Changing Landscape of Private Lending with RTLs: Q&A with Groundfloor’s Nick Bhargava
Last year saw a plethora of rated deals securitized by Residential Transition Loans (RTL), a source of construction, renovation, bridge financing and investor loans that are generally short-term (12-18 months) and typically bearing low double-digit coupons. The sector is an example of the expansion of private credit into structured and securitization finance.
The asset class has undergone significant growth since the issuance of the initial major revolving RTL securitization in 2018. Considering the prevailing conditions in the US housing market, characterized by demand surpassing supply, it is not unexpected that RTL origination volumes have risen.
Nick Bhargava, co-founder of Groundfloor, a real estate and lending marketplace, shared his thoughts with Connect Money regarding his current assessment of the market, the structure of its recently introduced deferred pay RTL, the regulation behind these loans, and more.
CM: What are the characteristics of a Residential Transition Loan?
NB: A Residential Transition Loan (RTL) is a short-term commercial loan made to a professional builder or developer of real estate property. They need the loan to rehab housing, construct new housing, or in some cases, finance a completed property for a period of time while they put renters in it or otherwise prepare it for a sale. Terms are typically 12 to 18 months, with a variety of payment options. RTL financing is the way most of the rehab and infill housing stock is financed.
CM: What are the underwriting and regulatory policies for these types of loans?
NB: RTL loans are typically originated by non-bank lenders. There are many non-bank lenders in this space, so the market is fairly efficient in terms of pricing. The underwriting and regulatory policies depend on who is ultimately purchasing the RTL loan as an investment. Some RTL originators are financed by smaller investment firms. They can have pretty loose or nonconforming underwriting policies. RTL originators that package their loans into bonds for purchase by banks and other institutional investors typically have more strict underwriting policies and loan files end up looking similar to residential mortgage loan files.
CM: In early 2024, Morningstar DBRS disclosed a rating methodology for RTLs. What has the impact been on the asset class?
NB: The rating of RTL asset backed securities demonstrates the maturity of this market and the stability of RTL loans as an investment. Ratings allow a different class of institutional purchasers to participate in this market. We expect more developments like this in the near future.
CM: What is your assessment of the market thus far? What elements render RTL deals attractive to investors?
NB: The RTL market is a growing market, and there will be more RTL asset-backed securities issued in the near future. What makes RTL based securities attractive are their high risk adjusted returns and shorter terms to maturity. Institutional investors earn a higher coupon, which can help offset their near-term liabilities.
CM: Can you give us an overview of Groundfloor’s deferred pay RTL and how it is structured?
NB: Our deferred pay product is an RTL loan that rolls the monthly interest payment into a balloon payment at the maturity of the loan. This allows the borrower to focus on project execution instead of monthly cash outlay, which is a value add for the most experienced builders and developers. We monitor the projects closely, and every draw request is accompanied by an inspection, therefore we do not feel monthly payments themselves give us any more information about the likelihood of success of a project. For this feature, we can charge a higher interest rate, and this translates into a higher RTL bond coupon.
CM: What separates Groundfloor from some of the other emerging RTL issuers?
NB: Groundfloor is a full lifecycle lender. This means we source, originate, service, and asset manage all of our loans in-house. We are also one of the very few RTL issuers that runs our own proprietary investment platform. This means retail investors get to participate in the RTL loans alongside the institutional investors, which further enhances the credit quality of the RTL bonds we issue. Anyone can check out our website or mobile apps to experience investing in RTL directly, and at higher yields than most other investors.
CM: Following a breakthrough 2024, how do you expect RTLs to perform over the next several years?
NB: We expect RTLs to remain a healthy and robust market. The U.S. is critically short of housing stock. The best way to solve this problem is to increase the supply of housing, and RTL credit is an important part of the solution. It allows people to improve properties without large amounts of equity, and this liquidity translates into more available housing and improved housing affordability.
