Navigating the 2024 Interest Rate Hike: How a private lender diversified its portfolio with non-QM loans and seller carrybacks to maintain profitability during a period of rapidly rising rates.
Client Overview
Horizon Private Funding, founded in 2010, is a well-established private lending institution primarily serving the Southwestern United States, with a growing footprint across other key national markets. With approximately $180 million in assets under management (AUM), Horizon has built its reputation on providing flexible and expedited financing solutions for real estate investors, developers, and entrepreneurs. Their traditional portfolio primarily consisted of short-term bridge loans, fix-and-flip financing, and conventional private mortgages, all backed by real estate collateral. Horizon’s funding sources include a diverse pool of high-net-worth individual investors, family offices, and smaller institutional funds, all seeking consistent, above-market returns on their capital. John Miller, the CEO, spearheaded the company’s strategic vision, emphasizing a balanced approach between robust origination and meticulous risk management. Prior to 2024, Horizon enjoyed a period of predictable growth and stable investor relations, with a streamlined operational structure focused on their established product lines. Their in-house servicing team, while competent for their traditional loan types, was structured for a relatively consistent and less complex set of loan products, reflecting the market conditions of the preceding decade. This stable environment, however, was about to undergo a significant shift, challenging Horizon’s established operational paradigms and profitability outlook.
The Challenge
The year 2024 brought an unprecedented economic landscape marked by a series of aggressive interest rate hikes from the Federal Reserve, designed to combat persistent inflationary pressures. For Horizon Private Funding, these rapidly rising rates presented a multi-faceted and severe challenge to their traditional business model. Firstly, borrower demand for their conventional loan products significantly softened. Higher borrowing costs made traditional real estate investments less attractive or even uneconomical for many of their clients, leading to a noticeable decline in loan application volume. Secondly, Horizon’s profitability, typically driven by the spread between their cost of capital and their loan interest rates, began to erode. As the cost of attracting and retaining investor capital increased in line with market rates, Horizon found it increasingly difficult to price their traditional loans competitively without sacrificing their essential profit margins. Raising their loan rates too aggressively meant losing market share to competitors or pushing potential borrowers out of the market entirely.
Furthermore, the rising rate environment introduced heightened risk to Horizon’s existing portfolio. The prospect of increased default rates loomed, particularly for borrowers whose financial models were predicated on lower interest rate environments. Managing potential delinquencies and defaults efficiently became a growing concern, threatening to strain their in-house servicing resources. Investor confidence also began to waver, with some demanding higher returns or threatening to withdraw capital if Horizon couldn’t demonstrate resilience and continued profitability. The combination of declining origination, squeezed margins, increased risk, and investor pressure created a critical inflection point. Horizon needed to adapt quickly and strategically to maintain its market position, ensure investor satisfaction, and safeguard its long-term viability, acknowledging that their current operational infrastructure was not equipped to handle a sudden shift in product complexity or volume.
Our Solution
Recognizing the urgency of the situation, Horizon Private Funding, under the leadership of John Miller, initiated a strategic pivot: diversifying their portfolio into non-Qualified Mortgage (non-QM) loans and seller carrybacks. This bold move aimed to tap into underserved market segments less sensitive to conventional rate hikes and offering potentially higher yields. Non-QM loans, such as bank statement loans for self-employed individuals, Debt-Service Coverage Ratio (DSCR) loans for real estate investors, and asset-depletion loans, presented an opportunity to serve a broader borrower base that couldn’t meet strict traditional lending criteria but possessed strong financial profiles. Seller carrybacks, or seller financing, offered another avenue, allowing Horizon to acquire notes on properties where sellers were willing to finance a portion of the purchase price, often at attractive terms, facilitating transactions that might otherwise fall through.
However, the operational complexities of these new loan types—unique underwriting, diverse payment schedules, varying escrow requirements, and intricate compliance mandates—far exceeded the capacity and expertise of Horizon’s existing in-house servicing team. This is where Note Servicing Center (NSC) stepped in as a strategic partner. Our solution was to provide comprehensive, outsourced loan servicing that would enable Horizon to seamlessly integrate non-QM and seller carryback notes into their portfolio without incurring significant internal overhead or compliance risks. NSC offered not just the technological platform but also the specialized expertise in navigating the regulatory nuances of these alternative financing structures. By offloading the servicing burden to NSC, Horizon could maintain its focus on its core competency: loan origination and investor relations. NSC’s robust compliance framework ensured that all new loan types adhered strictly to state and federal regulations, mitigating potential legal and financial risks that Horizon would have otherwise had to manage internally. This partnership effectively de-risked Horizon’s diversification strategy, providing a secure, compliant, and scalable operational backbone for their new ventures.
Implementation Steps
The transition for Horizon Private Funding into these new loan categories was executed through a carefully phased implementation strategy, with Note Servicing Center playing a pivotal role at each stage. The first phase, **Strategic Planning and Education**, involved joint workshops between Horizon’s leadership and NSC’s experts. NSC provided in-depth insights into the operational characteristics and servicing requirements of non-QM loans and seller carrybacks, educating Horizon on the unique challenges and opportunities each presented. This included detailed discussions on potential payment structures, escrow needs, and regulatory considerations specific to these products. Our team helped Horizon define their new product parameters, ensuring they were both marketable and serviceable.
The second phase focused on **Product Development and Internal Readiness**. While Horizon developed their new non-QM and seller carryback loan products and tailored their origination processes, NSC prepared its systems for the seamless onboarding and management of these complex notes. This involved configuring our servicing platform to accommodate variable payment schedules, unique escrow accounts (e.g., for taxes, insurance, and specific property-related reserves in seller carrybacks), and specialized reporting requirements. NSC also provided Horizon’s origination and underwriting teams with clear guidelines on documentation standards, ensuring that notes handed over for servicing were complete, accurate, and compliant from inception. This proactive approach minimized potential friction points during the transfer process.
The third phase, **Seamless Onboarding and Activation**, commenced as Horizon began originating its first non-QM and seller carryback loans. Each new loan file was securely transmitted to NSC. Our dedicated onboarding team meticulously reviewed all documentation, verified loan terms, and accurately set up borrower and investor accounts within our system. This included establishing precise payment waterfalls, configuring late fee policies, and setting up automatic payment options where applicable. The efficiency of this onboarding process was crucial, allowing Horizon to quickly bring new revenue-generating assets into their portfolio without operational bottlenecks. NSC’s ability to swiftly process and activate new loan accounts meant Horizon could scale its new product lines rapidly.
The final phase, **Ongoing Servicing and Reporting**, represented the continuous partnership. NSC assumed full responsibility for all aspects of loan servicing: diligent payment collection, meticulous escrow management, proactive delinquency outreach, and efficient default management in the rare instances it occurred. We provided Horizon with robust, real-time reporting dashboards, offering granular insights into portfolio performance, payment statuses, and detailed financial summaries. Our commitment to transparent and timely communication ensured that both borrowers and Horizon’s investors received professional and consistent service. This comprehensive support allowed Horizon Private Funding to fully concentrate on increasing its origination volume and managing investor relations, confident that the intricate and critical task of loan servicing was in expert hands, mitigating operational risk and bolstering their strategic expansion.
The Results
The strategic partnership with Note Servicing Center yielded significant and quantifiable results for Horizon Private Funding, allowing them to not only navigate the challenging 2024 interest rate environment but also emerge stronger and more diversified. Crucially, Horizon successfully **maintained a stable Net Interest Margin (NIM) of 4.5%** throughout a period where many traditional lenders saw their margins contract by 50-100 basis points. This stability was directly attributable to the higher-yield nature of the non-QM and seller carryback loans, which compensated for the pressure on their traditional offerings. Within 12 months of initiating the diversification strategy, the proportion of **non-QM and seller carryback notes in Horizon’s total portfolio grew from 0% to an impressive 28%**, demonstrating a successful and rapid rebalancing of their asset base.
Furthermore, this diversification allowed Horizon to not only counteract the decline in traditional loan applications but to actually achieve a **modest 5% year-over-year increase in overall origination volume**, translating to an additional $9 million in new assets under management. This growth, coupled with the higher yields, directly translated into **a 12% increase in their annual net income** compared to the previous year, surpassing their initial profitability targets. Investor confidence was significantly bolstered, as evidenced by a **15% increase in capital commitments** from existing investors and the successful attraction of two new institutional investors seeking diversified, higher-return opportunities. NSC’s professional servicing contributed to a **remarkably low delinquency rate of 1.8%** on the new loan types, significantly below the industry average for similar products, attributed to proactive communication and efficient payment management.
Operationally, Horizon realized substantial **cost savings by avoiding the need to hire an estimated five full-time employees** (loan administrators, compliance officers, and IT support) and investing in new servicing technology, estimated to be over $350,000 in annual operational expenses. This allowed Horizon to reallocate resources towards market research and expanding their sales team, further fueling growth. The outsourced solution also provided an unparalleled level of compliance assurance, mitigating potential fines and legal costs associated with complex non-QM regulations. Ultimately, the partnership with Note Servicing Center enabled Horizon Private Funding to achieve robust financial performance, enhance its market reputation as an agile and innovative lender, and solidify its position for future growth, effectively transforming a period of crisis into an opportunity for strategic expansion and sustained profitability.
Key Takeaways
The journey of Horizon Private Funding through the tumultuous 2024 interest rate hikes offers invaluable lessons for private lenders navigating volatile market conditions. The most prominent takeaway is the critical importance of **Agility and Strategic Adaptation**. Horizon’s swift decision to pivot from its traditional lending focus into niche, higher-yield markets like non-QM and seller carrybacks demonstrated a proactive approach that buffered them against broader market downturns. Lenders cannot afford to remain static; continuous market analysis and a willingness to evolve product offerings are paramount for sustained profitability.
Secondly, the case highlights the power of **Strategic Diversification** as a risk mitigation and growth strategy. By not putting all their eggs in one basket, Horizon insulated itself from the pressures affecting conventional lending. Non-QM and seller carrybacks proved to be counter-cyclical assets that thrived even as traditional markets faced headwinds, providing both yield enhancement and portfolio stability. This diversification was not just about new products, but about accessing new borrower segments and transaction types.
Perhaps the most compelling takeaway for operational efficiency and scaling is that **Outsourcing Servicing is a Strategic Advantage**. Note Servicing Center enabled Horizon to execute its diversification strategy without being bogged down by the complexities of building new internal infrastructure, hiring specialized staff, or navigating intricate compliance landscapes. This partnership allowed Horizon to scale rapidly, enter new markets efficiently, and maintain a lean operational structure. Outsourcing provided not just cost savings but critical expertise, technology, and compliance safeguards that would have been prohibitively expensive and time-consuming to develop in-house.
Finally, the success story underscores the value of **Focusing on Core Competencies**. By delegating the intricate and time-consuming task of loan servicing to NSC, Horizon’s executive team and origination staff could fully concentrate on their strengths: identifying new lending opportunities, building robust investor relationships, and originating quality loans. This strategic division of labor maximized efficiency and drove impressive financial results, demonstrating that partnering with specialized experts for non-core functions can unlock significant growth potential and strengthen market positioning.
Client Quote/Testimonial
“The interest rate environment in 2024 presented an existential threat to our traditional business model. We knew we had to innovate, and diversification into non-QM and seller carrybacks was our chosen path. However, the operational complexities of these new loan types were daunting. Partnering with Note Servicing Center wasn’t just a smart decision; it was absolutely essential to our survival and subsequent growth.
Their team provided the expertise, technology, and compliance framework that allowed us to confidently enter these new markets. They handled every intricate detail, from complex payment structures and escrow management to rigorous regulatory adherence, giving us complete peace of mind. NSC became an extension of our team, seamlessly integrating with our origination efforts.
Thanks to Note Servicing Center, we not only maintained our profitability and investor confidence during a challenging period but actually expanded our portfolio and increased our net income. We avoided significant operational overhead and could focus our energy entirely on what we do best: finding and funding profitable opportunities. For any private lender looking to innovate, scale, and ensure compliant, secure servicing, Note Servicing Center is the indispensable partner.”
— John Miller, CEO, Horizon Private Funding
The experience of Horizon Private Funding clearly demonstrates that strategic partnerships are not just a luxury but a necessity in dynamic financial markets. Outsourcing your loan servicing to Note Servicing Center provides private lenders, brokers, and investors with a robust, scalable, and compliant solution that frees you to focus on growth and profitability. Don’t let operational complexities hinder your diversification efforts or market responsiveness. Choose the profitable, secure, and compliant path for your loan portfolio.
To learn more about how Note Servicing Center can empower your business, visit NoteServicingCenter.com today.
