Archive for October, 2009

Commercial Mortgage Lenders – Government Agencies Dominate Multi-Family (Apartment) Mortgage Sector

October 23, 2009

There is not much liquidity for commercial mortgages in the retail, office or hospitality sectors of the commercial real estate industry, but there’s plenty of capital available for multi-family (apartment) buildings. The good news is that the Government is lending massive amounts of money against apartment properties; the bad news is that no one else is.

Virtually all the institutional loans being made today to purchase, refinance or build apartments are being funded or otherwise supported by Fannie Mae, Freddie Mac, The Federal Housing Administration (FHA) or The Department of Housing and Urban Development (HUD).

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For almost 2 years now, these Government Agencies have been the primary lenders to the rental housing industry. They stepped in to counteract the liquidity crisis that was caused by the collapse in the commercial mortgage backed securities markets (CMBS) and, almost by default, have become the only game in town. Even the banks who claim to be lending right now are, in reality, just originating loans and selling them to Fannie or Freddie.

As the economy improves traditional multi-family lenders, such-as insurance companies, smaller regional banks and Wall Street investment houses, would like to re-enter the market place with their own commercial mortgage offerings.  Unfortunately for them, they are finding that they can’t compete with Uncle Sam who, of course, can simply print the money that it uses to lend.

Fannie and Freddie could maintain their dominance in multi-family finance indefinitely, but they won’t. They are lending at such levels because no one else can. As the economy improves and real, traditional banking becomes profitable once again, Government Agencies will retreat and allow the markets to provide the necessary capital. When that happens rates will be higher but the increased competition will mean more people will be able to qualify for loans.

Those lucky enough to meet the requirements of a Government Agency loan ought to apply now. When the time comes to lure lenders back into the market the Government will make itself less attractive by further tightening their underwriting criteria and lowering their loan-to-value ratios.

To secure the most favorable rates, terms and conditions that Government sponsored lending has to offer, a borrower must have decent credit (640 or better FICO) and a sound balance sheet that includes some liquidity (cash in the bank). Fannie and Freddie will lend up to 80% LTV but most loans that they are accepting now are in the 70%-75% LTV range. The property must be able to pay its own mortgage with a debt-service-coverage ratio (DSCR) of 1.2% or better and the building has to be stabilized (history of profitability). It goes without saying that the property must also be in good condition with little deferred maintenance necessary. The Government is sponsoring loans in all 50 states in-order to benefit the rental markets nationwide.

Loans typically come with 3, 5, 7 or 10 year terms and are amortized over 25 years. Currently rates are at historic lows due to the weak economy.

Apartment owners can get Agency backed loans through their local banks, larger national banks and through many other commercial mortgage lenders who enjoy direct and indirect relationships with Fannie, Freddie, FHA and HUD.  You can’t apply directly to the Government.

Property owners who don’t qualify for agency loans will have to pay more to a private lender or work to meet Government requirements.

It’s good to know that there is liquidity for multi-family investing, but it is disconcerting to realize that the only willing and able lender is the US Government. As things improve this should change.

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Morgan Stanley Lost $400mm in Commercial Real Estate but Turned a Profit Anyway.

October 21, 2009

Morgan Stanley returned to profitability for the first time in a year as income from its investment banking operations offset losses in commercial real estate.

Morgan Stanley said Wednesday that stock and debt underwriting from investment banking, and rising profits from its retail brokerage business, which includes the Morgan Stanley Smith Barney joint venture with Citigroup Inc., more than balanced out $400 million in commercial real estate losses.

The New York-based bank earned $498 million in the July-September period, after losing $13.18 billion during the last three quarters combined…READ MORE OF THE AP STORY HERE

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Commercial Mortgage News – CMBS Delinquency Rates Continue to Climb – Hotels and Apartments are Worse Performers

October 21, 2009

New CMBS delinquency numbers via Fitch show that hotel loans are the worst performing category of commercial mortgage paper.

The general delinquency rate for all CMBS (again according to Fitch) was 3.58% as-of September ’09. That represents a 54 bps up-tick in troubled loans compared to August and a whopping 2.4% jump YTD. The trend is unmistakable and disturbing.

Along with hotels (5.83% delinquent in September), multi-family loans are fairing poorly with a September delinquency rate of 5.72%.

Currently, the biggest debacle in multi-family is a non-performing $195mm loan against the Babcock and Brown portfolio that contains about 14 equity hemorrhaging properties in NV, FL and other locations in the Southeast. Colum Financial made that loan to B&B and, not surprisingly, they are now out of business.

The ever helpful IRS has changed its rules to allow loan services to modify CMBS loans before they default without the huge tax penalties that used to exist. But it takes capital to restructure loans and the capital markets, especially the mortgage bond markets, are still dysfunctional. In-other-words, not only is there no liquidity for new loans but there is no liquidity to fund modifications of the old loans.

It seems that all loans are troubled loans now.

If other sectors worsen we can expect overall delinquencies to hit 5% by the second quarter of next year.  

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Commercial Mortgage Loans – Institutional Funding vs. Private Funding (Banks vs. Hard Money)

October 16, 2009

It is more difficult to get a commercial mortgage loan today than it was two years ago. The credit crisis has prompted many commercial real estate investors to look into alternative sources of capital. Private lenders, often called hard money lenders, have gained popularity recently as banks and Wall Street brokers have refused to make loans. It is true that privately funded commercial mortgage lenders can be more flexible and can close loans in just days, but that does not mean they are easy to get. Before a property owner applies to a hard money lender they should understand the differences between institutional funding and private funding.

Regulation

Traditional lenders like banks, insurance companies and Wall Street investment houses are all highly regulated. Banks carry FDIC or other government insurance, insurance companies are watched over by each State Insurance Commission and Wall Street is governed by the Securities & Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FIRA). There is a tremendous amount of bureaucracy, red-tape and rules involved in originating conventional, institutional loans. All this regulation means that bank loans are slow, banks are not flexible and there are loads of paperwork and documentation involved.

Private lenders are, by definition, private entities. They might be organized as LLCs or Limited Partnerships (LPs) or they might be a single, wealthy individual who makes money by making loans, but they do not fall under the prevue of banking regulation. They must, of course, adhere to all anti-fraud laws as-well-as all laws against un-fair and deceptive business practices, but they don’t have to report their specific lending activity to Government Agencies and are not subject to Government licensing or chartering. Hard money lenders can be highly flexible in their underwriting criteria; they can change their own lending policies as they wish for their own reasons. They don’t have to require large amounts of documents if they don’t want to and they can move very quickly if they like a deal.

Speed

Bank and other institutional loans typically take 90-180 days to close. Private loans can close in a matter of just days if they have to (a virtual impossibility when dealing with a bank) but generally take about 21 days. Rates Conventional loans are usually based on an established benchmark rate such-as the 10 year US Treasury Bond. The bank takes the base rate adds an index and comes up with a loan rate. Treasury and other rate indexes are historically low right now (Fall ’09) and commercial mortgage loans (for those who qualify) rates are being priced at between 5.5%-7.5%

Private lenders generally hold the loans they issue in their own portfolios as-opposed to institutions who generally sell their loans to Government Enterprises or the secondary market. Hard Money lenders make their profit on rate and points so they charge significantly more. Most private loans today are being quoted at between 10%-16%

Points

It is rare to see a bank charge more than 2 origination points on any loan.

Private lenders will typically charge at least 3 points and as many as 5.

Terms

Traditional lenders usually offer 3, 5, 7 or 10 year fixed terms on loans amortized over 10-25 years. A balloon payment or a refinance is usually necessary at the end of the term, although more and more banks are offering adjustable rate products that don’t require refinance.

Private loans are almost always short term, bridge type loans. Most charge interest only payments rather than amortize. The average private loan term is about 18 months and hard money lenders rarely write a loan for more than 36 months. The loan must be paid off in full at the end of the term.

Underwriting

Regulated institutions are now universally full documentation, full underwriting lenders. Every “I” must be dotted and every “T” must be crossed. They will fully underwrite the property first then the borrower. Both must pass muster or the loan will be denied.

Private lenders are equity lenders. They lend primarily based on the amount of equity in the target property. Investors will find hard money loans require much less paperwork and documentation. Private lenders will be careful and won’t lend to just anyone, but the underwriting is much more straight forward.

Loan-to-Value (LTV)

Banks used to lend up to 80% of a buildings value and allow a 10% second position loan, allowing sponsors to borrow as-much-as 90% of a deals value. Those days are gone. Now even the largest, strongest banks won’t lend more than 75% LTV and they discourage second loans. 65% is typical unless a borrower has a very strong balance sheet and a large liquidity position.

Private lender will not exceed 65% LTV even for properties that have excellent cash flow. Underperforming or vacant buildings will receive offers in the range of 50%-60% and land loans will come in at well under 50% LTV.

In a perfect credit environment bank loans or loans from other large money centers are the most desirable. They offer the best terms, lowest rate and fewest points. Any one who can qualify should seek funding from these powerful institutions. However, we are not in a perfect credit environment. We are in a mess.

Banks have tightened their standards, property values are dropping and the secondary mortgage bond market has completely collapsed. These circumstances have made it difficult or impossible for people to secure a conventional loan. Private lenders are more expensive and offer only short term financing, but they are filling a vital need and should be considered by borrowers if the bank has turned them away.

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FDIC to Dump 100 Properties on Atlanta Market – Huge, Two Day REO Auction

October 15, 2009

According to this press release, JP King Auction Company will sell more than 100 North Georgia properties, many with no minimums and no reserves, at a two day auction in late October.

 Consider this: if a first time home buyer buys a Junker for $8000.00 and gets an $8000.00 tax credit they could get a house for free!

 Good luck to all bidders…good luck to us all…

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