Character, capacity, capital, collateral and conditions again rule the loan universe

Michael G. Nassy, senior vice president for national real estate credit underwriting, National Cooperative Bank

As published in Scotsman Guide's Commercial Edition, July 2009.

The growth of the commercial mortgage-backed securities market in the past few years led many lenders and investors of securitized-debt obligations to mix up many different assets. They thought that even if a few failed, most would be healthy enough to cover losses.

But this financial model failed to consider consumer and real estate fundamentals, as well as the fact that several bad loans can sink a full ship.

During the boom period, many mortgage lenders lost sight of the prudent, managed, risk-based approach to financing that did not produce exorbitant revenues but innately insulated lenders from these unforeseen risks.

On the other hand, many lenders also avoided the earnings race and stuck to a more conservative form of lending. These lenders now continue to operate at a profit and are vital financing sources in this stark credit market, albeit with stricter underwriting requirements.

Commercial mortgage brokers trying to secure loans for clients in today's environment often are left wondering what these new requirements are. Essentially, the "new" underwriting requirements require lenders and borrowers to return to the fundamental five C's of credit: character, capacity, capital, collateral and conditions. These factors play into various stages of the loan process, from underwriting that determines whether a loan will be funded to post-closing when the loan sits on the lender's books.

Many lenders are reducing their loan proceeds or choosing not to finance deals where the risk-reward ratio is not in their favor. This is especially true for larger, riskier transactions with limited collateral and recourse. Nonrecourse loans are few and far between. Lenders likely will now require borrowers to sign a guarantee and pledge recourse for the loan repayment.

Also becoming the norm are shorter amortization periods. Now that lenders are holding loans on their books rather than selling them on the secondary market, they want shorter repayment windows to curtail risk.

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