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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   June 2009

How Lenders Look Beyond LTV

Loan tapes and other methods of portfolio analysis help lenders readjust their focus

Discipline has always been the hallmark of successful private lenders. In recent years, these lenders generated consistent returns by bypassing the siren calls of marginal loan opportunities touted by brokers and borrowers, sticking to their lending philosophy and loan-to-value ratios (LTVs), and following their gut instincts. And mortgage brokers who work with private lenders have gotten used to packaging their clients' loan applications to this disciplined approach.

Because of the market slowdown, however, many private lenders are realizing that this lending discipline must change and that they instead must focus on the portfolio itself. This is because a loan may have been solid at funding but can carry a different risk profile as it progresses through its term.

Fortunately, portfolio-analysis tools and approaches are available that are simple to use and effective in providing information. These tools include loan tapes -- which provide all the pertinent information about a loan at a glance -- as well as property and local-market information whose analysis during the loan's term can determine its performance.

Brokers who understand how and why private lenders use these tools can help collect information for use in portfolio analysis, thereby solidifying their relationships with their lender partners.

How to use loan tapes

A loan tape is a basic banking tool that compiles a loan's and a portfolio's most-important elements. Although loan tapes are common in the secondary market, many private lenders typically don't use them.

Traditionally, private lenders instead keep loan details in the loan file itself or, frequently, commit them to memory. Having originated, underwritten and funded a loan, private-lender principals often fundamentally know each loan's figures the same way that fantasy-football players know their players' stats.

This traditional approach saves paperwork and bypasses the tedium of creating and maintaining records that might seem of little use. It ignores the fact that market conditions can change, however.

For lenders that focus only on originating new loans, the first sight of market changes may only come about when loan payments begin to arrive late -- or not at all.

The loan tape serves two primary functions to help these lenders avoid any such surprises: It provides virtually every important information point for each loan at a glance, and it also aggregates data for the entire loan portfolio on one sheet.

Loan tapes generally carry the same information and are most often formatted in a spreadsheet with the following column categories:

  • Borrower name
  • Property address, city, state and ZIP code
  • County
  • Note rate
  • Sold rate
  • Fixed/floating
  • Spread
  • Float cap
  • Float floor
  • Loan priority
  • Total loan amount approved
  • Current principal balance
  • Loan balance
  • Loan term
  • Loan term remaining
  • Property type (e.g., residential, commercial, retail, industrial, etc.)
  • Zoning
  • Loan type (e.g., bridge, term, construction, construction-completion, development, etc.)
  • Property occupancy (i.e., owner or tenant)
  • Property LTV
  • Appraised value
  • Participating lender and percent
  • Annual income on loan

Over the life of a loan, the most-significant changes in the tape entries would be the decreasing time remaining for each loan and the paydown of principal for amortizing loans.

Remember that construction loans have a different formula: As more funds are lent, the property value increases at a disproportionate rate, and the LTV decreases.

Loan tapes frequently are linked to payment history, recording late payments and payment of insurance, maintenance, taxes, etc. They also can provide a quick, single-source overview of the loans originated and funded and of the lender's servicing management.

Focus on the property

During the loan term, private lenders also may analyze the property's performance to update the basic information that the appraiser assembled at the loan's inception. This analysis typically focuses on the key variables of a property's value.

For instance, is the property fully rented? Are rents paid on time? How are the tenants doing in tough times? What's the performance of comparable properties used for the initial appraisal?

Different sources can have this information. Tenants and/or borrowers could be required to forward their financials to the lender monthly or quarterly. Commercial property listings for sale and rental markets can be reviewed online.

You can obtain information by driving by the property, as well. Have "for sale" and "for rent" signs sprouted on commercial and residential properties in the neighborhood? Are competing commercial buildings under construction or renovation? Is the subject property's parking lot full?

In other words, look at the property through the same lens used when originating loans. Ask: Would you lend on this property today?

Look at the market

Private lending's strength comes from scrutinizing each borrower's and property's details. The thinking is that if each loan is reviewed meticulously at inception, the entire portfolio's risk profile is reduced.

The disadvantage to focusing on minutiae is that portfolios can drift to a high concentration of specific types of loans or of loans secured by properties in limited areas.

Fixated on the details, lenders can lose sight of the bigger picture. Commercial loans have many moving parts. Each loan, like a boat, can be well-crafted and seaworthy -- but it's cold comfort when the entire sea changes.

Add a macro view to the analytical mix. This process takes the form of a coordinated desk-and-field review and does not lend itself well to a check-the-box approach. Rather, private lenders must consider what's going on in the world and how it can impact each loan.

For example, looking at current events:

  • Oil prices soared last summer. What happens if they increase again? Gas station revenue plunges when gas prices increase. Convenience-store and auto sales also decline. Recreational-vehicle parks see higher vacancies, as do hotels and motels.
  • Tougher economic times are changing consumer-spending patterns. Retailers that focus on the lower end of the market are enjoying better sales than those selling luxury goods. Look at the tenant mix of properties in the portfolio.
  • Residential property values are shifting the landscape. Areas showing slower-than-anticipated growth or high numbers of foreclosures are having a negative influence on commercial properties designed to serve local residents. Look out for half-vacant shopping malls, empty parking lots choked with weeds and aging for-sale signs.

This macro view comes from a range of sources, including national and local newspapers, trade journals, blogs and simply common sense. Because each lender's portfolio is different, the analysis will vary. A lender that specializes in resort properties or golf courses would review different data than a lender focused on agricultural- or industrial-property loans.

Mortgage brokers can be invaluable conduits for information. You can cement relations with lenders by feeding them local-market data. For instance, send quick notes like "Office vacancies are up 5 percent and rents are down 2 percent in the neighborhood. We're seeing more empty storefronts on Main Street."

Remember: The same lender discipline applied to originating loans must be applied to updating the assumptions that underpin each loan's value.

Additional benefits

In addition to giving lenders information, implementing these practices can provide a level of transparency and assurance that investors appreciate and increasingly will come to demand. Scrutiny by individual investors is soaring, and private lenders must provide strong evidence of what they're doing to attract and maintain investor dollars. Lenders can get enormous mileage by letting their investors know that they're on top of their loan portfolio and the market as a whole.

Another benefit comes from the ability to expand lending capabilities beyond specialty niches and local markets. Understanding the bigger picture and measuring and tracking risk variations lets lenders expand and diversify their portfolios. It also helps them leverage the advantages of speed and custom-fit loans.

In a down market, portfolio analysis could lead to some discomfiting discoveries and even a few sleepless nights. But for brokers and lenders, it's better to know what's actually contained within a loan portfolio and what the risks may be before it's too late.


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