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Positioning Ourselves to Withstand a Market Downturn

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During the economic downturn of 2008, Noble Capital took a significant hit in our commercial portfolio. We weathered the storm and, wiser and tougher, fought tooth and nail to rebuild. Cognizant of the pitfalls that left us upside down, we built a foundational strategy focusing on residential real estate markets that inherently protects our clients from another economic downturn.

Noble Capital bases the majority of its decision to give prospective borrowers loans on the collateral underlying the loan. The collateral in this case is residential real estate. This approach creates “protective equity” to the tune of 30 percent or greater.  Essentially, Noble does not  lend a borrower more than 70 percent of the underlying asset’s value.

Protective equity is important in strong and weak real estate markets alike. In strong markets, like the current Texas market, protective equity may grow with appreciation that climbs as market values climb.  However, the primary reason for protective equity is to protect a lender’s position in the event of a downturn. In a weak or declining market, if a property loses value, then the protective equity is negatively affected. For instance, if a home is worth $100,000 and Noble lends the borrower $70,000 that would make the loan to value (LTV) ratio 70 percent. Should the market drop, decreasing the property value to $90,000, Noble’s exposure at $70,000 is now at 77 percent LTV ratio. The initial 30 percent of protective equity insulated the decrease in property value, thereby protecting the lender’s principal.

Noble’s underwriting guidelines fluctuate with shifting markets. In a strong market the property is the key factor in making a decision; in a down market the weight of the decision is redistributed between the properties, the borrower’s cash injection and the borrower’s creditworthiness. Generally speaking, cash and credit are the greatest mitigating factors that can be used when issuing debt in any market cycle – a truth more staunchly evidenced in a down cycle.

While private lending is not a liquid investment strategy, the short-term nature of our loans creates a sense of  liquidity. Our loan terms range from 6 to 18 months granting us flexibility to act quickly, avoiding the exposure of  client investments in decreasing markets for a prolonged time.

Since the inception of our Private Lender Network, and its subsequent focus on the residential market, Noble Capital has not had a member (one who lends to third party developers and borrowers through the network) lose any of their principal.

With the rise of distressed real estate opportunities in a downturn, borrowers positioned with solid cash and credit assets can benefit from utilizing Noble Capital’s Private Lender Network. This activity, in turn, ensures that Noble will have a steady pipeline of deals when the market rebounds.