Today’s post is written by Michael Green, Commercial Loan Originator for Counsel Mortgage Group, LLC.
Banks could be slipping into old bad habits. Last year, as interest rates fell, banks started to loosen underwriting standards reminiscent of the last cycle—the kinds of missteps that ultimately led to the great recession. This includes high loan-to-value ratios as well as skipping essential steps, like income verification – no-doc loans are back in the CRE lending market!
“The banks are starting to get a little bit scary. You are starting to see the behavior that you saw in 2006 and 2007 again,” says Steve Jacobs, CEO of Ten-X Commercial in an interview with”.
I don’t think this is a mainstream trend – yet, but it’s something that I’ve noticed recently. This ramps up buyer activity and compresses cap rates, pushing pricing up. This translates into a buyer maybe paying a 4-cap for a property when it really should be a 5-cap. This is when it gets dangerous. I’m told this dynamic is also present in the residential market, but at the commercial desk we only observe the residential market from a distance.
On the commercial side, I’m seeing lenders that were holding tight at the 60% or 65% loan to cost or loan to value starting to play in the 70% or 85% range, depending on the asset class and pre-construction vs. existing income-stable properties. I’ve seen lenders wonder aloud of 85-90% loans, but not seen anything actually close at these levels.
It is hard to say what is driving this trend—especially since the downfall of the last cycle wasn’t so long ago. It could be the reduction in interest rates, which made money cheap while demand remains high – it may stem from that. Generally as rates drop banks make less money; spreads get compressed. Lenders operating aggressively in low rate environments may be sacrificing profit for market share. If so, any one bank can’t conduct this strategy for long. This being the case, you may find significant rate spreads in funding offers. (Don’t forget to check all the other covenants in their proposal – ask questions.)
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