For a commercial mortgage broker to successfully analyze a potential loan opportunity during a downturn as severe as this one, they must stay ultra-informed about the market at large, closely follow asset paper trails and review property records in a timely fashion — all of which produce more confident decisionmaking.
Machine learning and other technological advances have allowed detailed data in user-friendly formats to be more readily available to commercial mortgage professionals. What the COVID-19 pandemic is teaching us is that mortgage brokers need to take more advantage of this data to make better decisions amid mass levels of economic and market uncertainty.
Heading into 2020, many commercial mortgage brokers were preparing for an economic recession. As we now well know, the crisis that actually arose due to COVID-19 was far more sudden and severe than anticipated.
Throughout this year, the mass industry upheaval resulting from the coronavirus has forced all commercial real estate debt professionals to work in ways they never have before — from finding craftier ways to source and analyze new opportunities, to building relationships with property owners despite working from home. Although the COVID-19 crisis is undoubtedly different than the cyclical economic downturns we’re accustomed to, the approaches that mortgage brokers should take to analyze new opportunities in this pandemic are the same as during any recession.
Prior to the pandemic, the industry was already modernizing and becoming increasingly driven by data. As new technologies and machine learning are applied to data, information about properties, people and companies can be interconnected digitally in ways we’ve never seen before.
This opens a huge door of opportunity for those looking to connect borrowers to the right lenders. It also evens the playing field a bit. Data also fuels more competition, however, and thus creates an environment in which mortgage brokers must make informed decisions in less time despite more uncertainty in the market.
Simply put, there’s never a time where you should neglect immersing yourself in data. The commercial mortgage broker should always be attentive and always absorbing information. Those who don’t continuously conduct research in a healthy market will find themselves well behind the pack when the economy takes a tumble. The uninformed broker scrambles around, reacting and needing to backtrack to move forward.
By contrast, in a market downturn, an informed broker merely needs to pivot and strategize — a simple adjustment as opposed to a full-blown change of course. The informed broker also will have more time to analyze the opportunities in front of them rather than spending time trying to untangle the complexities of the market as a whole. If you’re not entering into a recession well-informed, then all of the subsequent work you do loses value and impact.
Recession or not, however, successfully unearthing new deals comes down to having reliable digital data sources and conducting ongoing, exhaustive research. Year-round data immersion helps brokers know their place in a changing market. They can monitor asset-specific transaction trends, borrower concentration and available government relief. When turmoil strikes, the broker can form an initial view of the market and define their likely appetite within that environment. Only once that’s done should they start engaging with their sources of capital and begin analyzing individual prospects to work with.
Paper trails and dated records, as well as what’s already known of the market, are what allow commercial mortgage brokers to assess the risk and reward of working with certain assets and borrowers. It’s about understanding the story of the property and owner in question. To analyze an opportunity during a recession, brokers should check the essential details of the asset or “data tape,” be hypercritical of dates, and compare what was found to similar scenarios from the past and present.
First, it is important to check the data tape and understand the story of a property. Behind every property, there’s an owner (who’s likely a part of a larger company), a history of sales records, previous debt, valuations, tenants, a business plan and much more. Past information points to how well a market or asset performed in previous recessions. It also shows how the owner handled these downturns.
A good portion of this information can now be found online and, when compiled, helps contextualize an asset. Mortgage brokers can digitally access a property’s sales history, view its tenants, and then review the current lender and loan amount. A broker will be able to see when the property was last sold, if the tenants are likely to struggle in a recession and which lender the borrower is currently working with.
In a similar vein, by diving into paper trails specific to an owner, brokers also can see if that person is likely to be active in a risky, depleted market. Once you have the story in place, the next step is determining if now is the right time to make a play.
Brokers also must apply a hypercritical eye to dates and dues. The windows of time that brokers are used to operating in shrink quite a bit during a recession. The sweet spot for finding loan opportunities can come and go at faster rates.
During a recession, data can go stale quickly. This makes it crucial for brokers to pay close attention to dates on any reports or records tied to a property, then verify that the information is still useful. Underwriting and appraisal reports from only a month or two earlier may not represent what today’s market dictates. Loan due dates also are a telling sign of the direction of the market. Late loan payments are an early signal of stress and may point brokers in the direction of where future loan opportunities lie. But these things take time.
It takes 30 to 90 days for a mortgage to qualify as delinquent. Across the market as a whole, it takes much longer for peak stress to unfold during a recession. During the financial crisis of 2007-2009, for example, the rate of past-due residential mortgages peaked in first-quarter 2009, more than a year after the recession began in fourth-quarter 2007. So, while late payments may be an early sign of stress, they also may signal many months of rising delinquencies to come. Paying close attention to dates allows brokers to assess the freshness of the data and the overall health of the market.
It also is important to use data to make comparisons. The ample historical data on past recessions can inform mortgage brokers when making present-day decisions. And there is enough data on specific geographic areas and asset types to see how lenders are treating loans of a specific type and size. In times where uncertainty rules, it’s valuable to look at historical evidence of how things might turn out. To thoroughly analyze a new loan opportunity, brokers can run side-by-side comparisons of the asset they’re reviewing and loans originated for similar assets in the recent past.
Times are changing. The commercial mortgage industry has long lagged behind others in terms of its adoption and widespread use of data. Although much of this was happening prior to the onset of COVID-19, the pandemic stands to change many industrywide expectations regarding future recessions.
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Much, if not all, of the research that a mortgage broker needs to do can be done digitally, in less time and often with more accuracy. Recession or not, mortgage brokers should be fully immersing themselves in data to thoroughly vet the opportunities available to them. ●