Coverage Corner: An insurance perspective on a shifting lender landscape

‍Rising interest rates, in-flux inventory, and dynamic borrower needs are all forcing lenders to adapt their strategies. As a leading real estate investment insurance provider, we work closely with our lender partners to understand their challenges and tailor solutions. We spoke with Heather Kockler and Keslee Diiorio, Obie's channel partner leaders, to explore the evolving borrower landscape and its impact on lenders' insurance considerations.

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Q: What major industry pain points do you repeatedly hear from lenders?

‍Keslee: From 2020 to 2022, we saw record-low inventory and rates. Despite new builds, we are still hearing from our partners how investors are grappling with a strained inventory, while the rates have recalibrated on the backend of inflation.

Rates impact everything from buyer sentiment to how much investors can swing financially. We’re hearing concerns about the potential for defaults due to these high-interest rates. Still, lenders recognize the importance of assessing borrowers' ability to navigate various scenarios and exit strategies in a market with unfavorable rates.

Here’s the thing: Market conditions are always evolving, and lenders will always be ready to pivot in response.

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Q: How are lenders adapting their strategies to the current market conditions?

Keslee: Given fluctuating interest rates, a number of our lending partners are now placing a much heavier emphasis on exit strategies. Uncertainties in interest rates and market stability are prompting them to conduct deeper dives into borrowers' financial profiles, exit plans, and property valuations. This comprehensive risk assessment minimizes the chances of loan defaults.

The industry consensus is that fix-and-flip markets hold the most promise right now. Focusing on interest payments, these loans offer easier access for borrowers while posing a lower risk for lenders.

In response to this shift, lenders are becoming more adaptable and innovative in their product offerings. This allows them to better address the changing needs of borrowers in the current market.

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Q: What types of loans are seeing the most funding?

Heather: The market presents a fascinating challenge: balancing flexibility with reliable options. As an insurance partner, we recognize the complex relationship between loan products and risk management strategies. Hard money lending perfectly reflects this. Bridge loans remain the cornerstone, as their quick access to capital is ideal for fast-paced fix-and-flip projects. 

However, several partners point to longer-term rental loans (DSCR) as an increasingly popular alternative. Investors are likely using these more as a hedge against potential volatility in the resale market. 

Keslee: Exactly. Bridge loans are a staple, but the market is evolving. There's a surge in interest for BRRR loans (buy, rehab, rent, refinance). From an insurance perspective, lenders have to consider the potential risks involved in each stage of the BRRR process, such as property damage during the renovation phase or liability issues during the rental period. So, while attractive, lenders still have to set realistic timelines for project completion to manage risk. 

Additionally, DSCR loans offer versatility and are great for short-term flips or long-term rentals. And with interest rates stabilizing, they become a viable option for refinancing later.

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Q: What markets show significant promise for lenders, and why?

Heather: The Sun Belt is at the top of my mind because of its high demand from property investors. We’re also seeing a lot of buzz in the Midwest. 

However, while investors flock to these areas, they might not fully understand the implications of the insurance market. Florida, in particular, stands out as a singular market with its challenges, especially regarding insurance policies.

So, while these markets look attractive, lenders must be aware of the potential hurdles, especially in areas with higher risk. Intense inspections and stringent requirements in states like Florida can impact the borrower's ability to secure insurance, ultimately affecting the loan process.

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Q: At this risk/return crossroads, do you foresee any regulatory changes that will affect lenders' insurance needs?

Heather: The Florida legislature is acting to lower the insurance cost for property owners. They moved forward with legislation reducing premiums and removing certain taxes and fees. The market in Florida is tough now, yet the demand from property investors is increasing. 

This legislation, along with bills passed in 2023 to reduce frivolous litigation costs and those in 2022 to strengthen the property market, are the first steps towards stabilizing insurance costs in the state. We will likely see this repeated, or some version of it, in other areas.

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Q: Are any notable technological trends helping lenders “run to the exit”?

Keslee: Our strongest lending partners are the ones who can gather information most efficiently. They aren’t just working out of email. Nothing is lost in translation in terms of eligibility for underwriting requirements. It's centralized, it's fast, and it's accurate.

For Obie, the idea is to enhance, not disrupt. Constantly ripping and replacing—frequently discarding existing systems or solutions in favor of new ones—can cause instability for your teams and clients. That disruption can also cause workflow interruptions, retraining requirements, and even loss of client trust. 

Solutions should be adaptable and intuitive. The market constantly changes, and you want your systems to keep up.

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Heather: Traditionally, the lending industry has operated on antiquated technology stacks. These legacy systems in place can be complicated to innovate on top of because you have many moving parts with money being exchanged. I see an opportunity specifically when there is an issue with standard insurance policies that may not include coverages that lenders require. 

This results in lenders having challenging discussions about why coverage is needed with their borrowers. Embedded insurance with a trusted partner can remove the friction and ensure policies are bound to meet their specific requirements. 

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Q: How can technology enhance borrower risk evaluation for this market?

Keslee: Verifying borrower insurance was wildly cumbersome in the past. You had to chase down documents, hoping the borrower obtained the correct coverage per the loan terms. It’s slow and frustrating.

Now, imagine storing all your loan requirements—mortgage clauses, general liability, minimum dwelling coverage)—right there in the platform. They would be crystal clear for both you and the borrower, so no one would guess or be surprised. Obie is working on that level of assurance and transparency. 

The key is automation. Once the policy is bound, the system can automatically send a copy of the borrower's insurance info (the Dec Page) straight to the lender. That's why Obie is built the way it is: to mitigate risk from the outset and save lenders time. This embedding process also provides a scalable, repeatable customer experience for their borrowers again and again.

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Empower your borrowers with the right coverage from the jump, ensuring a smooth and secure experience for everyone involved. Ready to make a clean exit every time? Contact us today to learn how Obie can be your trusted partner. Or check out what Obie can do for you at: https://www.obieinsurance.com/lenders

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