Ever since the outbreak of the COVID-19 Pandemic in late 2019, private lenders have had to overcome two major obstacles in giving loans. One is the decline in originations due to the limitations and regulations and a reluctance on the part of borrowers to go ahead with purchase deals. The other is reducing the amount of capital available to lenders to grant out loans to prospective clients. With an uptrend observed in loan originations over time, limited funds become more of a stumbling block to lenders. Thus, there is the need to free up funds for new originations of loans.

The three most popular strategies employed by lenders to create liquidity and generate funds for loans include:

  1. Selling of Fractional Interests: The most typical method is to sell fractional interests in a loan, as this structure is the most straightforward for both the lender and the investor. The investor purchases a direct ownership interest in the loan and loan documentation in a fractional sale and thus has a direct connection to the borrower and real estate collateral.
  2. Selling Participation Interests: Lenders who do not wish to lose any stake or control in the loans in their lending pool can sell participation interests. The lender transfers a right to the income stream provided by the debt service from the borrower by selling a participation interest.
  3. Hypothecations: A hypothecation is a loan backed by a second loan. In hypothecation, the originating lender obtains a loan from an investor, with the investor’s loan secured by some or all of the originating lender’s stake in one or more loans.

To read more on these strategies, click here.


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