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GREAT
FALLS BPA FEATURED ARTICLE:
Sponsored by Terry Graves from Capital Realty
Services, Inc.
www.CapitalRealtyServices.net
The Subprime Lending Mess by Terry Graves.
Over the past 6
months, I have been asked a number of times what affect the “subprime”
lending problem will have on our business and for most of that time I was not
convinced that it would have a significant impact on the commercial real estate
lending business. It appears now that I was mistaken……………..
From what I
can see, the “subprime” lending business was created through the outright greed
of Wall Street firms who created and then aggressively marketed residential
mortgage products specifically tailored to borrowers whose credit was “impaired”
or for investors (speculators) who were simply trying to ride the wave of
rapidly rising home values. Many of these products allowed for lax
underwriting standards, excessively high loan to value ratios and adjustable
rates or other provisions that made them ticking time bombs……especially
if interest rates climbed or if home values fell in the future…. Both of these
events have happened and they have happened together making for the “perfect
storm”. The subprime mortgage products were marketed by residential mortgage
banking companies with the full encouragement of Wall Street and indirectly by
the Mortgage Bankers Association of America. These mortgage lenders and Wall
Street firms made huge amounts of money when they pooled the mortgages and sold
them off to investors such as hedge funds, life companies, banks, and pension
funds. When the housing market started to cool, as it normally would, some
people and investors found themselves overleveraged and, at the same time,
unable to sell their homes. The result was that mortgage default rates began to
climb. As lenders experienced rising default rates, they reacted by raising
interest rates and tightening credit standards all which reduced liquidity in
the marketplace. Reduced credit availability caused a further slowdown in
housing demand, an increase in unsold homes and then additional reductions in
home values. The downward spiral had begun and it hasn’t yet abated.
Unfortunately,
when the residential housing “bubble” burst, massive numbers of borrowers
defaulted on their home loans. Unexpectedly high default rates have caused the
rating agencies like Moody’s and Standard & Poor’s to lower credit ratings on
the various debt instruments (“mortgage pools”) which in turn has forced many
financial institutions like Merrill Lynch, Citigroup, and Countrywide into
writing down their assets and tightening their underwriting standards for new
business. In some extreme situations, entire financial institutions here and
abroad have failed. National banking regulations frequently require banks to
liquidate foreclosed properties rather than retaining them as “REO’s” (Real
Estate Owned) and “working them out”. The end result is that entire
neighborhoods in some cities have been foreclosed and put on the auction block
further aggravating an already very serious national problem. I simply don’t
understand why our national leaders appear to be standing on the sidelines while
huge numbers of families are being thrown out of their homes. In my opinion, it
doesn’t make any sense to allow all of these foreclosures to continue unabated
when lenders should instead be proactive in “working out” these loans thereby
leaving tens of thousands of families in their own homes until we return to
better times and a more stable lending market. To me, everyone looses in a
foreclosure and forced sale at the auction block. Where are our national
leaders in all of this? Why haven’t they stood up and called for national
relief instead of doing nothing. When will this spiral end and what does it
have to do with our business?
Like most
industries, the commercial real estate finance business is dependent upon the
availability and flow of reasonably priced capital. Our two main sources of
capital are CMBS (Commercial Mortgage Backed Securities) conduit lenders and the
traditional life insurance companies who have been in the market for most of the
past 100 years. Our CMBS conduit lenders, who are frequently Wall Street based
firms, have been hard hit by the residential lending crisis and they have been
forced into raising their lending rates and curtailing their loan production.
Their problems will continue until they write off all of their bad paper which
may take many more months. We are, however, beginning to see a number of our
conduit friends return to the market which is a good sign. Fortunately,
our life company friends have remained in the market with competitive rates and
terms and they show no signs of slowing their activities. By their nature, life
companies are traditionally “portfolio” lenders meaning that they don’t sell
their mortgages but retain them as long term assets. When they occasionally
acquire properties through foreclosure, they typically keep them as REO and
rework them back into performing assets. Their long term view of investing has
served them well through alternating periods of national prosperity, recession,
war, and even a worldwide depression. We don’t expect their appetite for new
business to decline next year and we are therefore quite able to process new
loan applications at historically low rates.
For more
information on our loan programs, please call us at 703-759-4900 or visit our
website at CapitalRealtyServices.net. We welcome your calls and we
pledge to provide you with the highest personal and professional service in the
placement of your real estate capital needs.
Terry Graves
Capital Realty Services, Inc.
772 Walker Road
Suite C
Great Falls, Virginia 22066
703-759-4900
703-759-4256 fax
www.CapitalRealtyServices.net
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