Shannon Faries of Land Gorilla: Expanding Construction Lending Key to Long-Term Growth

Shannon Faries is Director of Risk Management with Land Gorilla, San Luis Obispo, Calif. He oversees consulting and new product development for lenders looking to enter the construction lending space and provides best practices of loan program development and risk management. Shannon also manages strategic partnerships and provides consulting services for Land Gorilla’s industry partners, including loan closing doc providers, MI companies, insurance providers and government agencies. He has lifelong experience in mortgage banking and construction lending. He has founded and managed mortgage banking operations and is the former Chief Lending Officer of a Federal Savings and Loan. Throughout his career, starting as a loan officer, Shannon has focused on construction and renovation lending, including A&D loans and builder financing.

Steadily rising housing prices and a lack of housing inventory have set the stage for the most challenging time for potential buyers to afford a home. The National Association of Realtors recently noted the sharpest year-over-year decline in housing affordability on record this past year, as mortgage rates have cut affordability by 29%. Research from the same group stated the U.S. is short 5.5 million single-family homes and it will take generations to close this gap. 

Expanding housing inventory, despite higher rates, is the only way out of the housing affordability crisis, which is why the future belongs to lenders with products to finance more building and renovation.

In fact, Land Gorilla has seen more lenders enter the construction lending market this year compared to all of 2021. Banks, Credit Unions, and Independent Mortgage Bankers see a huge opportunity to not only serve their borrowers, but also to retain origination talent within their organizations and increase origination income and profitability. One of our clients that specializes in CTP lending recently said the use of one-time close lending has led to a return to “gain on sale” figures not attainable for standard purchase money or refi loans.

There is a good reason to forecast strong housing starts. In spite of the recent slowdown in new home construction permits, new home construction starts are still roughly 15% higher than they were three years ago. Most of the reductions in permits are due to the large publicly traded tract home builder. By contrast permits and starts for custom and semi-custom homes still remain strong. This is because the planning process for a custom home may extend years and include the financing of the lot over several years before a permit is pulled. 

Richard Branch, chief economist for construction research firm Dodge Data & Analytics, recently said he expects material prices to slowly improve into the second half of 2023. Meanwhile, the nation’s homebuilders have also been pressing Washington to act on housing inventory, and their message seems to be resonating.

Last May, the White House introduced the Housing Supply Action Plan with the goal of building or preserving hundreds of thousands of affordable housing units and fast-tracking new home construction to the highest rate since 2006. 

In October, the Biden Administration put forth several steps to follow through on the plan, including reforming and streamlining a Fannie Mae and Freddie Mac financing program providing more affordable financing for multifamily housing construction to make it easier to build homes for rent. We are cautiously monitoring this effort and hope for results. To further this goal both Fannie Mae and Freddie Mac have encouraged the use of Single Close Construction to Perm for 2-4 family construction with LTV’s up to 85% and maximum loan amounts pushing two million dollars.

Construction loans are a great recruiting tool for lenders, as top producers are typically attracted to lenders with the most dynamic product offerings, especially products that help them compete. Look for originators that are certified as construction loan specialists or who have significant construction loan origination experience. Diversifying a loan portfolio through construction loans can also create additional revenue sources—including net interest margin, gain on sale, and loan origination income.

Traditionally, construction loans have been mired in manual processes involving paper and spreadsheets, which frequently create costly delays and a poor customer experience. Fortunately, technologies are helping to digitize and automate these processes, making the cost of managing construction loans less risky and less expensive to manage than ever.

Technology also provides visibility for builders and borrowers to access a project’s budget, upload documents, submit draw requests and receive funds in a fraction of time and creates a permanent system of record. These benefits are something a lender’s team and customers will immediately appreciate.

The bottom line is that even as mortgage rates remain elevated, housing inventory levels and affordability are still major issues in the U.S. and we don’t see that changing in the foreseeable future. Many lenders are looking at ways to incorporate smart growth into their budgets and leverage new technology to better meet the demands of today’s customers. Ultimately, these lenders will retain customers and close more loans. 

Lenders who are interested in learning more on the potential earnings on a construction-to-perm loan can request a copy of the Land Gorilla Weighted Average Yield Calculator here. This will help determine the net-interest margin, gain on sale, and origination income for many scenarios.

(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes your submissions. Inquiries can be sent to Mike Sorohan, editor, at msorohan@mba.org; or Michael Tucker, editorial manager, at mtucker@mba.org.)