Private Commercial Mortgage Lenders; Filling a Vital Role in Today"s Credit Market
The Liquidity Crisis Has Paralyzed Institutional Commercial Mortgage Lenders
We are in the middle of the most challenging credit environment in a generation, crisis is not too strong a word to describe the situation we find ourselves in. American business runs on borrowed money, as-does America's multi trillion dollar commercial real estate industry. Without the free flow of capital the system breaks down.
Institutional lenders are just not lending. Thousands of great projects that would have been fought over just two years ago are being rejected out-of-hand by banks and by Wall Street. The problem is liquidity. Conventional lenders can't sell their loans into the secondary mortgage market anymore, so they are opting to hold on to their cash until things improve. And who can blame them? There is no money to be made writing a 6% mortgage and then holding it for decades. A thriving market in mortgage paper is imperative; institutions absolutely must have the ability to sell and borrow against the loans they write.
The Mortgage Derivatives Market Has Broken Down
Specifically, it's the "collateralized mortgage obligation" or "CMO" market that has broken down. CMOs are simply publicly traded bonds that are backed by packages of mortgages that Wall Street investment banks have bundled and turned into marketable securities. They trade in several different incarnations such-as "CDO" (collateralized debt obligations), CCMO (collateralized commercial mortgage obligations) and "MBS" (mortgage backed securities) but, whatever the acronym they're all the same thing; mortgage derivatives.
Because many of these bonds are backed by a variety of mortgage types, including the dreaded "sub-prime" residential mortgage, and because no one really has a handle how bad the sub-prime crises will get or if it will spread, investors are cool towards mortgages now-a-days. Or, put another way, nobody's buying CMOs anymore. Lenders are not confident that they can sell the loans they write, so they don't write them. Likewise, investors are not buying mortgages because they aren't sure they could turn them back into cash if they needed to. The cycle is vicious and devastating to our economy.
A Massive Funding Gap Has Been Created
The result is what I call "the funding gap". Loans that fall into the funding gap are quality commercial mortgages that should be funded but, due to the turmoil in the credit markets, have been rejected. There are tons of great deals on the sidelines today, deals with top-notch sponsorship and plenty of equity. With the big banks largely out of the lending business, private mortgage lenders have stepped in to fill the funding gap.
Private Lenders Are Playing a Vital Role
Private lenders, once referred to as "hard money" lenders, are privately held companies that engage in commercial mortgage lending for their own benefit. Privately funded commercial mortgages are, generally underwritten on the basis of equity and are typically not credit driven. Interest rates and points on private loans are significantly higher than those charged by banks and other large institutional money centers. Private mortgage lenders can make decisions quickly and fund loans in a matter of a-few weeks, rather than the several months it takes to close a conventional deal.
Many private commercial lenders are, what's-known-as, portfolio lenders, meaning they hold the mortgages they issue in their own company portfolios. Others do sell their loans, but generally not to investment banks that turn them into bonds. By-and-large, private, hard money lenders are not concerned with the goings-on in the CMO market. Private lenders charge more than double what their institutional counterparts' charge, so it can be very profitable for them to write a loan, collect the interest during the loan's term and then get their principle back at maturity. They issue mortgages at low LTVs (loan-to-value ratios) so the risk inherent in holding mortgage paper is mitigated. Because private mortgage firms are not at the mercy of the secondary market, the liquidity crisis that has paralyzed banks, Wall Street and other traditional lenders has had little negative impact on them. In-fact, private commercial mortgage lending is thriving.
Once considered lenders of last resort, private, hard money, firms are now mainstream business and are, indeed, the fastest growing segment of commercial real estate finance. With bank lending volume severely curtailed, thousands of excellent loans are in danger of going un-funded. Commercial real estate property owners, investors and developers are becoming more and more frustrated and are turning to private funding sources in record numbers. Private lenders are making deals and closing loans based on the merits of the deal not the condition of the credit markets. Even large developers and project sponsors who would not have dreamed of turning to a hard money lender just 18 months ago, are now lining up for privately funded loans.
"Hard Money" Can be Well Worth the Cost
Hard money commercial mortgage loans funded by private entities are more expensive than conventional loans on an absolute basis but, because there is no institutional bureaucracy and lending decisions are based on a simple LTV formula, private lenders are much faster and more efficient. If a deal makes sense, a private lender can close and fund it in 10 business days or less. Many real estate investors have come to realize that, even as high as the rates are, hard money is a-lot less expensive than losing the deal completely.
Private lending has been around for many years, and until fairly recently, has not enjoyed a good reputation. Today, spurred-on by the credit crisis, private commercial mortgage loans have gained respect and prominence in the real estate industry. They are funding deals when others can't or won't.
Today most private lenders are highly sophisticated and professional organizations. They are fulfilling a vital role in real estate and will continue to be important industry players until the credit markets stabilize and well beyond.
We are in the middle of the most challenging credit environment in a generation, crisis is not too strong a word to describe the situation we find ourselves in. American business runs on borrowed money, as-does America's multi trillion dollar commercial real estate industry. Without the free flow of capital the system breaks down.
Institutional lenders are just not lending. Thousands of great projects that would have been fought over just two years ago are being rejected out-of-hand by banks and by Wall Street. The problem is liquidity. Conventional lenders can't sell their loans into the secondary mortgage market anymore, so they are opting to hold on to their cash until things improve. And who can blame them? There is no money to be made writing a 6% mortgage and then holding it for decades. A thriving market in mortgage paper is imperative; institutions absolutely must have the ability to sell and borrow against the loans they write.
The Mortgage Derivatives Market Has Broken Down
Specifically, it's the "collateralized mortgage obligation" or "CMO" market that has broken down. CMOs are simply publicly traded bonds that are backed by packages of mortgages that Wall Street investment banks have bundled and turned into marketable securities. They trade in several different incarnations such-as "CDO" (collateralized debt obligations), CCMO (collateralized commercial mortgage obligations) and "MBS" (mortgage backed securities) but, whatever the acronym they're all the same thing; mortgage derivatives.
Because many of these bonds are backed by a variety of mortgage types, including the dreaded "sub-prime" residential mortgage, and because no one really has a handle how bad the sub-prime crises will get or if it will spread, investors are cool towards mortgages now-a-days. Or, put another way, nobody's buying CMOs anymore. Lenders are not confident that they can sell the loans they write, so they don't write them. Likewise, investors are not buying mortgages because they aren't sure they could turn them back into cash if they needed to. The cycle is vicious and devastating to our economy.
A Massive Funding Gap Has Been Created
The result is what I call "the funding gap". Loans that fall into the funding gap are quality commercial mortgages that should be funded but, due to the turmoil in the credit markets, have been rejected. There are tons of great deals on the sidelines today, deals with top-notch sponsorship and plenty of equity. With the big banks largely out of the lending business, private mortgage lenders have stepped in to fill the funding gap.
Private Lenders Are Playing a Vital Role
Private lenders, once referred to as "hard money" lenders, are privately held companies that engage in commercial mortgage lending for their own benefit. Privately funded commercial mortgages are, generally underwritten on the basis of equity and are typically not credit driven. Interest rates and points on private loans are significantly higher than those charged by banks and other large institutional money centers. Private mortgage lenders can make decisions quickly and fund loans in a matter of a-few weeks, rather than the several months it takes to close a conventional deal.
Many private commercial lenders are, what's-known-as, portfolio lenders, meaning they hold the mortgages they issue in their own company portfolios. Others do sell their loans, but generally not to investment banks that turn them into bonds. By-and-large, private, hard money lenders are not concerned with the goings-on in the CMO market. Private lenders charge more than double what their institutional counterparts' charge, so it can be very profitable for them to write a loan, collect the interest during the loan's term and then get their principle back at maturity. They issue mortgages at low LTVs (loan-to-value ratios) so the risk inherent in holding mortgage paper is mitigated. Because private mortgage firms are not at the mercy of the secondary market, the liquidity crisis that has paralyzed banks, Wall Street and other traditional lenders has had little negative impact on them. In-fact, private commercial mortgage lending is thriving.
Once considered lenders of last resort, private, hard money, firms are now mainstream business and are, indeed, the fastest growing segment of commercial real estate finance. With bank lending volume severely curtailed, thousands of excellent loans are in danger of going un-funded. Commercial real estate property owners, investors and developers are becoming more and more frustrated and are turning to private funding sources in record numbers. Private lenders are making deals and closing loans based on the merits of the deal not the condition of the credit markets. Even large developers and project sponsors who would not have dreamed of turning to a hard money lender just 18 months ago, are now lining up for privately funded loans.
"Hard Money" Can be Well Worth the Cost
Hard money commercial mortgage loans funded by private entities are more expensive than conventional loans on an absolute basis but, because there is no institutional bureaucracy and lending decisions are based on a simple LTV formula, private lenders are much faster and more efficient. If a deal makes sense, a private lender can close and fund it in 10 business days or less. Many real estate investors have come to realize that, even as high as the rates are, hard money is a-lot less expensive than losing the deal completely.
Private lending has been around for many years, and until fairly recently, has not enjoyed a good reputation. Today, spurred-on by the credit crisis, private commercial mortgage loans have gained respect and prominence in the real estate industry. They are funding deals when others can't or won't.
Today most private lenders are highly sophisticated and professional organizations. They are fulfilling a vital role in real estate and will continue to be important industry players until the credit markets stabilize and well beyond.
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