From the mid-1970s through the late 1990s, hard money lending had a presence in the residential mortgage market. Known as private mortgage lending, it was an industry built on helping people who could not qualify for traditional mortgages buy homes. It faded with the McMansion fad. However, some say it is emerging once again.

Hard money was not a good thing for residential mortgage needs 40 years ago. It still isn’t. It works extremely well for property investors and business owners because of their asset-heavy financial situations. But your typical home buyer is not asset heavy. That makes hard money a risky proposition for buyers who cannot qualify for traditional mortgages.

How Hard Money Works

Hard money represents a form of private lending rooted in the asset-based lending model. The way that Salt Lake City’s Actium Lending conducts business perfectly illustrates the hard-money concept.

Actium says most of its clients are real estate investors looking to obtain new properties. An investor will seek a loan on a commercial office building, for example. He offers the property as collateral on the loan. If approved, you will have between 6 and 24 months to repay what he borrowed, depending on how the loan is structured.

Although this type of loan is risky, Actium is comfortable with the risk because the property has more than enough value to cover the amount the borrower is asking for. The transaction is structured as a trust deed transaction, meaning a third-party holds the deed in trust until the borrower makes good on the loan.

The Asset Is What Makes It Work

It is the asset that makes all this work. A competent real estate investor knows the value of the asset he is attempting to purchase. He is willing to risk that asset because he has a reasonable plan for paying off his loan within the prescribed term. Most importantly, he doesn’t need 30 years to pay. A 24-month term sits well with him.

Your average residential home buyer does not have the resources to come up with several hundred thousand dollars in just 24 months. Home buyers do not have the types of assets capable of generating that kind of income. Instead of being asset-heavy, they are asset-light. They represent too great a risk for hard money lenders. At least that has been the case for the last 25 years. So what has changed?

Bundling Risky Loans

Hard money lenders and banks alike were okay lending to unqualified buyers in the previous century because they were able to bundle their high-risk loans and sell them as investments. They would only have to hold the loans for a year or two before selling them. The risk was pretty low for them.

What they failed to realize is that their tendency to make high-risk loans would combine with federal legislation to create the 2008/2009 housing crash and subsequent Great Recession. Following that crash, Washington instituted new rules to prevent both risky mortgages and subprime mortgage bundling. But it turns out lenders are finding ways around those rules once again.

Interest Rates Remain High

Residential mortgage rates remain too high for many homebuyers. That, combined with very strict lending requirements, is keeping many prospective home buyers out of the market. Some hard-money lenders see an opportunity to step in.

Is hard money returning to the residential mortgage market? It looks that way. I am no expert, but I suspect that any large-scale adoption of hard money mortgages will not end any better this time than it did the last time.