How Nonbank Lenders Can Help Ease The Affordability Crisis

For decades, cities across the U.S. have been running a housing deficit: Each year, the number of new residents exceeds the number of new housing units that have been built. Though the causes of the housing crisis are manifold, a major factor is new housing projects may not always have a viable source of financing, especially if they lie outside the core markets where banks and other traditional lenders are most comfortable lending.

By investing in underserved and underfunded neighborhoods, nonbank lenders may play an outsized role in easing the affordability crisis and help to close the housing deficit. 

“Alternative lenders are absolutely filling a void, in various asset classes, but multifamily in particular,” said Gary Bechtel, president of Money360, a nationwide direct lender. “We can go into a market that isn’t getting the kind of attention it needs from traditional lenders and get projects done.”

While developers, lenders and officials are trying to work together to create more housing, banks still tend to shy away from lending in neighborhoods in secondary and tertiary markets, Bechtel said. Because they restrict themselves to established markets, traditional lenders have, to a certain degree, kept cities’ housing stock artificially low.

But private lenders may be more willing and able to swim in these waters and have been filling in the gaps left by many traditional lenders. According to Bechtel, lenders like Money360 are responding to unignorable market demand for more — and denser — multifamily housing.

“These neighborhoods require a more aggressive lending strategy than many traditional lenders are willing or able to give,” he said. 

These alternative lenders could play an even more vital role if banks decide to pare back their multifamily lending practices in response to an economic downturn. While he has not yet seen banks begin to shy away from multifamily, Bechtel said many of them have already taken steps to cut down on lending for retail and office projects.

Another trend that could pose an issue to new housing development is rent control. With states like New York and California expanding rent control measures, Bechtel said, it will be much more difficult for housing developers to make new projects financially feasible, exacerbating the fact that banks are already not lending as aggressively as they could.

“At the end of the day, it comes down to math,” Bechtel said. “Rent control policies don’t encourage new housing, and as long as new residents outnumber new housing units, the issue is going to get worse.”

Nonbank lenders also have a leg up on traditional lenders in terms of speed. While a bank may take 90 or more days to close on financing for a new multifamily project, private lenders like Money360 will often close in a month or less. Reducing a developer's timeline to secure financing can help reduce some of the soft costs of development, which include legal fees and permitting charges, helping more housing projects pencil out.

Developers who work with nonbank lenders may also be able to receive a more customized loan structure than what they would receive from a traditional lender, which can help them solve particular financial challenges, like unit renovations or stabilization. Many of the deals that Money360 wins, Bechtel said, are won on structure more than loan pricing.

Of course, much of the work of solving the affordability crisis will have to come from communities re-evaluating the highest and best use of their land through more proactive zoning, housing advocacy and the possibility of public-private partnerships. 

“Cities have to work to fast-track these kinds of residential projects, but must also address some of the NIMBYist sentiment that we’re seeing,” Bechtel said. “We need new residential projects, near employment centers and transit hubs, with an eye toward density for the workforce and affordable housing sectors.”

This feature was produced in collaboration between Bisnow Branded Content and Money360. Bisnow news staff was not involved in the production of this content.