One Survey Predicts Increased Commercial RE Lending

In an article in the Washington Post, a survey from Jones Lang LaSalle Inc finds the majority of respondents predicting increased lending this year.

In the survey, conducted earlier this month with 50 nationwide lenders, 53 percent see more loans this year. The respondents included life insurance companies, dealers of commercial mortgage-backed securities, private lenders, commercial banks and government agencies. The optimists in the survey were private equity lenders and government agencies, which estimated an average rise in production up to 20 percent. Banks and life insurance companies, however, expected a volume decrease in 2009 ranging from 30 to 80 percent.

However, this doesn't mean new lending since most lenders are reserving available funds to refinance existing loans in their portfolio that are maturing:

This year, 80 percent of lenders predict that up to 40 percent of their loan allocations will be used to refinance maturing loans within their existing portfolios. And 13 percent expect refinancing of maturities to make up 80 to 100 percent of their portfolios.

This may be well and good for banks and their own maturing loan base. But to-date many commercial borrowers whose loans have matured in the last two years have been out in the cold, frozen out of the credit markets. These will only get loans when the secondary market comes back to life. Yet the forecast for that market is dismal:

About 67 percent of lenders expect some sort of securitized lending to come back to the capital markets by 2011 or later, while 22 percent predict securitized lending will return next year.

My own discussions with lenders leads me to believe there will be no return to securitization this year or next until we hit bottom in the economy and with the banking mess.

Which SBA Lenders are Actually Closing 7a?

SBA 7a guarantees used to earn a huge premium on the secondary market.

When a bank wrote a 7a deal, they usually sold the guarantee immediately on the secondary market for up to 9 points. That was a huge source of cash to the bank.

Since the secondary market has died and dryed, with no one to bid much of anything on the guaranty portion of the 7a, about the only lenders doing 7a loans are banks that are willing to hold onto the guaranty.

Consequently, while many banks will look at an SBA deal and give some happy talk to a prospective borrower, only those that hold the guaranty will actually do the loan.

Big difference in one's lender shopping, isn't it?

These guys ran Wall Street!

Somehow the Wall Street math that measured risk and reward got all screwed up, and we all wonder how some smart guys screwed up so badly.

Look at the video and find out why . . .

Lender Comments On What's Getting Funded

Riding the phones, looking to see what lenders are still employed, much less which lenders are still actually closing commercial real estate loans, has yielded the following items on which loans will get closed in the current credit environment:

• No story to the deal. The raw numbers must speak for themselves, but if an explanation is necessary the deal will die.
• Low leverage, no more than 65% LTV. Don't even start at a higher number and try to negotiate your way down unless you want to waste time killing your deal.
• Basic property types only (retail, multifamily, office). Anything else, especially anything strange or a little weird will be kicked out.
• Rate/term refinances or purchase money but no cash-out. Don't ask, don't hint, don't attempt or the deal dies.

It appears that the bankers are starting to think about lending again, though very, very conservatively. We'll see if this means that the happy talk they give to prospective borrowers actually leads to a closed loan, because so far it hasn't.

If they are intending to lend more, don't forget that bankers in the recent past were less than half the lending market and the conduits were the major lenders. Since conduits are basically gone for now, the amount of lending possible just by banks will still be way less than in past years.

65% Drop in SBA 7a Lending in 1st Q in Michigan

Lastest bank notes for Michigan-based SBA lending shows a 65% decreasse in 7(a) loans and 56% drop in 504 loans.

There was a 53% drop in dollars lent as well.

Much of this is due to the lack of a secondary market for the SBA guaranty, which while a valuable commodity, is only valuable if there is a market in which to trade the guaranty.

Banks typically sell off the guaranty for immediate cash-flow, but, no one's buying. Therefore, while SBA transactions may be very creditworthy, the lending just can't happen if the bank needs to sell the guaranty.

95% Drop in CMBS in 2008

This year $171 billion of commercial/multifamily mortgages will mature, without any liquid commercial mortgage market to take out these loans with fresh money.

The Mortgage Bankers Association report released yesterday says that commercial mortgage backed securities fell 95% in 2008.

Mortgage Brokers Getting Squeezed Out?

Mortgage brokers on the residential side (not me, I don't write residential) are finding fewer and fewer sources with which to place their loans.

Brokers get their programs and rates and terms from wholesalers who have the large balance sheets and credit lines that enable them to go directly to Fannie/Freddie/FHA or other secondary market players.

A slight markup to brokers has been a relatively inexpensive way to have a sales staff that isn't on the payroll.

However it appears that more and more wholesalers are exiting the broker origination channel altogether, leaving brokers scrambling to place loans with fewer and fewer lenders. Those lenders know this and are racheting up rates and fees and reducing premiums they pay brokers.

Why?

I don't know right now, but something is up. About the only brokers remaining on the residential side are those that are legitimate and long-term survivors who write good business. All the riff-raff exited the industry many months ago. But you wouldn't know it from the exodus of wholesale lenders, the difficulty mortgage insurance firms place on brokered-loan reviews, and banks pulling back warehouse credit lines.

Brokers have always thought there was a conspiracy by banks and mortgage bankers (essentially brokers with credit lines) to eliminate the lowly broker, but the brokers lower origination cost and sales-ability to bring in volume always kept them in the game.

Right now, though, it appears that the large lenders have all the ability they need to wipe out or so severely constrict brokers so that when the markets open up to the pent up demand for refinances the banks will get the majority of this business directly by default.

This will not be good for consumers, who will suffer from poor terms, slow service, and the usual bureaucratic bank processes. While brokers may be blamed for many of the loan problems people are suffering in these economic times, don't forget it was the bankers and mortgage bankers that wanted all the loans they could get from brokers, and it was not the brokers who underwrote the paper that has been so greatly criticized.

Ever-increasing Credit Writedowns

Update on the amount of credit write-downs:

Nouriel Roubini was just credited at Davos with his accurate forecast of the credit market meltdown, given his years of study of emerging economies. In the article, it mentions his newest forecast for write-offs:

With that bubble now popped, Roubini remains more pessimistic than economists elsewhere. The IMF forecasts global growth of 0.5 percent this year and bank losses from toxic U.S.- originated assets of $2.2 trillion. By contrast, Roubini sees the global economy shrinking this year, and banks writing down at least $3.6 trillion -- compared to the $1.1 trillion disclosed so far.

Now compare this with what I wrote back in :

• December 11, 2007 detailed Mark Hanson's estimate of future mortgage write-downs and their cause. Here is the link to the original article.
• November 12, 2002 detailed Nouriel Robini's then-forecast of the toxic mortgage write-off of up to $500 billion, which was a number scoffed at by all as unrealistic.

Now that the number is up to $1.1 trillion disclosed so far and Roubini estimated three times that as the ultimate number, it only adds more credence to the demographic argument that housing will not bottom for perhaps two more years.

Numbers supporting this were posted here on June 6, 2008 and here on June 7, 2008.

If banks are technically insolvent, refusing to take all their write-downs right now and even holding foreclosed homes on their books rather than listing them for sale to avoid further mark-down in assets and profits, then what does this say for the economy finally hitting bottom so that it can begin to improve?

Things only improve when market forces take over, when artificial support is eliminated. Until the pain is fully realized and not masked, there will be no trust in markets, no bottom in housing, no credit markets returning to functional levels.

Bill Gross: CRE price stabilization necessary for economic recovery

I just found a great blog called All American Investor that has a wide variety of topics posted, is well written and well-organized. I suggest those involved in commercial real estate finance subscribe to its feed.

From that site I came across an article that PIMCO's Bill Gross just wrote

"But one thing is certain: an economic recovery is dependent upon commercial real estate prices stabilizing and most retail stores staying open for business in the months and years ahead."

His argument is that banks are lending, albeit at much small levels than we prefer or need, but that the larger set of lenders are being ignored, which is the shadow-banking system of securitized financing instruments.

That CMBS market was responsible for a huge portion of commercial real estate lending, and since trust has not reentered that market, neither has lending.

This is evident, for example, in the inability of lenders to sell the guaranteed portion of SBA 7a loans off to restock their funds for more lending. There just isn't a secondary market for those guarantees that is profitable enough.

The first thing many lenders think of for owner/user financing is the SBA programs given that most lending that gets done in this credit environment needs a government guarantee. However, the reluctance of banks to do the 7a is amazing, but is due to the lack of a market to sell off the guarantee.