Lender Segment – Market Update
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, but have narrowed their requirements for product type and strength/experience of the borrower. The primary challenge in this sector of the market is pricing. Most insurance companies compare the yields of their investments in commercial mortgages to the pricing of investment-grade bonds. Due to the volatility of bond pricing in the market, it can be complicated for an insurance company to price a loan right now. Slatt Capital represents a wide array of insurance company lenders as a servicing correspondent, providing debt from $1,000,000 up to $100,000,000 across the four major asset classes. Current pricing on typical 10-year insurance company loans averages between 3.5% and 4.5%. At this time, it is important to work with established mortgage banking firms that can provide life-of-loan service and certainty of execution with correspondent relationship lenders.
Some banks are still actively lending, although most are using much more conservative underwriting requirements. A March 20 article in Commercial Mortgage Alert notes, “Banks and insurers are still originating loans—albeit at lower leverage and with higher spreads than just a few weeks ago…” Construction and bridge bank loans are much harder to come by than loans on stabilized properties. This market remains fluid, but selective. Many banks that are on the sidelines feel they should wait for another week or so while they determine how best to price transactions amidst the volatility and manage requests for modifications and relief.
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 higher leverage loans.
The market for CMBS loans is currently extremely volatile, to the point where most active players are not lending. According to a March 20 article in Commercial Mortgage Alert, “Issuance of private-label commercial mortgage-backed securities came to a halt and secondary-market spreads blew out this week, as the economic effects of the coronavirus pandemic worsened.”
It is more important than ever to choose the right mortgage banking company to serve your needs. Slatt Capital is active with many lending sources and has the experience and relationships to help borrowers navigate these turbulent waters.