In this video, Eric answers some of the common questions people have been asking us during this crisis.
At Northwest Private Lending, we put our clients first. We will never recommend a financial decision that is not in your best interest. Please don’t hesitate to give us a call at 503-941-5473 if you have any questions. We are here to help you make the best decision for your specific situation.
My name is Eric Larson and I’m the president of Northwest Private Lending. Our family has been making private money loans for over 30 years, and our mission has always been to help our clients make sound financial decisions. We’ve been here in 2000. We were around in 2008 and we’re here to help you navigate this new, challenging time. My goal of this video is to try to give you three aspects of the lending business, what’s going on in the market, and what’s happening with Northwest private lending and how we can help you make a good decision. So, first of all, the question I get more than anything else is, “What the heck is going on? What has happened? Why is this happening? And what’s going to happen?” It’s not an easy question to answer. The truth is, that things can go a lot of different directions, but I first think it’s most important to understand what is happening and what is going on right now, so that each of you can make your own decisions. The first thing I want to address is what Ray Dalio terms, as the “long-term” and “short-term economic cycles.” In any market, there are transactions and the more transactions there are creates more productivity. And that is a straight line productivity growth does not change quickly. Over time, more people buying more goods and services produce more things. If you have less people producing less goods and services, that line shifts down. Now, if you want to increase productivity, you can create credit. And that begins our long-term credit cycle, which is government debt. And the Fed printing money to create more currency, to have more currency in the market. This is a slow moving curve that goes 75 to a hundred years in cycles. It’s not something we perceive. Many of us were born into this season of market, and it is growing slowly as debt increases. Every cycle has to come back to its center. So over time you create too much debt and you have to de-leverage the debt and reset the cycle.
It is possible that we are nearing the end of a long-term economic cycle, which would have repercussions that are different than if we’re in the end of a short-term economic cycle. Now, if we overlay that graph with a short-term economic cycle, these are cycles that we’re a little bit more familiar with: expansion periods and recession periods. These generally last five to eight years. An expansion period over time has lasted about eight years on average. And the last expansion period that we were just in was over 10 and a half years. After every expansion period, you have a recession and after a recession, you have another expansion period. This happens because banks can also create credit. Credit and currency is what we spend. You have the currency created by the Fed and the credit credit by the banks makes up the total amount of credit and money that we can spend in an economy. If you overlay the short-term economic cycle over the longterm economic cycle, you can start to see the pictures that we have and get familiar with what we’re experiencing in today’s life. If we’re just in a short-term economic cycle, what can we expect? We can expect that in nine to 18 months, which is a standard recession period, that things would come back and that the bubbles would get popped up, pumped back up with the liquidity, put into the market, and we will rise again and have another expansion period. If we are forced to print too much money, over-print the currency, you could see a de-leveraging of the economy and a change in the currency that we use. Bubbles. What is a bubble and how do they get inflated? A bubble can be in any economic sector. It can be in housing, it can be in stocks, it can be gold. It can be in anything. It’s where you have more currency flooding into a product or service that becomes overvalued. It has to be corrected. Bubbles occur when money flows into a sector and then has to be released to come back to this natural supply and demand. This can happen in real estate, just like it can happen in our stock market or a bond market or anything else. Inflation is something we should all understand as we should also understand deflation, because it’s, what’s going on in these market cycles.
Inflation is when you have more currency and the same amount of goods and services–as you increase the currency, the goods and services will cost more. If I rise, raise my goods and services with the amount of inflation or the amount of currency I’m putting in prices generally stay the same. If I keep the goods and services the same and I raise the currency prices go up. Deflation happens is when you have too much credit in a market and credit gets pulled out of the market. Last recession in 2008, the banks collapsed and credit was sucked out of the market. That caused deflation. There was less currency to buy houses, to buy stocks, to buy goods and services and it caused asset prices to go down. So what’s happening right now? I think what’s happening now is that we have an unmovable object coming in collision with an unstoppable force.
You have deflation, which is the entire world economy, not producing goods and services. There’s people not working, there’s products, not being built. There’s transactions not happening. That is inherently a very deflationary event because you’re removing things out of the market. At the same time, we have a Federal Reserve who is printing money basically into infinity. We’re giving helicopter money to people, which is not a bad thing in these times, but from an economic standpoint, it’s very inflationary. So, what’s going to win? Is the economy and the loss of jobs and the loss of small businesses going to cause a deflationary event? Less people working means less people buying homes, less people working, making money is less money to buy stocks. But you have a Federal Reserve who’s willing to buy stocks, who’s willing to buy the loans, which could keep the market where it’s at, or it could inflate the economy heavily.
These are the types of things you have to navigate as you’re making a decision, whether you should buy or sell real estate right now. So with all of this going on, how is that affecting the lending space? Well, first of all, there’s different ways that you get loans. Most people get loans conventionally through their banks. Even banks sell their loans in the secondary market. What’s happening in the secondary market affects you as a borrower and the banks who are lending the money. Right now, there’s nobody to buy the secondary market paper for jumbo loans, which means a bank making a jumbo loan has to have the money and hold that loan on their books. They can’t sell it to anyone else. And so it’s much harder to get a jumbo loan for loans below $510,000, the Federal Reserve is buying up all those notes, which is why you’re seeing such great rates in the conventional lending space.
If you can get a conventional loan and do it under $510,000, you should go to a bank and do that. The private lending space is different. There’s multiple ways that you can be a private lender, but at the end of the day, a private money loan is just one person lending you another person’s money. At Northwest Private Lending, we are lending you our money. We either have it, or we don’t. We can lend it, or we can’t. We don’t have lines of credit. We don’t borrow from people. And, that makes us very stable. The other way that you can be a private money lender is that you can sell your notes. If you have a certain amount of money, and once you’ve lent out all that money, you can sell those notes to somebody else, get your money back, and then relend it out. The challenge right now is similar to jumbo loans. There’s not that many people buying hard money loan paper on the market. So the hard money lenders who are planning to sell their paper, to get more cash, to lend out, can’t. And so those lenders are not lending money.
The other way that you can be a lender, as you can borrow money from the banks, you can borrow a million dollars or a hundred million dollars, whatever line of credit that business is able to support. And then they can lend that money at a higher rate than what they borrowed. That’s another way to do it. The problem is is that a lot of banks are freezing or “calling” their lines of credit due. And so those sources of income to those lenders are going away. The other way is that a lender might have a REIT or a large investment partner that wants to make loans into the private lending space or make hard money loans. Those people too are getting more shy or scared. They may want to have their cash. They may not want to make loans. And those are some of the reasons you might be seeing some of your go-to lenders not be able to fund deals like they were a month or two ago.
So how is this affecting Northwest Private Lending and how can we help you? Northwest Private Lending is a direct lender. We’re lending you our money. We have it to lend out and we haven’t really changed through this crash. And we didn’t really change in the last two crashes before that. Our number one goal is to allow our clients, to use our cash, to buy properties for cash, in order to get a better deal than they otherwise have gotten if they got a traditional loan. 2: We’re helping our clients who are property rich, but currently cash poor who need to get some equity out of their properties to fund another deal, to support a business, to take advantage of another buying opportunity that they otherwise would not be able to. The last couple of months, we’ve been seeing a ton of opportunities to kind of help clients who had a normal conventional loan that fell through, and that just needs some more time.
And we’ve been doing what we call “bridge loans” to help people bridge with a private money loan for a few months, while they wait to get a conventional loan. These are all areas in which we can help. We’ve always helped and we want to help again. At the end of the day, our goal is to tailor our advice to each specific investor. I never want to make a loan that’s not in your best interest. Whatever I can do to help you, please give us a call. We’ll always look at your specific situations and try to help you make the best decision possible.