NY lender says he spends his days 'trying to get these deals to work'
The state of lending – or lack thereof – comes down to leverage. But in these volatile times, it’s difficult to gauge the degree of leverage lenders are able to take.
That’s an assessment Abe Bergman (pictured), president and co-founder of New York-based Eastern Union, recently gave Mortgage Professional America. Given the challenges of today’s market – exacerbated by uncertainty – he jokes about the state of his routine is these days: “Waking up every morning and trying to get these deals to work.”
Of course, his role is much more complicated than that. Similarly, the challenges of the market are influenced by known economic factors – but a good measure of uncertainty added to the mix has made things that much more complicated too, he said.
Bergman was asked if the lending rate set by the Fed played the most prominent role, and quickly disabused of the notion. Sure, it plays a key role. But remember: It’s complicated.
“It’s very much rooted in that, but more importantly than that is the uncertainty of it,” Bergman said. “People still don’t know what the end of the movie is. You have to keep in mind it’s a lot more complicated than that. I don’t claim to be an expert on financial policy and things like that; I understand that on a basic level. Costs of funds to a lender is a lot more than just where the Fed rate is. So, it’s a lot more complicated than that, but that’s definitely a driving factor.”
It’s the not knowing how it will all shake out that has made commercial lending that much more challenging, he suggested: “Not knowing what it’s going to look like,” he explained. “Most people who have money in the bank have gone in and said ‘hey, what rate are we getting?’ For the first time in the past 20 years, people are actually going to the banks and asking, ‘what rate are you going to give me on a money market?’ And: ‘If you don’t give me a good rate, I might move it to another bank.’”
He explained the brazen nature of such customers: “Because it’s actually a significant difference from when we were only getting .1% on it.”
It’s increasingly about the costs of funds
The upshot: “Banks are paying much more for their deposits,” Bergman said. “Where is that going to end up in a year from now? What will they be paying on those deposits? The same? More? Or less? That’s a big factor in your cost of funds.”
Cost of funds refers to how much banks and financial institutions spend in order to acquire money to lend to their customers, as defined by Investopedia. Stated simply, the cost of funds refers to the interest rates banks must pay when they borrow funds from the Federal Reserve bank, the passage defines.
“The spread between the cost of funds and the interest rate charged to borrowers represents one of the main sources of profit for many financial institutions,” Investopedia explains. “Lower cost of funds commonly generates better returns for banks when they are used for short-term and long-term loans to borrowers. When costs are high, that is passed on to borrowers, which means they must pay higher interest rates to access credit.”
Those are immutable facts but remember: Today, It’s complicated.
Funds are having a tough go at it too
It’s not just lenders having to achieve borrowing equilibriums but funds too, Bergman said: “This is a big issue when it comes to lenders and even funds. So the funds that are lending money – they’re lending some of their own money but also leveraging their loans. So what’s their cost of leverage going to be?”
The hovering cloud of uncertainty doesn’t help any: “Anytime there’s uncertainty, when you’re getting your money on short term rates and lending if out on long term rates, it creates a challenge.”
The long-time political platitude guiding those running for office on what their focus should be in resonating with voters succinctly suggests “It’s the economy, stupid.” Increasingly, the new iterations seems to be: “It’s the uncertainty, dummy.”
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