We’ve written before about lenders raising the bar, or tightening, lending terms and conditions. One of the terms that’s started showing up in the covenants is “full recourse only”. Everything beyond the value of the property is now on the line. This was a somewhat common term in the 70’s and early ‘80s going through and coming out of the stagflation period at the time. But this had largely vanished from CRE loans when markets were relatively stable. (This term has been maintained in SBA loans from at least 2000, re-named as a “personal guarantee”.)
A June brief note from Colliers on lenders tightening credit included this warning that hasn’t been part of the CRE lexicon in years.
“Recourse is becoming part of the conversation again due to various factors,” wrote Aaron Jodka, research director for U.S. capital markets at Colliers. “These include the instability in the banking industry beginning in (last) March, a lack of loan churn (elective refinancing has dried up), and increased capital requirements.”
Through May, CMBS issuance declined 75% from the same period last year, while the number of deals dropped 66%, per Trepp. The Fed’s latest lender survey shows a clear upward trajectory of tightening lending standards. The net percentage of lenders doing so rose to:
73.8% for construction and land development,
66.7% for nonfarm nonresidential deals (commercial), and
64.5% for multifamily.
Two-out-of-three or three-out-of-four lenders have tightened up!! The odds of not having a recourse covenant in your next loan are not good.
These are the highest levels seen since Q3-20 amid the pandemic.
The potential for even major property owners turning over the keys to lenders when a refinance doesn’t seem a smart investment for them is now a reality. Lenders can’t afford for this to happen in any scale because values are falling. Recovering the full value of a loan – often in interest-only payments – drops, and no one wants big hits to their balance sheets.
Furthermore, lenders aren’t particularly good property managers or operators – that’s not their business. They need to unload REO properties, which would likely mean dropping valuations, which might then undermine the values of other properties. If recourse is coming up in business discussions now, it could become an increasingly appealing demand for lenders, who don’t want to be left holding the bag in the seen-to-be-coming downcycle.
How to survive and even thrive in this environment? Seek a good counselor … Counsel Mortgage comes to mind. Maybe you’ll want to keep us in mind too. We work for you, not the lender.
Today’s post is written by Michael Green, Commercial Loan Originator for Counsel Mortgage Group, LLC.
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