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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   February 2013

Balancing Demand and Quality

Lenders’ scrutiny of loans is unabated despite the growing appetite for financing

Balancing Demand and Quality

Multifamily recently has been the  shining star of commercial mortgage originations. In fact, for each of the past two years, there has been an increase in this loan type, generating more competition and an increase in the number of lenders entering the marketplace. Delinquency rates in the multifamily segment also have been particularly low, according to the Mortgage Bankers Association (MBA).

This past third quarter, the delinquency rate on bank-held commercial and multifamily loans was at its lowest level since the beginning of 2009 and the delinquency rate for loans held in commercial mortgage-backed securities (CMBS) — while still elevated — continued to stabilize, according to MBA.

Despite a decrease of 17 percent in commercial and multifamily originations in this past third quarter over second-quarter 2012, the total volume of this past year’s first three quarters was 15 percent higher than the same period in the previous year, according to MBA data.

Commercial mortgage brokers should be aware that the increase in transactional volume on these property types is a reflection of lenders’ need to deploy capital and their desire to control risks. With multifamily properties being the industry favorite, low delinquency rates continue to encourage lenders to expand programs on an asset class that is typically self-sustaining. As a result, there is a growing base of business opportunities because of the popularity of this asset class among real estate investors and lenders. With historically low interest rates in particular, there has been a sustained demand for refinancing.

A necessary balance

Working with borrowers and lenders in today’s environment of low interest rates, commercial mortgage brokers should recognize lenders’ attempts to temper the growing demand with the need for good-quality loans. Many competitors may be willing to cut their rates to the bare bones for the right deal. What lenders typically are looking for are low loan-to-value (LTV) ratios, strong sponsorship and consistent historical income. With this in mind, it is critical to note that regulators today take a far closer look at loan products that grow on any lender’s balance sheet. Brokers, therefore, should not expect a compromise in credit and borrower quality.

Despite what appears to be a market rally, the risk tolerance has not changed. Lenders are fully aware of the need to accurately document files and maintain consistent credit criteria — an aspect of which commercial mortgage brokers often are reminded when underwriters ask for documentation or validation for items that 10 years ago could be assumed to be correct.

With that in mind, a few questions may be preoccupying the minds of mortgage professionals, like:

  • How can we maximize our ability to deliver the best products to our customers?
  • How do we capture the most competitive interest rate for the deal?
  • What is the best way to work with lenders to improve our customers’ experience?

The answer to these questions is simple: Know your deals.

A thorough checklist

Deals that are partially documented are a source of frustration for everyone involved. Commercial mortgage brokers should remember that reporting anything that seems different or out of the ordinary ultimately will save time in a process where speed can make or break future opportunities. For instance, unanswered questions about the collateral can dramatically slow the process on the lender’s end. Failing to report critical details about the history of the property or the structure of the borrowing entity also can cause delays. It is critical, therefore, to take time to conduct sufficient due diligence and to represent the loan request accurately.

One way to accomplish this thoroughness in a loan application is by asking questions. For example, in a multifamily transaction, a mortgage broker who doesn’t visit the property and fails to inquire about the property’s condition may be unpleasantly surprised when significant deferred maintenance is discovered during an underwriter’s site inspection. The point is: Don’t expect your client to tell you every piece of information that is critical to the deal; it is your duty to ask the right questions and gather details that will help you and your client avoid serious delays. In reality, the deal hinges on the mortgage broker’s ability to oversee the process, understand the pitfalls and get the borrower involved in a meaningful way. Only by doing so can a loan be closed in a timely manner.

With a return of lender appetite and the availability of numerous loan products, today’s multifamily borrowers seem to have options. Still, it’s critical for commercial mortgage brokers to be able to create a better partnership with their lenders by delivering complete and concise packages that reflect their professionalism and lead to uncomplicated closings.

• • •

Commercial mortgage brokers should keep three points in mind: Visit the properties, meet the borrowers, and know the ins and outs of the deals. The origination business is tough enough without the added inconvenience of undiscovered details complicating the underwriting process. By doing a thorough due diligence — including reviewing a set of property financials and an updated rent roll — before submitting the deal to the lender, your deal is likely to be smoothly underwritten and you may gain a client for the long run.


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