Changes in the last quarter for conventional commercial lending.
You’re hearing more and more now in the news that the large banks (and banks generally) have begun finally tightening their credit standards. That is fairly accurate as the Fed decided to create some new stress tests that the FDIC should start using for bank audits relative to inflation. Then there is the potential issue of increasing delinquency in specific property types (e.g. office) and concerns over debt which terms out and cannot meet DCR requirements to refinance. All of those combined for the brakes to start pumping on CRE lending.
What’s the impact? Someone once said ‘s#$t rolls downhill’! In this case, that means essentially a cascading effect in lending. If the large banks get conservative with loan requests they would have done in early 2022, those requests then move down to the regional banks. Those regional banks have already been under stress, so the advent of even more loan request volume floods them and they begin to ‘cherry pick’ among the loans. You know what comes next! The loans no longer fitting the large regional lenders move down the food chain to the community banks. And from there, it’s off to private investors.
Since interest rates tend to slide along an increasing scale from largest national banks up to the highest rates which are private investors, the fact that requests wind up moving along the same scale puts a lot of pressure on loan proceeds. And that’s exactly what we have seen over the past 3 months.
Even amongst the highest rate private lenders, cherry picking is now the norm and not the exception. None of this means lending has stopped in the same way we saw in 2008-2010. However, it does mean those of us in the mortgage brokering community need to take more time to correctly source the lender. We also need to stay in contact with our sources along the loan quality gradient so we know about criteria changes in real time and not get blindsided on what we thought was a ‘slam dunk’ request.
In speaking with a lot of friends in our industry over the past few months, one theme has become apparent; the order takers are moving to other industries. Now is the time when those of us who have been brokering for decades step up and solve the loan problems you don’t have when interest rates are in the 3’s. Experience matters now more than it has since 2008-2010. Back in those years, it was a struggle since so many banks failed and liquidity in the system was a major obstacle. That’s not the case in this cycle. It is, however, imperative to know your lenders and to keep in contact with them so you don’t waste time getting into a purchase or loan which cannot close.
Eventually this will pass. Fortunately unlike the recession, this will turn the corner the beginning of the year and be back moving in the right direction by mid-year 2024. We need to ‘just keep swimming, just keep swimming’ until then.
