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.
As the current situation continues to evolve, we will provide regular updates in the days to come. If you have any questions, please do not hesitate to reach out to our team. The unwavering partnerships and strong client relationships we have developed over the years are what gives us hope as we look to the future and we thank you again for your continued support. Best regards,
JEFFREY TESCH Chief Executive Officer, RCN Capital