Today’s post is written by Michael Green, Commercial Loan Originator for Counsel Mortgage Group, LLC.
Commercial and multifamily mortgage bankers are expected to close $248 billion of loans backed by income-producing properties in 2020, a 59% decline from 2019’s record volume of $601 billion, the Mortgage Bankers Association (MBA) reported.
Total multifamily lending alone, which includes some loans made by small and midsize banks not captured in the overall total, is forecast to fall 42% this year. MBA anticipates a partial rebound in lending volumes in 2021, with commercial/multifamily lending rising to $390 billion.
“The ongoing COVID-19 pandemic continues to disrupt commercial and multifamily real estate markets,” said Jamie Woodwell, MBA’s VP for commercial real estate research. He said NOI, values and cap rates across the different property types are “expected to experience varying levels of stress in the months ahead, with hotel and retail properties already being the hardest hit.”
Snowballing distress in commercial real estate loans are threatening to become an avalanche that could overwhelm banks.

Getting a glimpse behind the curtain on how bank loans are performing isn’t easy. “It’s amazing that we have gone from the great financial crisis to now and still have no better transparency into the banks at a granular level as we do with CMBS,” says K.C. Conway, director of research and corporate engagement at the University of Alabama’s Alabama Center for Real Estate (ACRE) and chief economist for the CCIM Institute. Some banks are more transparent than others and there is definitely a lag in the data, he says.
In addition, the FDIC is allowing banks to forbear on loans and not have to report them as troubled loans for up to 180 days. “We’re not going to see anything big show up in the numbers until this deferral period expires,” says Johannes Moller, director in North American banks, at Fitch Ratings. The next big question is how the Federal Reserve is going to act and whether there will be further forbearance, which will help to determine when clarity on defaults on loans held by banks will be revealed, he says. (According to the Mortgage Bankers Association, commercial banks currently holding 39 percent of the $3.7 trillion in commercial/multifamily outstanding mortgage debt in the U.S.)
The nation’s largest banks are facing a possible $47.6 billion loan loss on commercial real estate over the next two years in the worst-case scenario for economic fallout from the coronavirus, according to the latest stress test results from the Federal Reserve Board.
The U.S. central bank’s regulatory body considered three progressively worse downside scenarios in determining banks’ abilities to withstand the current crisis. In each case, the results suggest that commercial real estate will take large losses.
The results are not designed to be forecasts but are a measure of the money banks need to have on hand to survive the pandemic. Banks could take a hit on loans beyond commercial real estate. In total, losses in the three scenarios ranged from $560 billion to $700 billion — or about 47% to 57% of banks’ retained earnings and additional paid-in capital. (Do you think banks want to increase their exposure?)
Even though all 33 of the banking groups in the stress test exceeded the required minimum capital and leverage ratios, the Fed took several actions to ensure large banks don’t deplete their cash.
 The Fed is forcing institutions to re-evaluate their longer-term capital plans.
 The Fed also is capping dividend payments to the amount paid in the second quarter and is further limiting them to an amount based on recent earnings
 Lastly, for Q3-20 the Fed is requiring large banks to preserve capital by suspending share repurchases.
“Actions by the board to preserve the high levels of capital in the U.S. banking system are an acknowledgment of both the strength of our largest banks as well as the high degree of uncertainty we face,” Randal Quarles, vice chair of supervision for the Fed’s board of governors, said in a statement.
In contrast to the 2007-2009 financial crisis, the nation’s largest banks entered the pandemic with high levels of capital and liquidity: $1.2 trillion in common equity and $3.3 trillion in high-quality liquid assets, Quarles noted.
Fed Plans to Further Nationalize the Economy
When your only tool is a hammer, every problem becomes a nail!
So, how many ways can the Fed provide liquidity, or potential liquidity if and when needed?
The Federal Reserve Board on Tuesday (7-28-20) announced an extension through December 31 of its lending facilities that were scheduled to expire on or around September 30. The threemonth extension will facilitate planning by potential facility participants and provide certainty that the facilities will continue to be available to help the economy recover from the COVID-19 pandemic.
The Board’s lending facilities have provided a critical backstop, stabilizing and substantially improving market functioning and enhancing the flow of credit to households, businesses, and state and local governments.
The extensions apply to:
 the Primary Dealer Credit Facility,
 the Money Market Mutual Fund Liquidity Facility,
 the Primary Market Corporate Credit Facility,
 the Secondary Market Corporate Credit Facility,
 the Term Asset-Backed Securities Loan Facility,  the Paycheck Protection Program Liquidity Facility,  and the Main Street Lending Program.
The Municipal Liquidity Facility is already set to expire on December 31, with the Commercial Paper Funding Facility set to expire on March 17, 2021.
Don’t ask what this does to the USD. That’s a different discussion.
And Now to the Money
Yet, since last March Gantry has closed 67 CRE loans totaling nearly $400 million! Who’s Gantry you asked – and rightfully so? It so happens that Gantry Inc. is the largest private mortgage banking firm in the country! Some 30 years in the making … 9 offices nationally (including Phoenix), originating an average of $4 billion per year. Who knew!
At Counsel Mortgage we have not only heard of them, but also of the not-so-highly ranked. If, or as, banks may go out of business, current money center banks (the “big boy banks”, e.g., Wells Fargo, BofA, etc.) pull back acceptance of loan apps pending more data points, and we begin to have an environment reflective of 2008-2009, banks step aside and non-bank lenders fill in the gap. So how do you finance the opportunities we all know are coming? With “alternative” lenders, of course. These are not all hard money lenders, or bridge lenders with hard money terms. Finding them may be more of a challenge, especially when you’re looking for the “right fit”, even with the internet. And, working with them, is taming a different kind of beast than your familiar local bank or credit union.
If you think we might help, give us a call at the Counsel Mortgage Group.
We offer a variety of products and services, ask us how we can assist you today:
Counsel Mortgage Group®, LLC
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AZ MB #0909580
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