Today’s post is written by Michael Green, Commercial Loan Originator for Counsel Mortgage Group, LLC.
So much happening so fast – COVID-19 … current and downstream effects! We’ll try to sift through the clutter and focus on those factors affecting our market over the next few months. As I review data accumulated since our last letter, this will be a challenge. So here we go.
The primary factor affecting the market’s current negative behavior is the coronavirus … COVID-19. So the primary battle to be won is to neutralize this threat to the economy. Prior to the emergence of COVID-19 the economy was on fairly firm ground. Some pluses & minuses here-n-there, but largely stable. Retaining the economy’s structural framework through the crisis is paramount to positioning for a quick resurgence to where we left off. The Government’s quick actions over the last couple weeks have been directed to that end. We’ll be able to gauge the success of these actions
From where will the glimmers of hope originate? Why from day-to-day improvement in the control & ultimately eradication of the coronavirus, of course. As incremental improvements are made in winning the COVID-19 war, the economy will be put back on track with incremental improvements, e.g., lifting of travel restrictions, various segments of businesses will be allowed to re-open, specific geographical areas of the country are expected to begin hiring or reinstating employment.
But the Government is fighting to retain the economic structure with the few weapons it has –money … debt money. Be it funded from fiscal or monetary sources. The current legislatively approved commitment is about $3 trillion. (This is a day-to-day moving target.) But where does it go? Will this indeed shore up the main street economy or become another Wall Street boondoggle like all the QE’s of not long ago. Well, at a glance, see image for the big pieces.
What isn’t spelled out here is that somewhere in the Source-Recipient transfer is about $450 billion going to the Fed via the Treasury who is then to fund loans originated by banks. The way banking works is that this money can be leveraged 10X between the Fed and the banks. That $450 billion, then, represents $4.5 trillion of potential loans. That makes the liquidity capacity of the CARES Act closer to $6-7 trillion than the advertised $2.3 trillion. Clearly a minor oversight in public disclosure. That additional $4 trillion net of additional liquidity could very well find its way to supporting financial markets
But our job at hand is to remain informed, optimistic, and ready to resume life as we know it when circumstances permit.
Along that line … in every chaotic event there is opportunity!
Cloistered away as well are, however, our day-to-day emotional pulse is limited by sources that represent the mood of the nation, whether a small circle of family & friends or the national media – not a positive environment. We wonder is there really “normal” work being done out there? How much longer might this go on? How bad can “bad” get? No answers … only speculative opinion. War is hell!
But this from the front lines:
• We have an SBA loan that was approved prior to COVID-19 and are only pending updated documentation. The lender has not pulled their commitment or wanted to re-underwrite the loan for the current environment. And it involves construction.
• We have 3 additional loans in process of submission; two SBA and one conventional. All loans are being aggressively received and we expect multiple offers on all 3. Underwriters across the board have not raised the bar on standards, although some of the more conservative lenders are starting to make moves in that direction. Not always as straight forward as reducing LTVs or raising states rates, but more subtlety in covenants, particularly with conventional loans.
• The SBA has announced that it will pay the first 6 months of payments for 7(a) loans funded by the end of Sept. (Trump is trying very hard to protect his small business segment … as I recall about 40% of the workforce.)
• Borrower inquiries remain firm, although the tone of conversations reflects caution.
• Borrowers (and lenders), however, are in a quandary. The question is how will my business and/or real estate be valued for the negative effects of COVID-19? If it’s valued primarily on an income approach basis, what will that get me when my financials have to reflect Mar, Apr, etc., going outbound, and for how long? A concern not overlooked at The Counsel Mortgage Group.
We’ve discussed this topic with 3 commercial appraisers we know well in the AZ market. They’re working with various adjustments to data to reflect the anticipated situation, but nothing concrete … with one exception.
One of the appraisers we have a long-standing relationship with is the AZ rep for a national valuation company. His company has developed a model reflecting just what we’re talking about. It was originally developed and released internally several weeks ago, and has been updated weekly. This appraiser was kind (trusting) enough to send us a copy of their most recent report – to be treated of course with confidentiality. So this is not something we can share with you. We haven’t reviewed it yet, but will do so in the very near future. We suspect we’ll be able to apply the methodologies to current properties and businesses for acquisition and re-financing. (This area is also a big concern to folks who might want to be selling their properties for the same reason.) This also has direct application to the lending business. For underwriting, the primary basis their loan offers is the ability to service the loan from the underlying business, or property in the case of a rental.
If you’d like to identify and pursue your opportunity in the chaos but have some uncertainties, give us a call for a no-obligation consultation. This is not our first rodeo!
For specific representation, give us a call at Counsel Mortgage.
We offer a variety of products and services, ask us how we can assist you today:
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