NPLA's Hornik believes current unpredictability needs to be factored into any future deals
No matter where you fall on the political spectrum, the first five months of President Donald Trump's second term have been hectic. One industry executive believes private lenders should continue to prepare for the unexpected and price it into loan deals.
Jonathan Hornik (pictured top) opened Tuesday’s session at the National Private Lenders Association (NPLA) event in Atlantic City. The founding member and owner of the NPLA advised those in attendance to expect more turmoil.
“President Trump is moving markets,” Hornik said. “He is affecting every aspect of our lives. Whether you like him or hate him, it’s something that has to be analyzed. He does have a way to create uncertainty, and that makes a lot of people uncomfortable.”
Hornik said lending professionals must expect more uncertainty and be nimble enough to make adjustments on the fly.
“What we’re saying now is what we’re going to say for the next three years, is we have to learn to function in an uncertain market,” Hornik said. “You can’t curl up into a ball and not grow, and not do deals. This is not changing. The man is 79 years old and has an (X) account. It is not changing. So, we need to adapt as business people.”
Deportations could affect cost
One of the things that Hornik believes private lenders need to account for soon is the rising cost of construction, especially in light of deportations of construction workers.
“The estimate on the cost of construction increase (caused) by these deportations is that a project would cost anywhere between 12% and 20% more,” he said. “That’s for deportations for labor, and it’s also because of the tariffs. That is the estimate right now.”
The increased costs must be figured into pricing numbers, especially on large commercial construction projects, when 20% could be a substantial amount.
“If you’re a broker, if you’re a lender, if you’re an investor, you need to underwrite differently than you did before,” Hornik said. “You can’t just go in and say, ‘Oh, this is how it’s going to pencil out.’ Because your costs are going up.”
He also noted the ongoing battle between the Trump administration and the Federal Reserve, as the Fed continues to delay possible rate cuts for fear of rising inflation.
“Having been alive during the 70s, there’s nothing worse than an economy that has rising prices and slowing growth,” he said. “It’s a spiral down. But thus far, inflation seems to be coming down in check. My prediction, and it’s just my prediction, we’re going to see more cuts than are currently priced into the market, which is good for everyone in the room.”
Liquidity is the key
One of Hornik’s main themes was encouraging lenders to keep liquidity in mind when planning future business. He said improved liquidity starts with the Federal Reserve.
“Cheaper money raises transactional activity, which means there’s more movement and more deals to be done,” Hornik said. “But it all starts with the Fed and the overnight lending rate to add liquidity to the marketplace.”
He reminded those in attendance that a lack of liquidity caused the demise of several large companies during the financial crisis of 2007 and 2008.
“In 2007, companies with tremendous billions and billions of dollars of assets went out of business,” he said. “You know why? They had no liquidity. Remember a company called Bear Stearns? Remember a company called Lehman Brothers? No one would have thought they would go out of business, and then they went out.”
He said liquidity was even more critical considering the economic turmoil that he believes is likely to continue.
“Make sure you have enough liquidity to survive,” Hornik said. “Liquidity is the most important thing to keep your business alive. If I ask what the most important thing to your business today is, some say customers, customer service operations, none of that is important if you can’t pay your bills.”
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