The Banks Are Back
- Nov 13, 2013
Good news for small borrowers: The banks are back.
Regional and local banks that typically lend in the small loans space—generally defined as the $700,000 to $3 million or $5 million loan sector—are actively seeking business once again, at least in the top real estate markets.
These smaller banks have finally cleaned up their balance sheets, and as the economy has improved, they are more comfortable about lending. For some, customer deposits have been accumulating, so they are looking to deploy the capital that has been sitting on the sidelines. Ultimately, when banks are seeking profits, real estate continues to be seen as one of the more profitable business sectors.
“The smaller community banks have gotten very active and aggressive,” observes Hugh Frater, CEO of Berkadia Commercial Mortgages, which arranges bank, as well as life, conduit and GSE financings.
“Many banks have been on the sidelines working on issues. They are now turning on the lights again,” agrees Joseph Orefice, director of commercial real estate lending at Investors Banks. Orefice adds that banks do view the multifamily sector favorably.
The implications of community banks getting “back into business” is that as a result of the greater capital supply, loan terms are becoming more attractive to borrowers. At the same time, there is a greater range of offerings.
Traditionally, banks both large and small require recourse and generally provide only short-term, floating-rate, loans. But in the recent past, as these financial institutions increasingly compete with Fannie Mae, Freddie Mac, conduits and life insurance companies in desirable markets, they have begun offering non-recourse, fixed-rate, longer-term loans of five, seven, 10, or even 12 years.
Banks now are prepared to advance “fixed-rate, non-recourse loans at very competitive rates. That ability has made them extremely competitive in the $1 million to $3 million loan range,” says Frater. They are willing to extend longer loan terms in part to the degree they are comfortable that interest rates will stay low.
Interest rates charged by banks on small balance multifamily loans can be competitive with, or even lower than, rates charged by the GSEs today—and often non-recourse, too, says Frater. Closing costs are also often lower than those for Fannie Mae deals. And as for loan dollars, the community banks generally favor LTVs of up to 50 to 55 percent, but they have been observed to allow LTVs of as high as 70-75 percent.
Kathleen Felderman, managing principal and national real estate practice leader, at Epic (Edgewood Partners Insurance Center), an insurance brokerage, agrees that Fannie Mae financing, although favorable in many ways, may require “more hoops” to jump through compared to conventional bank financing.
Local banks today are one of the major sources of small balance financing for multifamily housing. The other major source is Fannie Mae, which has a small loans program. Conduits and life insurance companies generally are not active in the sector, while Freddie Mac offers larger loans. Thus the re-entry of local banks to lending makes a big difference in the sector.
Investors Bank is a New Jersey-based community bank that is active in the New York City metropolitan area, and also in Maryland, Pennsylvania and Connecticut. The bank expects to supply about $2.3 billion in commercial loans this year, the majority of the volume in small balance financing. Investors Bank will be trying to increase its loan production this year, says Orefice. The bank’s target volume for 2013 will represent approximately a 25 percent increase from the year before, he indicates.
Since 2008, Investors Bank has been providing five-, seven- and 10-year, fixed-rate, 30-year amortizing, small-balance loans, says Orefice. These loans are non-recourse. Properties it lends to are often Class B or Class B-minus, though not Class C, says Orefice.
The bank finds the New York City market particularly attractive. It will consider lending to properties in most neighborhoods of the metropolitan area, says Orefice. “Real estate has proven itself through the cycles as a certainty in the New York market,” observes Orefice. Downturns in the New York City market have so far tended to have been short-lived, he says.
Another reason banks like to lend to smaller properties is that they face less competition from other lenders in that small-balance market segment, points out Orefice. As a result of the lesser competition, the yields are higher for the banks. “The smaller you go, the less competition you have,” he says. Providing small loans also gives banks greater diversification by lending to a greater number of different properties.
From the lender’s point of view, executing small loans requires a different set of skills compared to conventional lending. The borrowers tend to be less sophisticated, and they may be “Mom-and-Pops,” or self-operators. “In a typical super large project with a professional property manager, everything is laid out for you.” On small loans, by contrast, the borrowers need more guidance and help, explains Orefice.
While banks may be more eager today to advance money to small properties, the caveat is that lending is still generally restricted to the more thriving primary markets. “In the major metros, there is a fair amount of liquidity,” says Rick Wolf, senior managing director, Greystone. “But as you move out to secondary and tertiary markets, the liquidity drops off precipitously.” In those less accessible markets, it is Fannie Mae lending that serves the small loans market, says Wolf.
There are some instances in which banks are capturing business from Fannie Mae because they can offer more loan dollars at a lower rate, but “once you are out of the core markets, they are not there,” adds Wolf.
Wolf says many banks provide five-year fixed-rate with a floating rate tail, or seven- and 10-year loans, but they do not make available much capital for this type of lending. Outside of the primary markets, many local banks are still finding it difficult to compete in supplying longer-term loans. They prefer instead to provide short-term money, and they also require a personal guarantee and give preference to bank customers, he says. “Banks have started offering longer term seven to 10-year product, but it is not a natural fit for their balance sheet,” he says. “They are only doing so because they are hungry for yields.”
Through its small loans program, Fannie Mae provides seven-, 10-, 15- and even 20-year fixed-rate debt. For the borrower, there is “more interest-rate protection, and more predictability in cash flow, in fixed-rate debt,” says Wolf. Fannie Mae lenders, such as Greystone, “like long-term money,” says Wolf. Increasingly, the local community banks also like the same, at least in the core markets, which is all good for the small loans borrower. To comment, e-mail Keat Foong at email@example.com