As we continue to monitor the rapidly changing landscape, Aloha is implementing prudent changes to protect our fund investors and borrowers. We feel these changes provide both groups with the best opportunity for success going forward.
Most significantly, we paused lending for 45 days while we surveyed the new environment. As a result of the lending pause, the cash position of the fund increased, which decreases risk and volatility.
We updated our underwriting guidelines:
- Increasing interest rates to reflect the uncertain environment
- Decreasing Loan to Value ratios for borrowers and risk for our investors
- Increasing our minimum borrower FICO score by 50 points
- Requiring interest escrows for all loans
These moves were in response to three major impacts to our borrowers. First, projects may take longer due to counties being slower to complete permit inspections along with a potential increase of days on market for completed properties. Second, borrowers need more liquidity to cover debt servicing. Third, there is uncertainty as to the effect COVID-19 will have on property values.
What’s happening in the US housing market
While commercial real estate crashed, with REITs in the sector declining as much as 85% earlier this year, the residential sector has been remarkably resilient. Demand is strong with pending home sales rebounding to 2019 levels in June, after sharp declines in the spring. Mortgage rates have been supportive, with the average 30-year mortgage dropping to 3.07%, the lowest level since the Federal Reserve began tracking the data in 1971.
Internal dynamics in the market have shifted, with home price appreciation in the mid-to-lower price ranges increasing since March. This shift benefits our investors, as we are active lenders in these price ranges. Nationally, inventory is lower, with new listings still below 2019 levels year-over-year. This meets our expectations, given reduced willingness of owner occupant sellers to list and show their homes in the time of COVID.
House flipping remains a substantial provider of residential inventory, with 7.5% of all US home sales in Q1-2020 attributable to the sector. This is the highest level of fix and flip activity in 14 years.
The economic tailwinds that underpin our strategy remain. The US housing market is still strong, and there is an ongoing housing supply shortage. Aloha’s lending programs are geared toward house flippers, who provide a significant source of desperately needed inventory to the market.
For more information on market conditions, please feel free to set up a call with us.