We’re STILL funding commercial real estate loans. If you’re curious as to WHY this is, you should watch one of our helpful and informative video’s on commercial loans and the financing industry.

Previously if an individual or business had just come out of a state of bankruptcy creditors were more prone to begin trusting that the individual has gotten themselves back to a stable situation. In some industries, such as the airline industries, it was commonplace to file bankruptcy in an effort to become more competitive than the competitor. These sorts of headlines no longer make the news as this tactic no longer works.

Bankruptcy laws have changed to such an extent that they have rendered previous underwriting guidelines obsolete. Today, when reviewing a business or personal credit history and a bankruptcy is noted that has EVER taken place then there is likely to be a loan decline. The government and the SBA have spearheaded this guideline and the industry has followed somewhat closely behind.

Is there hope after bankruptcy? Of course there is but the ship will need to be placed on a different course. Conventional (or prime) loan sources are closed once this issue is located. Fortunately private money has again made it available into the commercial arena and is generally far more lenient provided that the existing debt is able to be serviced and the building, or collateral, is a very high quality. In other words, a poor quality run down building will not be attractive to anybody. Combine the poor quality and run down building with poor credit and there may not be a credit solution for a consumer or business. In residential terms we used to ask this question is terms such as how many months out of bankruptcy, or what happens if they are in bankruptcy. To reiterate, today it is just that they HAVE been adjudicated bankrupt.

Today, much more emphasis is placed upon analyzing the complete credit situation and circumstances that a borrower and business find themselves in. This situation will absolutely require a complete credit analysis rather than a ‘quick look’ so that an accurate credit decision can be made.

When I was in the residential business we all understood what risk based pricing consisted of, however when I crossed over to the commercial world it was as if I crossed into another dimension. Although certain lenders will publish rate sheets, in fact commercial rates are really driven by factors that come up from within the capital markets. The capital markets have been silent for some time however they are beginning to show their heads from the gopher holes. Commercial Lending Capital publishes rates to previously registered and approved brokers. Commercial Lending Capital treats rate sheets like a loaded gun; in the wrong hands they can kill a perfectly good deal. Let’s examine why in the following few paragraphs.

The Wall Street Journal reports that in the worst-case scenario, federal regulators examining the 19 largest U.S. banks are projecting losses of up to 12% on commercial real-estate loans over two years. Guess what happens when banks need more capital? They raise the price for the capital that they do have.

Regulators are likely to cite commercial-property debt problems as a major reason why at least some of the large banks need additional capital. Such losses likely would cause even deeper misery, and risk of failure, at small and medium banks because they tend to have disproportionally more exposure to commercial real-estate loans than giant institutions. Guess what happens when banks have a higher than expected default rate AND need more capital? They raise the rates (pricing) and they tighten the credit standards.

Analysts already had been forecasting hundreds of bank closures in the next five years. The stress-test assumptions, including a 10.3% jobless rate at the end of 2010, raise the specter that some of the failures could occur sooner. Guess what happens when banks expect to fail? They quit making loans and rate is once again immaterial.

The bottom line is that from this perspective banks need more capital, they expect the capital to cost more, and they expect a higher than hoped for failure rate among their peers. This allows the survivors to finally earn more money on their products that they sell, which translates into higher rates and shorter fixed rate terms. Given the above scenario it makes absolutely no sense when a loan producer comes forward indicating that their borrower wishes to lower their current interest rate. Over the next five years borrowers will not be in a negotiating position as the market readjusts. This is survival of the fittest and rate is just a product of risk.

Back to the first paragraph of this article whereby I indicated we only provide rate sheets to approved brokers. The purpose behind this strategy is that we are disseminating correct information to borrowers. Let me give you the two examples below:

Borrower One: Cash-out – $100,000 – 25% LTV – Apartments in CA. Cash-out is to conduct improvements that will increase rents and utility.
Borrower Two: Cash-out – $100,000 – 25% LTV – Apartments in CA. Cash out is to reimburse themselves for improvements already conducted one year prior.

Assuming the same credit profile, borrower two would likely not be approved in this marketplace or the terms of the loan would be much more costly. No lender is anxious to allow borrowers to remove equity from a property, as that tends to be a high risk, high default transaction. Now along comes our well intentioned loan broker with a rate sheet in hand that may not see the difference between these two transactions. The borrower would be quoted incorrectly and expectations would be set incorrectly.

A few years back there was a lot of discussion about which index was used to compute the final rate that the borrower will pay for a commercial transaction. Mortgage brokers and loan officers would telephone our offices (and those of our competitors) with open discussion and debate about what index they thought should be used. When the loan finally sold in the secondary market the index that the loan finally ended up was likely going to change. The index at the beginning of the transaction is like a façade at Disneyland Park; there is an entire netherworld behind the scenes. Today the business is much simpler. You either have the credit file and scenario required or you don’t and thus the rate is a byproduct of the transaction.

Our training system focuses on assembling the transaction and understanding the scenario before rates, expenses and fees are never determined or discussed with the potential broker or borrower. The originator that attempts to start the conversation by determining or discussing interest rates is going to lose every time. By example, if I informed you that your interest rate would be between 4% and 12%, you would hear one of two things come out of my mouth; either my rates are 4% and I am your biggest hero in the whole world or your rates are 12% and you are a crook. Either way you are likely to lose.

The moral to this story is this: money is tight, the capital markets are maximizing their return on investment, values are down in most areas, and dissemination of correct information to borrowers is at an all-time low. Commercial Lending Capital is helping to bridge this gap by innovative training programs and the limitation of sensitive information dissemination.

To get an idea of the reasons why these limitations exist, just look out your window as you’re driving about your town. In most locations that I’ve gone to it’s obvious that there are extraordinary levels of vacancies in all aspects of the real estate industry. Multifamily has been especially hard hit for a variety of reasons, not the least of which is that families are pairing up and sharing residential space together. Medically related office space however, in general, is still in demand. Drs. are graduating or becoming tired of working for-the-man and are wanting to set up their own practices.

Notwithstanding the above there are pockets of construction financing available on a case-by-case basis when it makes absolute sense to provide additional leasable space or where it makes sense for a business to construct and occupied their own space in areas where you’re the space typically would not be available.

The good news is that there are still construction funds available. The bad news is that these funds are becoming more and more expensive as the market has become tighter and tighter. Even the best business plan will not survive the scrutiny of wary underwriters that are becoming beat up with the unusually high foreclosure rate due to non-completion of existing projects. In the old days when a contractor began running short of funds the bank would have granted extensions of credit in additional funding to make the project work. With the wave of FDIC forced closures of certain banks, the funds just factually are not available because the bank has gone away.

So the industry as a whole is being asked to make decisions on a huge quantity of construction loans that are perhaps one half made up of loans that are required as a component of a completion project. The completion project could be defined as that requiring additional funding in order to complete the original project which has undergone cost overruns or bank failure.

The moral to the story is that you should not give up on these loans however you should make a concerted effort to match yourself up with borrowers and other entities that have a realistic expectation of the current market conditions.

At any point in the workflow process, something could be discovered that destroys an otherwise good loan because it was not disclosed in the beginning. High quality loan producers make it a point to find out ALL of the deficiencies in the loan transaction at the very start of the process. I have always been in awe of the people that make a 1/2 million and more per year in the lending business. I’ve noted through the years that one substantial trait that they possess is the ability to separate the good loans from the great loans. In this economy the loans that are actually funding will be the great loans.

Whenever I make the statement above to a crowd, the room comes alive. I realize (that sometimes) borrowers lie. For those of us in the lending business, this sometimes comes as a surprise and we go home at night depressed, angry, and we go through a lot of dogs. All kidding aside, the great loan producer will produce a great outcome by becoming a great question ‘asker’. I know that when my wife asked me why I just got through the front door at 3 AM this morning, that there is absolutely no answer that I can give her that will satisfy her curiosity as to where I’ve been or what I’ve done. The part that really surprises me is that a loan officer will believe the borrower when they say that their property has appreciated by 200% in the last 12 months and do nothing to question that key issue. I am also surprised when borrowers claim they make $35,000 a month, and the loan officer includes this information on the loan application, that in fact after months of due diligence the borrower may only make $1000 a month or some other ridiculous number. The best advice that I can give any loan originator is to behave like my wife; she asks some of the best questions that have ever been created. I’ll guarantee you that she knows how many gallons of gas I used my car last week BEFORE she evens asks the first question. Know what the answer should be BEFORE you ask the question and you will graduate into a high quality loan producer.

“The moral to the story is that the times when a loan officer can make up any story in a borrower can tell any story and have the true facts go undiscovered are ancient history.”

Now back to another key issue: the real estate collateral otherwise known as the subject property. If I die tonight, the best piece of advice that I can give you is to work on GREAT properties. What I mean by this, is work on those properties that any investor or any occupant would like to own. I’m sure that we’ve all driven to the slums of one of our favorite cities and looked around and wondered why a business would want to operate there. If you have any inclination that this would be the case, then I suggest you keep on moving. The highest-paid originators will concentrate on high quality real estate transactions that will not produce issues during the appraisal process. Appraisers in the commercial world are extraordinarily qualified to observe deferred maintenance and neighborhood types of issues that would preclude excellent building performance. I can absolutely guarantee you that the appraisal process will catch 99.9% at these sorts of issues. I cannot express to you how tired I am of loan officers complaining when the value of their subject property comes in at one third or one half of what they thought it would be. In almost each one of these cases, the source of the problem can be traced back to the loan officer or the borrower; then becoming outraged (enraged, angry, etc) because their property does not prove to be worth what they WISHED it to be worth. Maybe I could click my heels together (Wizard of Oz reference) and get the value to equal what I wished it would be that it’s just not the way it works.

High Quality Loan Production = High Quality Borrowers and High Quality Collateral

Everything else will usually turn into a waste of effort. End of Story

Our company has established a training program to help take folks into the area of commercial lending and help them succeed by finding the borrowers that have the true capability of participating in the commercial lending environment. By this I mean that most individuals we see still participating in the lending industry spent an enormous amount of time chasing loans and transactions that would never make sense at the underwriting level. The end result is that the originator is dirt poor and the available lenders in the marketplace will shy away from the submissions unless they make sense on a regular basis. We all know that people do silly things and there is a certain expectation that borrowers will sometimes not behave as we would like them to. Even the best sales approach coupled with the best loan offer will not sway certain borrowers.

Commercial Lending Capital has invested the last five years in developing a street smart, streetwise training program that enables an originator to participate in the commercial business at the expert level at a higher than average success rate. I do not proclaim that we have all of the answers but I do proclaim that we have a highly successful program for the individual that would choose to take advantage.

We have written other articles about diversifying into countercyclical businesses that can take advantage of the current decline in the various credit marketplaces. This again will require training and support. We have other sections of our website that will describe how our company can go about supporting you in this area.

Sometimes, we get such nice responses from people we work with that it hurts our very souls to keep them to ourselves. Well, we have a blog now so it’s time to share one great compliment we got earlier this week (we’ll promise to keep it these to a minimum).

I am a mortgage broker in Key West and have recently had dealings with your company on the above mentioned loan request. My borrower eventually failed to respond to the last conditional commitment letter from you…but this is not because of the service we got from your staff.

Everyone with your company I dealt with during this request has been more than cooperative and very patient. Rosann was a pleasure to work with even though she got a very sloppy package sent to her by the original broker. She was very understanding while she and I tweaked the submission package for review. She would have been justified if she had just returned the package but she worked through it with me.

Kevin King and Rick Ford went over and above with their efforts as well. We had several conference calls with the borrower and they were very patient. You have a very good group, at least the ones I have dealt with. and that is unusual in today’s market.

The above deal may not be dead yet and I will keep working on it. I am also looking forward to doing business with CLC in the future. Again, I sincerely appreciate all of the effort by everyone!

My name is Christopher Ware; I work in the Investor Relations department here at Commercial Lending Capital. My experience for the past 20 years has been as an underwriter for commercial real estate lending. This experience has included portfolio, CMBS and FNMA. I have also worked as a Real Estate Appraiser in the single family lending realm and as an underwriter for both FNMA and portfolio single family lending.

In my position in the Investment Relations department I am charged with matching underwriting standards and products with our clients needs. Needless to say these have been both trying and exciting times. As the CMBS market has dried up along with the well known issues at FNMA and with assorted accounting methodology changes, Lenders willing to execute new commercial loans have been more and more difficult to locate. This reluctance has been exacerbated by commercial real estate Brokers living in 2006 and Lenders living in the 1950’s; after all it is the Lender’s money and they can do what they want. What I mean by this is Brokers have not been realistic in their expectations of pricing and (LTV’s), while Lenders have been cautious in value appreciation and the ability of commercial properties to service debt. In other words we are back to the adage that “believe nothing what you hear and half of what you see”.

We all know that real estate has devalued. Nobody doubts that it has NOT hit bottom yet; so what is your property worth? Nobody really knows until the knowledge professional (appraiser) is standing in front of the collateral and has done their research. What we DO know is that perhaps 75% of all values given by Brokers as fair market estimates have been off the mark by as much as 75% (not a typo). The most dreaded call that CLC can make is to a Broker or Client with this information that their property has devalued. Sometimes this devaluation kills the loan dead in its tracks and most of the time it means adjusting the scenario to the discovered ratios and values. All I can say is don’t shoot the messenger.

As credit has tightened interest rates have climbed and so have LTV’s been reduced; a property that a year ago Lenders would have been willing to loan up to 75% sometimes 80% of value have been affected by lower and declining values and as such are showing an unwillingness to lend higher than 65% of the current value. The LTV reduction is heightened by hyper awareness of declining values. The lower values for commercial properties are a direct result of lease rates (drastically) decreasing, climbing vacancies, and higher Capitalization (“Cap”) rates. Cap rate is a measure of the ratio between the net operating income produced by an asset (usually real estate) and its capital cost (the original price paid to buy the asset) or alternatively, its current market value. As income has decreased on commercial real estate, Cap rates have risen, reducing the market value of commercial real estate properties. Because of the uncertainty of values, Lenders have been unwilling to loan with LTV’s higher than 65%. More to the point is that historically Investors have been able to use investment properties as ATM’s, and tap into the increased value to get working capital, or just capital period. Lenders are unwilling to give cash out “for the wrong reasons” in the recent months, which has further tightened the ability to refinance commercial real estate. Cash out requests will require a logical and business minded explanation in scenario stage.

The good news is that President Obama is passing capital into the secondary credit market for commercial asset backed securities. What this means to those of us in the trenches is that there will be more entities available, with capital, that can go into the secondary market and purchase the loans that we are originating. This is outstanding news for those of us that have been used to operating in the secondary market and as well the CMBS market. This process is the equivalent of receiving cardio shock therapy during a heart attack. Hopefully Obama employs some great paramedics.

With regret, we were not ready for such a high turnout. This put us in a position where we had to split the registered group in half. There has been quite a bit of confusion but last night (Wednesday, May 14th) we sent emails to a group of registrants stating the above.

Below are the details for the new date and time in case you lose your invitation or if you want to let someone else know about the event. Thank you and we hope to hear from you soon!

It’s been said by many a wise man before that man is really an organic computer. The only difference between man and machine, is that man is generally has resistance to reset themselves. I have been deeply troubled by the number of suicides by good friends and key players in the financing industry that have occurred over the last 12 months. It cannot be argued that this indeed was a hard reset by them. It is my belief that there are better ways to do this.

For those in the mortgage industry.

I think that it is well recognized that the industry has hit a threshold. The industry is in considerable trouble and regulators will be prone to over react and then, as they have done throughout all time, lenders and entities that are in the securitization market will figure out how to work around these regulations and we will be facing the same issues again 10 years from now. Having said all of this, the day of the 18-year-old, sitting in his garage, dressed only in underwear and making $25,000 a month could be over in this business. I think there might be a better solution to the problem and that is why I’m here to discuss some possible solutions with you.

Countercyclical is a term used to describe operating outside the effects of what the current cycle is producing. We will spend some time considering and talking about some counter-cyclical activities that we can put some brain work into.

Mortgage Modifications: it is no secret that mortgage modifications have been under fire. The folks that got into this business deftly were counter-cyclical to putting people into loans. Unfortunately, the industry was pounded by inexperienced personnel that raised false hopes with some lies tossed in. In most cases, enter my own personal experience, the consumer was generally better able to make these modifications than a disinterested third-party. Now, regulators are hot and heavy after this operation in it seems like this business may be in serious trouble. There will be those that argue the point, however, I have been reading quite a bit of material from the various Bar Associations and trade attorneys and to me it is clear that this is a business to stay clear of.

Debt Settlement: debt settlement is not a new business; however with the changes in bankruptcy laws, it is an ever increasing business. Debt settlement has been around for quite some time since Congress has been initiating changes to the bankruptcy code that made many previously dischargeable debts non-nonchargeable. What this means to the consumer is that not only did they get to go through the bankruptcy process,but many of the debts that were dragging them down still remained after the bankruptcy. Debt settlement companies will offer reduced payment amounts or reduced principal amounts in full payment to creditors in lieu of not collecting anything further or forcing the collection into a legal case. Collection cases that make it into a legal status have very small collection rates while at the same time have very high default judgment rates (the defendant does not appear in Court although the Creditor spent money getting the case into court. There are some marketing challenges to this business however, like anything else, if you put enough work into the business this is a good avenue of achieving some level of success.

Commercial Lending: commercial lending really came on the scene about 6 to 7 years ago due to the mainstreaming of the activity by some of my personal heroes at Interbay Funding, Silver Hill Financial, Velocity Commercial, and Bayview Lending. These were really the first firms that came along and offered a work flow management system whereby a broker could efficiently predict an outcome to a transaction. Like many other avenues in this world today this business has also undergone its stressors. The wonderful part about this business is that it is making a significant rebound in the marketplace with some of the changes made by Congress driven by our President. The largest detrimental aspect of this business was that a huge number of residential brokers came into the marketplace and created hysteria by not also creating an educational experience for them. Education in the commercial lending business is vitally important, because there are so many workflow items. A typical transaction in the residential marketplace might only involve 9 to 10 steps. In the commercial lending arena, transactions are anywhere from 117 to 200 work flow steps from the time an originator first speaks to a business development manager to the time that a loan decision or loan funding occurs. This process is not for the faint of heart however with correct training and with a correct outlook originators can prosper dimensionally even in this marketplace.

Commercial Debt Settlement: commercial debt settlement is a brand-new business just coming into the marketplace. This business will again take a significant educational reset for those coming from the mortgage industry into this line of work. Commercial debt settlement will require a different mindset than those doing consumer debt settlement as it is not as easy as just calling Visa and asking them if they will accept $2000 on a $3000 account to pay it in full. In many cases there are various filings that have been published in public repositories to ensure that lenders collateral does not get up and walk away. For this reason lenders have been hesitant to negotiate that debt, however they are more and more becoming aware that it is better to negotiate a fair and equitable payoff of debt. Most assets that were financed by commercial debt firms have substantially devalued due to a decline in the local marketplaces and construction and retail operations. We heard of one case where a contractor held a little over $4 million in tractors that abound in the used tractor marketplace (and not selling) and only held a value of $1.2 million. The lender settled for $1.2 million and took their lumps rather than going through the repossession process and holding on to property that could not be disposed of anyway.

Tax Lien Settlement Services: now that the businesses from all industries are closing, they are leaving behind a huge volume of unpaid payroll and business taxes. People do not realize it but there will come a time and place where the IRS and local state authorities catch up to them for the trust fund portion of the taxes. In these cases, there will be significant representation issues for both the government and the individual being pursued. These types of services need to be conducted by licensed individuals in many cases however; the marketing of these services can generally be conducted by unlicensed entities. The bad news is that people that are going through mortgage modifications, short sales and certain debt reduction processes are going to have a rude awakening in a few years when the government eventually catches up to the lost revenue. Let’s face it, the government at the local and national level spent too much money on too many things and the only place they can catch up is to do things such as pursuing the citizens (in other words, taxpayers). It is my prediction that this will be a huge marketplace to get these issues sorted out over the next 10 to 15 years.

I’ve given you some ideas of things that I’m hearing in the marketplace and I would love to hear from anybody else that would have ideas that can influence or better the lives of our fellow mortgage folks. I would be more than happy to pass them along.

I know that working here has always given me an edge but this is going to be great. People like Nicole Ferguson and Mike Jernigan have freely offered their expert knowledge on how to get a commercial real estate deal closed but this is from Scott Oakley himself. Neat.

Anyways, here’s the webinar sales pitch.

Click here to join the upcoming webinar on Thursday, May 14th 2009

If you want to see the flyer that was sent out click here.

Brokers like us have been around a long time now. From our experiences there are 3 kinds of Brokers.

1. Tough, never die, non-conformist, deal FACTUALLY with any issue as it comes up.
2. Follow with the flow and die along with the rest of the followers.
3. Whine, complain and shop the heck of every loan scenario hoping to make another few dollars (loan shoppers) pretending to be a player. Makes certain that every piece of value information is inflated and every piece of financial information is either inflated or deflated according to the likelihood of obtaining a loan approval.

What I know for certain is that the toughest times are ahead of us. I don’t have a crystal ball but I do have great hearing and what we hear is that fall and winter may be equally as dismal as last year. I know that our company, Commercial Lending Capital is not going to go through the same insanity that besieged the industry last year again this year.

• Values ARE decreasing
• Rents ARE decreasing
• Tenants are scarce

But Scott, how do we avoid this holy calamity about to besiege us? First off the easiest would be to expect that President Obama is not going to save the world, in one year. This economy is going to take some time to fix and commercial real estate is likely going to be the very last of any of this to be fixed. Second, I suggest that you consider a new line-of-work if you do not fit the criteria in item one above. This will be a tough road, even for the toughest of them all.

The fantastic news is that for the guys (and ladies) that DO fit in description one above, this will be a great year. Want to know how to do it?

1. Find transactions that make sense. Forget the Borrower that lives in Ca and is buying a 200 unit multifamily property in LA. Not going to happen. The industry got left holding the bag when these folks got tired of dealing with the issues that come with property management from several thousand miles away. Somebody in CA stands a good chance of qualifying for a property in CA etc.
2. “Stated income” is not a word (or phrase for you English majors). Forget it. It’s gone. Over with. “Straw that broke the camels back”. End of story…
3. Don’t beat up your appraisers. They are just the messenger.
4. Don’t shop your Lenders. They are overwhelmed with bad submissions and are having to sort through a ton of garbage to get to the good deals. If you get a good response then put on your selling hat. I don’t know the count, but I am rendered speechless daily when I see scenarios submitted to our staff that say “they walked away from the closing table”. I know that this was the game back-in-the-day but in today-talk this is crazy.
5. Dot the I’s and cross the t’s. Nothing frustrates an underwriter more (and by nature pushes your file to the bottom of the pile) than when a file is pushed through without the minimum items or incomplete data (like the cash assets missing from the 1003).
6. Sell! Do NOT shop!

Summary: what we have all done over the past 20 years will not work anymore. Do something different, redefine yourselves and continuously strive for perfection.

Each day we (all of us including Commercial Lending Capital) are confronted with questions and issues regarding the valuation of real estate and what it all means to the value of the loans that we are able to issue. GONE are the days when an investor could whimsically hand over suitcases full of cash for borrowers that in hindsight had no intention of repaying their loans. Also gone from the repertoire of commercial underwriters is the ability to depart from tried and true underwriting guidelines; in other words welcome back to the good old days.

Instead of crying to the heavens in the name of an individual’s god, as many have been doing, it seems to make more sense to understand the issues behind commercial real estate valuation as it is currently confronting us. When Commercial Lending Capital evaluates a loan proposal we also are confronted with the issue of what a property might be worth. Unfortunately unless an individual with adequate training and experience and with the correct data set is standing in front of the collateral then it is very difficult to understand what the true nature of the three approaches to value might be. Commercial Lending Capital has recently adopted a four approach method so as to minimize the client’s expenditure on appraisal activities. It has been said that any 10 similarly trained appraisers sitting in the same room with the same data and using the same brand of calculator could come up with 10 opinions of value. The one thing that I know for certain is that although the values may differ from one another the differences mainly involves semantics. In other words Appraiser’s, especially in the commercial arena, have been found to be extraordinarily accurate in their assessments due to the amount of research that they must conduct to arrive at the valuation. Brokers will frequently vehemently disagree with this position but I stand by it.

The economic downturn is reducing demand for commercial real estate, and vacancies are expected to rise sharply (and have done so). Investors are facing higher borrowing costs and have access to less leverage, which negatively impacts values. Leverage is one of the prime motivators for investors to purchase real estate. To start, it allows investors to control a larger property than they otherwise could if they had to pay all cash, thus increasing their return on equity. Leverage also allows investors to spread their equity across multiple properties, minimizing their risk through diversification.

Here is the problem: when there is uncertainty in the markets (some say panic), lenders hedge their risk by building in greater cushion in their underwriting, including increasing 1.) Debt Service Coverage Ratio (DSCR) requirements, (2) much wider loan spreads, (3) and decreasing Loan-to-Values (LTVs). Brokers on the other hand have also panicked and have artificially (some say fraudulently) increased income and values on loan applications because they are rolling back to the 2006 stigma when it was considered commonplace to do so due to the stated loan phenomenon. Guess who suffered? The Broker got paid but the investors and lenders are still holding the bag on loans that went south because the level of due diligence was inadequate. Even the Correspondent lenders got caught by surprise and put out of business when the first payment defaulted or some other defect caused a ‘buyback demand’ which pushed many of the ‘players’ to extinction.

What is happening today?

1. Rising DSCR – Prior to the capital markets shakeup, DSCR was at an average of 1.1:1, which means lenders required $1.10 in NOI for each $1 in debt service. Lenders today are mitigating risk by requiring NOIs are 1.25:1 greater than debt service. NO matter what you have heard even the guaranty programs are doing this. NO matter what you have heard nobody will accept a forecast of income or profit; today it is show me what you’ve had AND what you have right now this minute.
2. Wider Loan Spreads – Previous competition among lenders forced spreads to historically low levels in 2006 and early 2007, with the average falling to 100 to 110 basis points. Everybody suffered because there was not enough money left over to cover the inevitable loses suffered by competing Lenders and Investors.
3. Lower LTVs – Approximately one year ago, LTVs were 75 to 80 percent with SBA publishing 90% promises. The rapid appreciation cycle has ended, and tighter credit markets are demanding lenders to become more cautious and some say paranoid. I other words we all have to think ZERO defaults. As a result, LTVs have decreased to the 65 to 70 percent range and lower.
4. Sliding Values – Values have decreased. Period. The only real judge of this is the appraiser. Period.
5. Less Tolerance- Brokers shopping loans, instead of selling good loans, is causing a further constriction of the availability of capital. Underwriting a loan takes money and no company can afford to spend money to attract shoppers. If you get a loan offer you should present it to your Borrower and solve real issues instead of any perceived drama.

This all might sound mysterious and depressing but it is just another real estate cycle (on crack). There are exceptions, there are mistakes, there are caveats and there are certainly plenty of arguments for and against this synopsis, but one thing for sure is that 2006 is gone!

I’m going to be administrating the blog so it’s only fitting if I formally introduced myself as well. If you’re not familiar with our company you can click here to view our company profile.

Not long ago, my boss Scott Oakley came to me and asked if I would be willing to share my knowledge and my opinions of the commercial mortgage industry, the economy and other various topics as they pertain to commercial loans. He had decided to start this blog as a way to communicate with everyone (lenders, brokers, clients, etc) about a wide array of topics we find ourselves passionate about. We also plan to utilize our press release section to help boost awareness of our company such as training classes, job fairs, webinars and other events.

In the upcoming months you should find this blog filled to the brim with articles I think you will find extremely useful. If you would like to see a certain topic written about feel free to send us an email and we’ll see what we can do to accommodate.

Good luck out there and just remember you can subscribe to our blog here.