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Lending Is Back

By Joel Ross

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Lending Is Back Many groups raised funds to buy distressed loans or REO, but found there was almost nothing to buy. Having raised the funds they needed to do something with the money so they have now almost all become lenders/preferred equity providers. There is now a rush of money to loan and the race is on to put it out. Spreads have already started to come in and leverage levels are rising already. We already have competition between lending sources. On transactions I am personally doing, and others I am familiar with, there is funding for deals none of us would have imagined just 60 days ago. For example I am arranging funds for a brand new condo project at 75% of DPO cost. Another is a cash flowing portfolio of select service hotels some of which are still in the ramp up phase being brand new. Again a 75% LTV is apparently achievable through an A/B structure. Another transaction I am advising on is to raise a fund for hotel debt at similar LTV with a similar structure. These are all non-recourse, but underwritten on today values and today existing cash flows. The banks are getting back in slowly and it depends on what condition the bank is in as to capital. The major banks are lending, although more conservatively than the funds. Insurance companies are lending to core properties. Spreads on the top quality loans with low LTV and top rated borrowers can be as low as 300-350 over with 30 year amortization. Some insurers are now lamenting that they did not act more aggressively late last year and early this year, as they are now having strong competition to put out dollars. One foreign bank is considering a construction loan in New York at fairly low spreads. Several bankers I recently had dinner with this week were discussing how they are still working the old book of bad loans while the push is starting for new originations. They commented that originations are much more interesting and a lot more fun than modifications, which leads on to believe modifications are going to be accelerated to get them over with so the lending officers can get back to enjoying their work by making new loans. A number of the grown ups in the business are already worried, including me. We can see where this is headed. We are astounded that any lending is happening at all this fast compared to the early nineties when it took until mid to late 1993 to restart having stopped in 1989-4 years. Now we see it stopped in late 2007 and here we are in spring 2010-2 ½ years later- and just past the worse collapse since 1932, and we are off to the races again. It will not take long before the amount of money chasing loans ramps up and spreads come in further and competition is underway for each good loan. While there is still hundreds of billions to refi over the next few years, the rush will be on by borrowers to lock in lower rates while they still exist. Securitized lending is coming to your neighborhood sooner than we all expected. Treasury pulled a wonderful massive head fake with TALF making believe it was a real program, which it never was. The capital markets thought it was real and a few prime deals happened and securitization was jump started. TALF was never real and it was designed to do just what it did. Fool everyone into thinking it was real and to get securitization going again. It worked. Now we just need to wait to see what comes out of Congress as to the proposed 5% holdback and possibly other restraints to try to prevent the insanity of securitization of the past. They can regulate all they want, but unless stringent underwriting is adhered to and the rating agencies hold the line on subordination levels, we will be back to dumb lending a lot sooner than anyone would have believed. Here I personally think tying bonuses to long term success of a securitized pool is what is needed to make it clear there are real consequences to bad underwriting. Otherwise in several years we will be doing all the dumb things all over again. I have seen this picture show several times in my career.

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