Many lenders are scratching their heads at why they are originating single loans when they cancherry pick their preferred risk tranche on an entire pool. Assuming an investor can getcomfortable with the rating agencies’ assessment of the risk (and this is a big IF) outsizedreturns can be achieved with little personnel costs. Several loan originators I have talked torecently are fearful of losing their jobs should their bosses realize this and axe their entireorigination platform.
Source: Commercial Mortgage Alert
The Death of New Customers: Capital is scarce. Many lenders have developed the parochialmindset that their funding capacity is for existing customers only. No new customers needapply. In the rare case of a new customer being welcomed to a bank, they need to be preparedto have a
relationship
with their new lender. A
relationship
isn’t nearly as interesting as itsounds. It does not mean candlelight, bubble baths and foot massages; it means… get ready to pony up at least 10% of the loan amount in Certificates of Deposit at our bank.The Death of The Amateurs: In the go-go times lenders were flush with cash and willing totake a shot on an amateur developer with a limited track record, experience, net worth andliquidity. Bankers wooed Developers with fancy Porterhouse Steaks, limo rides and tickets tosporting events. Not anymore. Now experienced developers with $50 or $100 million personalfinancial statements are being kicked to the curb left and right. Sponsorship has become moreimportant than ever: Sponsors need to have a verified track record, real liquidity not just“paper” net worth. They also need to have strong global cash flow to be able to service anynew debt out of their pocket since interest reserves are a thing of the past.The Death of Leverage: The entire global financial system is deleveraging. The Death of Valuesection outlined the new reality that the days of quoting loans based on the concept of Loan toValue (LTV) and Loan to Cost (LTC) are over. The new reality is that Debt CoverageConstrained Loans are the only ones that will get closed during these uncertain economictimes. During the underwriting process lenders will verify the income side of the equation,adjust for tenant turnover risk & market vacancy and make sure that operating expenses used inthe analysis are appropriately conservative. Once the NOI is determined the lender willdetermine a conservative allocation for Reserves for Replacement to Arrive at theUnderwritten Cash Flow (UCF). This gives the lender another swing at the funds available to pay debt service and further hammer loan proceeds. DCRs will continue to rise. Lenders thatwere at 1.2x 6-months ago have increased to 1.25 to 1.3x on the safest, lowest risk properties.The difference in loan proceeds generated by the new conservative underwriting and the costof the property will need to be filled with Sponsor Equity. As the Equity requirements getlarger and larger borrowers will need to find a creative solution or transactional volume willcontinue to drop.The Death of Upside and Appreciation: During the good old days lenders added a level of optimism to their proformas. They underwrote inflation into the rents, gave weight to aBorrower’s proposed cost cutting strategy, lightened the Reserve requirements and sized loans based on interest only DCR as opposed to loans that require amortization. This artificiallyraised the UCF and the corresponding loan proceeds. Current market conditions have madelenders dubious that future rent increases and operating expense reductions will ever happen.August financial institutions such as Fannie Mae & Freddie Mac have suspended offeringforward commitments to fund new construction upon completion and stabilization. With a lesscertain exit strategy construction lenders are assuming that they will need to hold an asset ontheir books for the duration and are evaluating their risk accordingly.
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Serious perspective on serious topics, but delivered with David's hallmark wry, sophisticated humor --- making the 'medicine go down' a little more palatably. I've shared this with several colleagues and each has appreciated his literary approach:)