Diversified Lending by Industry

The same way an index fund helps to mitigate risk by balancing investments across many types of businesses, lenders can help ensure performance by making loans across a multitude of industries.

This is the second post about loan diversity.  Post One: Short and Long Term Loans

The mid to late 2000s was a disaster for many real estate lenders.

I was among the millions of people deeply affected by the recent "mortgage crisis" for two reasons.  Watching the fission of the market as both investor and borrower, I got to see how overeager borrowers combined with overeager lenders to create the critical mass of debt.

In the fallout that ensued, hundreds of mortgage companies would be bankrupted, bailouts would be given, and the industry would have to take a long hard look at its practices.  Billions of dollars simply vanished from lenders' bottom lines.  It was a difficult time.

TrailsWeb made most of its money by way of association with the real estate industry.  We sell Moneylender Professional to lenders around the world, a major percentage of which are real estate investors.  We also worked closely with AZNORTH Development, Inc., a mid-sized real estate developer and investor in Flagstaff, AZ.  We created highly customized market valuation software and investment opportunity maps, among many other software projects.  In 2006 TrailsWeb saw an 80% drop in total revenue.  By the end of 2011 the company had moved into my home office and I got an hourly software development contract with the State of South Dakota to keep the servers running.

For borrowers the story was a little different.

I was almost a casualty as a homeowner/borrower as well.  Foreclosures were rampant 100 miles away in Phoenix.  I had been in foreclosure for eighteen months before borrowing some money to reinstate my mortgage ten days before my home was to be auctioned.  I was about to go back into foreclosure again when I found work in South Dakota.  Taking advantage of the by-now-popular loan modifications, my interest rate was dropped to less than 3%.

I bought my house nothing down based on my credit score and stated income.  Often unable to pay even the first mortgage, the second mortgage went without payment for two years.  When I finally offered 20% of the principal balance (never mind two years of interest) as settlement in full, they jumped at the opportunity.  I immediately gained $40,000 in equity by not paying for my house!

In both of these situations, the lenders took a loss of one form or another to their bottom line.  And there are an unsettling number of users of Moneylender feeling sour about their mortgage and home equity loans.

Many parts of the economy survived the slowdown unscathed.

The auto industry was definitely hurting for a few years, and as new car sales slowed, used cars filled more of the market demand.  A good portion of Moneylender's users invest in auto loans on used cars - often because they operate a dealership or affiliate with one.  Many of these lenders saw new demand for their loans and could required higher rates or be more selective with their borrowers.

As the real estate market led the rest of the economy into a downturn, much of the displaced labor force sought continued education.  Lenders offering loans for tuition, books, and other school related expenses saw a healthy boost to their markets.  Some lenders played it safe with low-yield ultra-secure federally back student loans, while others collected moderate rates on personally guaranteed notes.

Small businesses rose up and prospered in the wake of the failing mortgages as a counterpoint to other businesses struggling.  As builders stopping pumping out new houses, handymen stepped in to maintain the existing housing inventory.  Realtors stopped selling houses and inspectors started valuating foreclosed properties.  Some small business lenders made stable loans to innovative entrepreneurs in the new marketplace.

And, in spite of the gloom on the horizon, the unemployment rate went from around 5% to just over 10% during the recession, meaning most of the well qualified borrowers who received loans from private lenders were able to continue paying, unaffected.  These borrowers are made up of constituents from every industry in our country.

Lenders in several markets mitigate risk, loss and fluctuation.

By holding a variety of notes, lenders can achieve the stability of a stock index fund.  All while maintaining personal and involved authority over the assets invested.  In Arizona, to be a professional lender you have to pay between $2000 and $10000 for the license.  If you've paid the money to be in business as a lender, I think it's worth it to take full advantage of the myriad lending opportunities.