Commercial Crunch

Unless you have been on vacation in the Bahamas for the past 6 months, you should be aware of the serious credit market concerns in the residential mortgage market.

In fact, check out these new "Guidelines" I received from a Residential Lender today:

• All borrowers must have one Blue eye and one Brown eye
• LTV > 65% on SIVA asset programs require minimum credit scores of 849
• For all LTV's > 65%, 360 months of reserves are now required
• Borrowers must have no previous bankruptcies in their family history going back three generations
• A minimum of 25 years self-employment history is now required for all NIV Programs (at same location)
• Minimum credit scores for Subprime loans is raised to 720
• All non-arm's length transaction borrowers (mortgage, real estate professionals, family members) will be required to provide full-documentation, subject to criminal background checks, wire tapping, strip searches, and a minimum of 12 hours of interrogation by the Department of Homeland Security

Now that we have all had a good laugh, let's hope it really never comes down to this!

Anyways, during the first quarter of the year it looked like the credit market concerns would be limited to the Residential market, but that is no longer the case. With the relative strength of commercial paper being called into question, the PAR spreads we've known over the past several years have all been increased dramatically and higher LTV deals are also being cracked down on.

So why the tightening of the guidelines? In a very simplistic explanation, lenders are taking these actions to ensure that they can find a "buyer" when it comes time to securitize their notes. These deals are being affected because of the growing concern about the liquidity in the market to support such large transactions (securitizations can top $1B with ease).

So what is being done about it?
The past couple of months have had investors taking the classic "flight-to-quality" move into bonds. This has caused Bond yields to drop considerably over the past few months, though continued market volatility is expected for the coming weeks.

Though the Federal Funds rate is typically how the Fed influences market stability they took another course of action today. They first announced that $19B would be pumped into the banking system in an attempt to alleviate the growing concerns about liquidity, and then increased it to $35B and finally $38B. This mirrors the actions of the European Central Bank pumping $213B of liquidity into their banking system over the past two days.

From a financial point of view the $38 Billion infused by the Fed is a small ripple in the wake of the US economy. However, we live with an emotional market as much as we do a financial one and so the infusion is bound to settle some concerns about the markets liquidity and stability.

So how can you be successful in such a turbulent time?
Commercial Mortgage Backed Securities (CMBS) deals have traditionally had rates which were much lower than portfolio style programs. The credit crunch we are in the middle of has changed the playing field, and as a result that difference in rates is not always the case anymore.

For example, we recently received a quote back from a top CMBS source and for that deal it was 15 bps higher than what we could offer on one of our own portfolio style programs. We are able to close the deal either way, but it sure was great to be able to offer a program with a rate lower than what the other conduits were offering. Throw in the lower application fees, less restrictive prepayment penalties, and greater program flexibility and it was a great deal for the borrower.

What this means for you is that it is now easier to win over some of those $2-$5M deals with faster, less expensive, portfolio style programs. The key is to find programs that you know offer a competitive advantage to what the market is offering, and then go out and find the properties which fit those programs.