In the July issue of Private Lender, the publication of the American Association of Private Lenders (AAPL), there was an article that caught my attention. It's an interview with Todd Pigott, the owner of a company called Zinc Financial. According to the article, Zinc Financial is a company that specializes in investor rehab loans, similar to the well-known Brookview Financial. The reason for our article is to bring attention to some very interesting points that Mr. Pigott makes in his commentary and to point out some very distinct differences in the lending philosophy of a company like Zinc Financial as compared to our own here at MMG Capital. Click the icon to the right to download a copy of the article for review.

 Here is a simple list of points to find in the article as you read through it:

1. Credit-based Lending vs. Asset-based Lending
2. Hard Money has Changed
3. Some Flaws in the Logic

A lot of people don't understand the difference between credit-based lending and asset-based lending. But, quite frankly, they're extremely dissimilar and are almost opposite philosophies when it comes to underwriting a loan. Todd states, "We finance distressed assets, not distressed borrowers." In other words, Zinc Financial makes loans based on the credit and income of the borrowers that they lend to. However, the assets they're utilizing as collateral are "distressed." In the case of investor rehab loans, that will almost always mean physically distressed as well as financially distressed. MMG Capital, on the other hand, finances distressed or undistressed borrowers that have undistressed assets - we underwrite our collateral first before we underwrite our borrower. A borrower being distressed won't disqualify them automatically. We have to look at why they're distressed and whether or not they have a strategy to get themself out of trouble or not.

The difference between these two philosophies is central to the entire theme of successful private lending. While we don't refute that Zinc Financial has found a niche and could potentially be successful in credit-based private lending, our philosophy is entirely different and we believe that our standards are the absolute safest in today's marketplace. On at least a few counts, we differ on both reasoning and logic. Here's how:...

Banks are credit-based lenders. They lend very strictly on the qualifications of borrowers and more loosely on the strength of their collateral. This isn't necessarily a bad thing, and in fact, it's critical to our economy that banks lend this way. However, the past few years have shown us what happens when real estate markets are trending downwards: borrowers, both good and bad, find themselves with assets that aren't worth what they've borrowed against them and are more than happy to hand them over to the lender and wish them good luck. In the case of a good borrrower purposely defaulting on a loan, we use the term "strategic default" - and it happens all the time. If you lend too much money against a bad asset, chances are that you just bought it for more than it's worth. What good does it do to have a borrower with an 800 credit score if you've lent them too much money against their property? Will you be happy owning a junker property for $100,000? That's the question that you have to ask before you decide to lend to a good borrower with a bad asset. And remember, a credit score isn't' security - a credit score is a measure of probability based on past events. It doesn't give any assurance as to the safety of your investment in the future. Only collateral provides real security. The day that you assume that your borrower is going to repay you and therefore you don't have to worry about your collateral is the same day that you should reconsider being a private money lender.

MMG Capital makes asset-based loans, with credit and the ability to repay considered, secured by valuable real estate that is in high demand at an average of 20 - 30% of fair market value. We provide high net worth borrowers with liquidity as opposed to leverage. So, with that knowledge, I ask you this question: with which borrower are you more likely to be in trouble. The borrower with an 800 credit score that you've lent 80% of the property's value to? Or the borrower with a 650 credit score that you've lent 30% of the property's value to? In other words, which one is going to be more concerned with getting their loan repaid? Who has more to lose?

One thing that Zinc and MMG certainly agree on is the fact that hard money lending has definitely changed. Most firms have chosen to adopt the title of "private money lender" as opposed to "hard money lender" because the old definition of hard money is no longer accurate. Pigott states that "it is difficult today to find a hard money lender that is not going to somewhat entertain credit, somewhat entertain capacity to repay..." 2005 has come and gone, and lenders aren't just handing out money nowadays. If you want to borrow from a private lender, you're going to have to prove that you deserve the loan. Some qualification factors are going to weigh more heavily than others, but the amount of due diligence and the process that lenders have to go through to ensure that they have good collateral and a real borrower is far more extensive than it used to be. And the term "hard money" no longer means that you can borrower 65% LTV against just about any asset as long as you can provide an appraisal. The rules are changing, as are the players, so borrowers had best get used to it.