Tag: Risk

The Status of Commercial Real Estate Values

Commercial Real Estate
CRE UNDERWRITING

Recent data, just released from Real Capital Analytics, shows that since the start of the year (month-end April), commercial real estate (CRE) has appreciated 2.6% in 2019. This is good news for banks as it shows that every significant loan sector likely has improvements in both debt service coverage and loan-to-value. In major markets, this appreciation has been closer to 4.9%, and in secondary markets, price appreciation has been 1.5%. In this article, we take a look at the details to help banks better manage their pricing and risk.

 

Why You Are Watching The Wrong Lending Competitors

Credit management - graphic of man looking through binoculars
CREDIT MANAGEMENT

No doubt, you hear all about how your competitors are winning deals because they are more aggressive when it comes to underwriting. While banks must always ask if they are taking the right risks and the right amount of risk, it is probably the competitors that you are not watching that is causing you the greatest risk. In this short article, we explore one often overlooked aspect of competitor surveillance and how this one technique can help protect your bank.

 

The One CRE Underwriting Metric You Are Likely Not Using, But Should

More Accurate Commercial Real Estate Underwriting
More Accurate CRE Underwriting

Whenever your bank is looking at underwriting commercial real estate (CRE), you are probably looking at a variety of macro factors such as rent and occupancy trends, absorption, and capitalization rates. However, since we see hundreds of underwriting packages a month from a variety of banks across the country, it is rare that we see banks, and even borrowers, adjust rents for new construction. In this article, we present our methodology, data, and adjustment factors that banks can use to have more accurate underwriting.

 

Do You Really Want To Lend Below A 10% Debt Yield?

PROFITABLE BANK LENDING
PROFITABLE BANK LENDING

Commercial lenders should be aware of the important factors that drive customer behavior to borrow funds. Our clients borrow from us when they refinance debt, or purchase equipment, real estate, or finance working capital. However, there are three key elements that make debt especially appealing for borrowers. Commercial lenders that understand these three elements can better position themselves for success.

 

The Three Key Elements to Borrower

 

The Current State of Commercial Real Estate Lending

More Profitable Commercial Real Estate Lending

Many banks today are satisfied to underwrite real estate secured loans on just two metrics: debt-service-coverage ratio (DSCR) and loan-to-appraised value (LTV).  Banks typically approve credits above 1.20X and below 75% LTV – with many loan-specific factors that may skew these acceptable levels either way.  For competitive reasons, we see some banks who are dipping to 1.10X DSCR, and some deals are approved at 85% or even higher LTVs.  However, in today’s business c

The State Of The Housing Market And What It Foretells For Banking

Housing and Credit

Home prices and trends are thought to be a leading indicator of bank credit, and so we pause to analyze what 2018 is telling us and how it could impact our future in the banking industry. December existing homes sales came in at 4.99 million units or below the 5.24 million units expected. That continued the trend of weaker demand in 2018. Luckily, we can correlate much of that drop in demand and pricing to higher interest rates and inflated home prices against a backdrop of flat income.

Here Is The Latest C&I and Owner-Occupied Real Estate Credit Trends

Credit Trends in the US

As they say, bank performance follows credit.  Right now banking is good because credit is good.  Credit performance for the second quarter of 2018 improved over the first quarter. While investor commercial real estate has seemed to hit is high point back in 2Q of 2017, C&I and owner-occupied real estate continue to improve. According to our analysis derived from Paynet data, the average probability of default (POD) for small and mid-sized businesses was 2.28%, a decrease of 3.8 basis points, or 1.7% improvement over last year.

Is Your Bank Getting Properly Compensated for Lending Risk?

Risk Arbitrage in Lending

A “pay-for-risk” model means that the goal of the business is to price risk at a premium so your revenue covers the risk and leaves you with an acceptable profit. If you believe that the business of banking is a pay-for-risk model, then we have some bad news for the current state of banking.  The mature economic expansion is not a good time for bankers who expect to be rationally compensated for the risk they take.

How To Tell When Your Borrower is Not Truthful

Borrower Management and Lying

If we got a dollar every time we heard a less than truthful explanation from a borrower describing terms and pricing obtained from a competing bank we wouldn’t have to work.  We have heard hundreds of borrowers tell us that they obtained fixed-rate loans at X% interest for ten years, only to find that the LOI expressly indicated a five-year reprice or a 5-1 ARM.  Of course, not all deceiving comments we hear are flat out lies - borrowers relay less than the full facts and are often not motivated to inquire about the details.  Borrowers are moti

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