I am frequently asked if the residential mortgage crisis has impacted commercial lending. Unfortunately the resounding answer is yes. Small Balance commercial lenders and hard money commercial lenders have been tremendously impacted by the credit crisis. In this blog I will discuss one impact of the current credit crisis. Future blogs will delve into further impacts that have occurred/are occurring.
As a result of the crisis, underwriting standards have changed substantially for both small balance lenders and hard money lenders. Many of the players in this arena are no longer in business. If the lenders are still in business the parameters for writing loans has changed drastically
First, what has caused the credit tightening? Most small balance and hard money lenders rely on the secondary market to unload their commercial paper. A loan is made and then put into a Wall Street security that allows the lenders to quickly turn their capital and reuse it for further loans. Over the last 12 months, the ability to securitize the majority of small balance or hard money transactions has unraveled. Few if any securities are being completed. This has left lenders with a large pool of loans on their books that they are unable to turn. Fortunately Fairview Lending holds and services all of its own loans and therefore is not impacted by the tides of Wall Street.
As a result of the credit tightening, lenders have had to adapt. Many stated lenders have substantially reduced their volume so that they could comfortably hold the loans in their portfolio. Many lenders have also increased their underwriting standards. Instead of funding loans to borrowers with a 620 FICO, now they are only funding loans to borrowers with FICOs above 680. Along with tightening their credit requirements, many lenders are also being much more selective on the properties they finance. Most are sticking to general purpose income producing properties. As a result of the tightening of lending standards, many commercial borrowers are no longer qualifying for conventional or stated products. This trend will likely continue for the next 12+ months at a minimum.