Lenders Don’t Want to Be Landlords: Why LTV Isn’t the Full Story

Abstract: Private mortgage lenders often rely on Loan-to-Value (LTV) to assess risk, but this metric only tells part of the story. Hidden costs, legal complexities, and borrower obligations can quickly erode recovery margins, leaving lenders with the undesirable role of landlords. This article explores why LTV isn’t enough to gauge risk and highlights the importance of assessing borrower behavior, financial health, and repayment ability. Leveraging AI-driven tools like Levitas.ai, lenders can adopt smarter underwriting practices to minimize risk and avoid the pitfalls of property management. Discover why it’s time to think beyond LTV in private lending.

In the private mortgage world, Loan-to-Value (LTV) is often heralded as a cornerstone metric for assessing the risk of a deal. The calculation seems simple: the loan amount as a percentage of the property’s estimated value (including encumbrances). The assumption? If a deal falters, the lender can recover their investment through the collateral. However, as any seasoned lender will tell you, this assumption barely scratches the surface of risk.

The truth is far more complex. While LTV offers a snapshot of collateral coverage, it cannot guarantee a smooth recovery or insulate lenders from financial loss in worst-case scenarios. The reality is that lenders don’t want to be landlords. Let’s explore why LTV isn’t the full story.

The Hidden Costs and Complexities of Relying on LTV

While LTV might look like a neat formula on paper, its real-world application is anything but simple. When a deal goes south, the aftermath for the lender often involves hidden costs, delays, and complications that LTV alone can’t account for:

• Legal Fees and Delays: Recovering a property often leads to lengthy legal proceedings, which can be both unpredictable and expensive. Court costs and procedural delays erode lender margins.
• Carrying Costs: Properties don’t sell overnight. Even in favorable markets, holding onto a property can tie up capital and increase costs for taxes, maintenance, and insurance.
• Real Estate Fees: Selling the property incurs significant fees. Commissions alone can take 3–6% off the sale price, further reducing recovery amounts.

Borrower Obligations That Become Lender Problems

When lenders take possession of a property, they also inherit the financial and legal obligations of the borrower. These often include:

• Taxes: If property taxes have gone unpaid, those arrears become the lender’s responsibility upon taking possession.
• Insurance Gaps: A lapse in the borrower’s insurance leaves the lender with an uninsured asset, increasing exposure to risks like damage or theft.
• Tenant and Occupancy Risks: Evicting a borrower—or managing existing tenants—can be a time-consuming and costly process, further delaying recovery efforts.

Simply put, lenders don’t want to manage properties. The time, cost, and effort involved in maintaining and selling properties often outweigh the value of the collateral.

The Core Question: Can the Borrower Pay?

Ultimately, a lender’s focus should be on the borrower’s ability to repay the loan. While LTV influences pricing and mitigates some risk, it does not provide a complete picture of the borrower’s financial health or the viability of the deal. That requires a broader underwriting approach, incorporating:

• Credit Reports: Useful for gauging past behavior, though not always predictive of future performance.
• Bank Statements: These reveal real-time cash flow and spending patterns, providing critical insights into a borrower’s financial stability.
• Notice of Assessment (NOA): This document shows whether the borrower owes taxes, a key indicator of overall financial health.

For the roughly 10% of the Canadian mortgage market that comprises private deals, these factors are even more critical. Borrowers in this sector often don’t qualify for traditional bank financing, presenting unique opportunities—and heightened risks—for private lenders.

Why Lenders Don’t Want to Be Landlords

The private lending market is full of potential, but it also demands a nuanced approach to risk management. Missteps in underwriting can leave lenders in the unintended role of property managers—an expensive, time-consuming, and undesirable outcome.

Relying solely on LTV heightens this risk. A comprehensive understanding of borrower behavior, financial health, and ability to pay should be the foundation of risk assessment. Without it, lenders are more likely to end up navigating the costly challenges of property ownership.

The Role of Technology in Smarter Underwriting

Advancements in technology and data analysis are reshaping how lenders approach risk. Platforms like Levitas.ai use AI-driven underwriting tools to offer a holistic view of borrower risk. By incorporating cash flow analysis, credit behavior, and tax compliance into decision-making, these tools provide a clearer picture of a borrower’s ability to repay—and reduce the likelihood of lenders becoming landlords.

Rethink Risk: Beyond the Metrics

What’s your approach to risk assessment? If it starts and ends with LTV, you’re likely leaving yourself exposed to unnecessary liabilities. It’s time to move beyond the traditional metrics and adopt a more comprehensive, data-driven approach.

Because at the end of the day, lenders don’t want to be landlords. And with the right tools and insights, they don’t have to be.

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