Our Underwriting Philosophy
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The prompting to document and memorialize our underwriting philosophy stemmed from a post-closing site visit of a construction project that we recently funded. The project was a partially completed ultra high-end spec home in Los Angeles, California. As we walked through the property, the pride on the face of the borrower was clearly evident. We visited each part of the home and it felt good because of the passion we saw in the borrower and the manner in which we had worked with the borrower prior to closing the loan and, more importantly, after the fact.
A common practice that we see for many hard money/private lenders is to work very hard with the borrower up through closing and then let the borrower figure things out on their own after the fact. The mindset behind this practice is that, as an originator, you’re not really getting paid to help the borrower after the loan is closed. Many lenders are busy enough so that they only really have time to focus on new deals that will be generating new income, separate from the interest income received on the note rate.
To compound the issue further, many originators sell the beneficial interest in the note at or after closing so that they’re not benefiting from the coupon at all, only the origination fees. Additionally, the actual loan officer (or submitting broker) who is working with the borrower through the loan process is not benefiting from the note rate regardless; they’re only benefiting on the origination. Even if a loan company wanted to work with the borrower after closing the loan, the only person in the company who really has the rapport to do that is the loan officer – a person who has no financial interest in doing that other than building good relationships which is undervalued in today’s market.
Underwriting Philosophy – FK Capital Fund
Many times our investors ask us what we do as part of our loan servicing especially since we use a third party for much of the minutiae – e.g. monthly statements, 1098’s, 1099’s, reconveyances, etc. Our loan servicing contribution which helps define our underwriting philosophy is this:
• We will never originate a loan and send the borrower on his/her way.
• We will always focus on the borrowers exit strategy, a common enough practice, but we will take it a step further and do whatever it takes to help the borrower achieve his/her goals AFTER our loan is closed. This could translate into credit repair and/or helping to facilitate the exit refinance loan when appropriate.
• In addition to standard loan servicing, we will monitor all monthly payments carefully in order to identify potential problems far in advance of them actually becoming problems.
• We will become trusted advisors to our borrowers and our investors to encourage and facilitate repeat business and on-time monthly payments.
In these ways, and others, we will commit to underwrite prudently and in the best interests of all stakeholders in the loan process.