Pandemic Advances Lending Technology, But Slows Lending

Like most aspects of the commercial real estate landscape, loans have been influenced by COVID-19. As might be expected in a global pandemic, newly signed leases have declined and for some sectors mortgage default rates have skyrocketed. While some companies are tightening their purse strings and waiting for the storm to end before considering their next venture, others are hoping to take advantage of low interest rates and struggling asset prices. But even with a lot of dry powder ready to deploy, companies looking to buy still need to get approval from a lender, which could be a challenge.

According to the Mortgage Bankers Association (MBA), both commercial and multi-family loans are expected to decline by 59% in 2020, compared to the record volume of $ 601 billion in income-generating property-backed loans in 2019. This year, the MBA estimates that total loans will reach $ 248 billion and increase slightly to $ 390 billion in 2021. MBA Vice President of Commercial Real Estate Research Jamie Woodwell explained, “The current COVID-19 pandemic continues to disrupt commercial and multi-family real estate markets. Predictions amid social and economic responses to the virus are difficult, but we expect the origins to drop significantly[ly] this year before realizing a sharp partial rebound in 2021. ”Visibility into the future of the industry, including forecasting and valuation, is at an all-time low as different parts of the country struggle to elaborate and follow plans to reopen as COVID-19 cases increase. Some real estate companies are starting to use alternative data to help better assess the assessment.

Better valuation methods help companies understand the market, but they still don’t make it easier to access loan capital. I spoke with Tim Milazzo, CEO and co-founder of StackSource, a lending technology platform that acts as a marketplace for borrowers looking for business loans. Milazzo gave me an overview of the current lending landscape and why lending technology is so important right now. “Capital markets change, don’t they? Many other lenders have suspended their loans due to COVID. A lot of them are just trying to figure out their own portfolio and figure out where the economy is and where it’s going to be. So either they suspended the loans or they restricted them, ”Milazzo said.

Milazzo admitted that the second quarter of this year had been terrible for almost everyone, as the economy was essentially at a standstill. But, he thinks the situation is starting to be more positive. “Things are opening up a bit. The rates are also very low, so a lot of people are refinancing, ”Milazzo explained. The restrictive precautions lenders take make the transparency created by technology like StackSource more valuable than ever. “If people aren’t able to go talk to their local bank and get a decent loan now, they’ll look online,” Milazzo said. As more and more borrowers try to find lenders, they will end up using services like StackSource because they will have to buy from a larger market.

An online loan market offers several benefits to borrowers, including providing them with options in obtaining loans from hundreds of lenders, not just those near or in their city. “We keep track of who lends, how and on what assets. What are their sizing constraints? What are their pricing parameters? We have all of this information that we are tracking on hundreds of lenders. And so when someone has a loan application, we match them with all the relevant lenders in the market, ”Milazzo explained. By providing borrowers with the information they need, all in one place, it not only expands their options, but also helps them find the best deal for whatever they are looking to finance. This type of information is particularly useful during a time when lending is at its lowest.

Suspended or restricted loans not only mean fewer loans are approved, it also means loan terms are restricted as well. In some cases, lenders give less money for the same property, as opposed to pre-COVID loan amounts. According to Milazzo, even government-sponsored companies like Fannie Mae and Freddie Mac issue smaller loans or require higher cash reserves. “So if you buy a property for a million dollars and take a loan for half a million dollars, they may ask you to put more money in a reserve account, just to make sure” Hey , if this property stops producing income, we will still be able to withdraw from this account to continue paying. And so the reserves are very high in all areas, ”said Milazzo.

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Where you might have already secured a loan of 80 percent of the value of the property, it could now be as high as 60 or 70 percent. Borrowers need to be aware of what they are asking for and understand that loans are going to require higher standards. While pre-existing relationships have always been important in financing, they may not mean as much now, as lenders need to objectively consider less risky terms.

Likewise, borrowers may have to turn to different types of lenders than in the past. Large lenders like commercial banks and credit unions are highly regulated. Typically, these large organizations have more paperwork to deal with, which can slow them down. Alternatively, Milazzo said that “private lenders are adopting certain types of technology faster than banks,” which may mean borrowers might have a better chance of getting a loan with them. However, larger and older organizations like banks have adopted online document management portals faster, which can be useful during the loan closing process.

As with almost everything in commercial real estate, lending has long been a relationship process that relies little on technology. But as we have seen in other sectors of industry, HVAC automation To virtual tours, the pandemic is forcing commercial loan Luddits out of the Dark Ages and into the present (and the future). The credit landscape is going to see many changes in the months and years to come. From changes in loan-to-value ratio assumptions to fears of inflation due to monetary policy, obtaining a commercial loan will not be the same as before the pandemic. Borrowers and lenders will be reinventing the way they make loan deals, and technology will likely be at the heart of the reinvention.

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