Lender Segment Market Update
According to a recent announcement from City National Bank, “Q1 GDP contracted sharply by 4.8%, the first decline since 2014, and the steepest drop since 2008…. For the first 2/3 of the quarter, the economy was running strong, close to 3% GDP. The majority of the decline happened during the lockdown period, the last two weeks of the quarantine.”
Due to the market disruptions brought on by the COVID-19 virus, we believe it is important to keep our clients informed about the major segments of lending. The following is an updated summary of the state of each market segment:
Contrary to what we have read in other sources, many insurance company lenders are still actively originating and closing loans in this market. Most insurance companies are not only looking at historical operating history when assessing new lending opportunities, but they are also taking a hard look at the current rent schedule. They want to make sure all tenants are in occupancy and paying rent. Current pricing on typical 10-year insurance company debt averages between 3.00–4.50%. At this time, it is important to work with an established mortgage banking firm, like Slatt Capital, to assure certainty of execution and life-of-loan service. Deep relationships established over multiple decades of transacting helps ensure smooth closings.
Many banks are still actively lending, although most are using much more conservative underwriting requirements. Construction and bridge bank loans are much harder to come by than loans on stabilized properties. This market remains fluid but selective. Many banks are on the sidelines while they focus on PPP loans through SBA and wait another few weeks to determine how best to price and underwrite CRE and multi-family transactions amid the volatility.
Freddie Mac and Fannie Mae have come out with new credit criteria to make loans in this environment, particularly if the properties are deemed affordable. The biggest changes involve requiring principal and interest reserves, tax and insurance reserves, and replacement reserves for loans. Interest rates in this sector are very aggressive and typically in the 3.0%–4.0% range.
The CMBS market has essentially been stalled out for several weeks because the market to securitize loans basically shut down in early March. There are currently discussions of CMBS lenders starting to securitize and originate new loans again. According to a 4/24/2020 article in Commercial Mortgage Alert, “Commercial MBS issuers are in talks to resurrect more conduit offerings that were put on hold due to the Coronavirus Pandemic, as the first post-shutdown deals hit the market this week.”