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Wednesday, April 1, 2020
First and foremost, we hope that you and your families are staying healthy and safe. We also want to thank you for your past and continued support during these trying times. As we continue to monitor the impacts and volatility that have and are continuing to result from COVID-19, we felt it is important to communicate to you what we are seeing throughout the industry and provide full transparency into our thoughts regarding the marketplace.
RCN Capital remains open for business, however, we have made the extremely difficult decision to temporarily suspend all new originations. We maintain our commitment to the real estate industry and will continue to fund draws to our existing bridge customers and service all their construction needs.
In an effort to expedite servicing and wire requests, and continue to provide exceptional customer service, we have taken steps to shift existing members of our origination team to assist in these areas. We understand that this decision will adversely effect our customers and their businesses and we are working tirelessly to update our guidelines and pricing to properly structure ourselves for the future.
We are expecting to re-enter the market with a short-term bridge product in the very near future. As we continue to evaluate our loan products and how they will align with the an evolving marketplace, we felt it was important to convey to you the areas we are most focused on in assessing the changes that are coming to our industry.
- Housing Fundamentals: A key area of focus for us is how housing fundamentals are ultimately going to perform following this recession. History has told us home values should see a decline following this disruption, but the question remains as to what level of depreciation we will see. We believe the low housing supply coupled with high demand will ultimately result in minimal change to property values. However, we are very focused on how leverage should be viewed to account for the potential risk.
- Loan Performance: The largest area of focus for us is analyzing the impact this volatile economic climate will have on outstanding loan performance with both ourselves and the industry as a whole. The severity of defaults that we see, starting in April, will be a key indicator for the overall health of the industry. Stable performance will bring a level of confidence to many capital sources who remain in a wait and see approach, while unstable performance will result in more restructuring.
- Government Intervention: A large portion of our concerns regarding loan performance is the amount of intervention from state and federal governments. As governments continue to issue loan forgiveness, forbid evictions, etc. it is important for us to properly assess the impact this will have on future loan performance.
- Secondary Market Volume: As liquidity has become scarce and the capital markets have seized up, ultimately, we have seen bond trades executed in a very irrational manner. Spreads have widened out significantly and ultimately the volume of trades have either reduced significantly or ceased entirely. This is a key focus as the securitization market is generally the standard that sets the expectation for credit and pricing of all bridge, long term, and non-QM paper. As volume picks back up, it will allow for us to generate a better sense for what future origination should resemble.
- Lending Logistics: Developing a further understanding of how long the COVID-19 pandemic will affect the basic, yet critical, functions of the lending process. As lock downs continue to occur nationwide, it makes functions such as ensuring proper title coverage, conducting proper appraisals, recording documents, etc. very difficult to securely execute. While we are working diligently to find solutions for these issues, it does present a hurdle to many in regard to when they may resume lending practices.
Monday, March 23, 2020
Dear Valued Clients & Partners of RCN Capital, As we continue to experience unparalleled health and market disruptions that are impacting us all, we thought it was important to communicate what we are currently seeing in the industry and provide full transparency as to how that is affecting our loan programs. First and foremost, RCN Capital is open for business and we're very committed to the real estate industry. Our entire team has transitioned to working remotely, and we will continue to provide the superior level of customer service that clients have come to expect from RCN. We appreciate your patience and understanding as we may experience minor disruptions as a result of this. We will continue to fund draws to our existing bridge customers and service all their construction needs. However, at this time, we are taking the opportunity to reevaluate our guidelines and pricing to properly structure ourselves based on the volatility currently occurring in the marketplace. Being a firm that has built itself upon the values of that of a family office, RCN is thankful to have had the ability to reinvest all profits back into the firm instead of large capital sources who are tied to the public sector. This has allowed RCN to develop a very strong and robust balance sheet, as well as develop solid relationships with a variety of capital sources in the marketplace. Our balance sheet and unwavering partnerships are ultimately what allows RCN to withstand volatility during these uncertain times, and ensure that we are here for you, not only in the interim, but for the long term. As we go into this week where conditions in the capital and financial markets continue to be highly unpredictable, we must recognize the changes that are rapidly occurring as a result and adjust accordingly, even if only on a temporary basis.Here are our current thoughts as of Monday, March 23rd:
- As previously mentioned, capital and financial markets continue to be extremely unstable and a sudden lack of liquidity has prompted many lenders to reduce product offerings or halt originations entirely. Because of this, the rates and terms you have become used to seeing from RCN Capital and from other lenders in this space are no longer feasible. This means, our lending guidelines will change, and probably continue to change often, as market conditions fluctuate. Some of the immediate changes we currently anticipate are raising minimum credit score requirements, lowering leverage (LTV and LTC) and increasing rates across all loan programs. Please know that we are working tirelessly to provide updated product guidelines to our customers as they are developed, as many of these updates will be implemented immediately.
- In addition to the issues we are seeing in financial markets, we are also observing disruptions with appraisals and inspections due to health and safety concerns. We will do our best to minimize any delays this may cause, and we appreciate your patience during this time.
- Finally, due to numerous county courthouses closing throughout the country, we are starting to experience difficulties with obtaining title policies and we are seeing title companies backing away from issuing gap coverage.