You don’t have to be an expert to know that the media loves tragedy, and anything with the word Subprime in the last several months has qualified. Let’s face it, doom and gloom sells and I would love to see the circulation numbers on any newspaper that had the word “Subprime” on the cover. It could even be why you are reading this right now! However, that is not what this article is about, and I think we are all ready to hear about a silver lining on this seeded and cultivated dark cloud.

Without letting the whole cat out of the bag, there is a boom going on and hardly anyone knows about it. So what can possibly be the upside to this favorite downside topic? To answer that question let’s first separate the reality from the hype. The reality is that many of the banks that threw centuries of tried and true lending practices out the window are now finding themselves out of business. I say centuries because the basic premise of lending money should be, “Never lend money on anything you can’t make money on if you are forced into taking the asset and selling it” as opposed to, “Lend money and hope the collateral will keep going up in value while trying to sell the debt for more than it’s worth to someone else.” All though it is a lot more complicated than those two phrases, the after effects of the subprime crisis has shown that a lot of lenders lost their way when it came to the principles of lending, and after all the chips fell the only hand left to play was closing the doors and calling it quits.

Now, let’s move onto the hype portion; The absolute pounding of the media on any real estate story involving a decline in sales, prices, construction numbers, increases in foreclosures, or any story involving a homeowner that was supposedly preyed on by the evil banks. In fact, presidential candidate John Edwards’s website posted during his run for election that, ” he proposes immediate steps to help homeowners escape predatory and other unaffordable mortgages, including letting families shed excessive home debt through bankruptcy and creating a Home Rescue Fund to help struggling homeowners renegotiate or refinance their mortgages. Finally, he called for federal regulators, lenders, and investors to take responsibility and work together to help homeowners avoid foreclosure.” Being in the industry I can definitely attest to the fact that there is predatory lending and that there were some homeowners that were led down a path to nowhere.  I am sure there were a lot of brokers that skimmed over the details of teazer rates and ARM(adjustable rate mortgage) resets and it was part of the whirlwind of and industry “gone crazy”.  But wait a minute, aren’t we missing someone in the, “taking responsibility” category? Aren’t the people that signed on the dotted line for the home just a little bit responsible as well? We do live in a democracy that affords us huge amount of comforts and advantages, but that doesn’t allow us to broad brush everything in the color of unaccountability? What the media is not reporting on is the fact that some of these homeowners lost their sense of accountability and didn’t have enough self control to not over spend. I realize that we live in America, and that the American way is called, “buy now pay later ” but that doesn’t mean we should act like goldfish and consume whatever is in front of us without any consideration for the consequences. What else they’re not reporting on, is that many of these foreclosures are not owner occupied. They were single family homes that were bought for investment purposes, which reminds me of all the stories around 2004 and 2005 of rookie investors with annual income of only $40,000 a year that somehow thought it was a good idea to buy 3 houses; Most likely because the banks were allowing it but I hate to remind everyone that we don’t live in a communist country, there are up cycles and down cycles, and capitalism is sometimes “survival of the most responsible.”

 To quote a Fortune Magazine article from October 24, 2005 by Shawn Tully in which he interviewed the non-self proclaimed king of real estate, Tom Barrack, who likened the market back then to a game of polo. Tom Barrack said,“I feel totally safe playing polo on a field full of pros,” says the bronzed 58-year old. “But when amateurs are all over the field, someone can get killed. They have more guts than brains. They charge after every ball and don’t know when to hold back.”It’s the same with U.S. real estate right now. “There’s too much money chasing too few good deals, with too much debt and too few brains.” The amateurs are going to get trampled, he explains, taking seasoned horsemen, who should get off the turf, down with them.”I don’t think it could have been said any better or more accurately.

Let’s now move into what has ensued from all of this reality and hype, with that being the proverbial pendulum swinging all the way to the other side and the irrationality that goes along with it. The banks that are left standing not only have changed their subprime programs, but they have tightened their lending standards to a point of suffocation. It is akin to going into the closet and pulling a blanket over their head, hoping for the monster outside the door to go away. However, it really isn’t their fault because the regulators are all over them about lending practices, foreclosures, and anything else they can think of. 

So, what happens when you still have demand from solid borrowers that want to purchase commercial property but the supply of lenders has greatly diminished? Welcome to the new world of hard money. Hard money is just an industry term for alternative financing or in easier terms, borrowing money from any source other than a bank. These private lenders are usually thought of as private individuals, but that has also changed. Private equity funds like Regent Global Funds(RGF) www.rgfunds.com operate as a hard money lender while providing eligible investors with an actual investment . Now the reason I say, “the new world of hard money” is because in the past hard money has been associated with mostly bankrupt borrowers and bailouts. However, it has changed in the past several years, and since the banks that are still standing have tightened their lending guidelines, there are exceptional 700 credit score borrowers needing loans for good properties but aren’t able to get financed. This has created a great need for alternative financing because business is still taking place no matter what the media is saying, albeit at a slower pace. What has changed are the valuations of the collateral. They are becoming more realistic and are being based on solid fundamentals instead of speculation of future value predictions. The current market has allowed lenders like Regent Global Funds to over-collateralize their loans and in fact, the current portfolio as of March 2008 has an average of a 56% Loan-to-Value. That means for every $560,000 lent out, there is $1 million dollars of collateral. Again, borrowers are willing pledge increased collateral because they benefit from the speed, flexibility, and ease that alternative financing can offer.

In the past 6 months, RGF has reported that business has absolutely boomed as is the case with many of the hard money lenders; however their structure is a bit different. Many hard money lenders are more like brokers in that they have a pool of investors they can go to and they usually match one investor to one loan. Regent Global Funds has a new business model that diversifies all of their investors over all of their loans, much like a “mutual fund for loans”. However the big difference is security, and compared to a basket of overleveraged properties like a bank, or a basket of unsecured paper like a mutual fund, RGF has a diversified basket of loans secured by properties with an ample amount of collateral. It is not surprising that with this kind of collateral backing, many investors are asking how they can participate. It is for this reason that Regent Global Funds has actually turned this model into a private alternative investment for its participating investors. Unlike many alternative investments the model is based off of an asset backed private offering that is shielded from the fluctuations of publicly traded securities. In addition, Regent Global Funds has been paying their investors double digit annual returns since 2006 and that return could be viewed as quite high compared to other armchair alternative investments that are asset backed.

It is hard to predict when the Subprime Crisis and all of the various financial components it has affected will work themselves out. Analysts can’t seem to agree on the length or severity and it is probably a bit optimistic to think it has a chance of working itself out within a year. As far as hard money is concerned, the duration of this downward economic cycle doesn’t hold the same concerns as other investments because one of the best traits of hard money is its cyclical resiliency; the current troubled real estate cycle is favorable and when it turns back to more robust times there are a multitude of real estate investors that will take advantage of accessible, short-term hard money. The cyclical resiliency of hard money is helping create an exciting alternative investment opportunity that helps mitigates risk by being asset-backed and also having those assets appraised by independent 3rd party appraisers for realistic valuations. In closing, I would say that yes the Subprime crisis is a debacle and yes there is going to be a lot of pain to come, though the question you have to ask yourself is this, “what are you going to do with your money while the cycle works itself out?” In reality, you can make good returns in any cycle as long as you know where to invest and in the current debacle seeing through the hype will lead you to the “where”.