ability to pay back the loan. Others are to high-risk borrowers with high LTVs. Others, still, can be anywhere in between. It’s not possible to accurately characterize this type of investment with blanket statements.
4: Believing that Banks Are the Sole Lenders
It is true that banks dominate the credit market. But thousands of other lenders permeated the business post-2008 after banks scaled back their portfolios. Today, there are various property lenders that borrowers can choose from, says Alexis Assadi. They range from credit funds, mortgage investment corporations (MICs), mortgage real estate investment trusts (mREITs), syndicates and other financing businesses. As such, there is broad diversity in the types of loan products that are currently available.
5: Thinking That All Hypothecated Loans Are Long-Term Debts
While banks generally lend for periods in the decades, most other companies offer shorter-term maturity dates. Mezzanine loans, for example, are generally for a few months to a couple of years. They are designed to “bridge” a financing gap that the borrower might have. They are quite common for real estate developers, who may not want to borrow money for 25 or 30 years.
It’s important to educate oneself about the potential risks, rewards and intricacies about all investments. There are plenty of misconceptions and misunderstandings about the lending industry. This type of asset can be either risky, safe or anywhere in the middle. The best way to find where its risk profile lies is through extensive due diligence.
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