Here Come the Life Cos.

Since the financial crisis began in 2008 many life companies have scaled back or exited the market. Rates on life company loans were very high--relative to GSEs and banks--at 400 to 500 basis points over the treasury. But no more. At the Mortgage Bankers Association CREF conference in February we heard that life companies were in the market for stabilized low LTV properties. Lenders indicated their interest in all asset type-- multifamily, office, warehouse or even retail properties as long as the loan to value was low and debt service coverage high. Life companies indicated they were in the market for secure loans, and they were willing to reduce the price they charge--rate and spread--to win some of those deals.

In the past week alone we have begun to see these deals come to fruition. In the past month, I was in competition on a $20-million, stabilized, low LTV multifamily loan. The GSEs quoted the deal for a Sept. 1 closing--the transaction had a small forward component to it. In addition, the existing incumbent lender is a life company who, over much of 2008 and 2009, had been totally out of the market. Only in past few months have they restarted their lending operation. Shortly after, another large life company slashed spreads on low LTV loans to win business. Within days the incumbent life company lender reached down, slashed its spread and locked up and retained the deal, soundly beating the GSEs spread quote. Just weeks ago this would have been unheard of. But life companies have pressure to invest their cash and get the money out. This pressure to invest is cause for them to slash rates and retain good-quality multifamily loans they would otherwise have lost to the GSEs.

And expect to see more of this over the summer. We are starting with low LTV investments. Life lenders will increasingly lower spreads to retain and win good business. As long as the economy continues to exhibit positive signs, life companies will be increasingly active. As competition for loan investments increase, life lenders will increase acceptable leverage--though, in the short term the GSEs will continue to have a decided advantage on multifamily loans greater than 60% to 70% LTV. This is good news for all. More lending portends more transactions. Transactions promote health in the commercial real estate industry and will serve to strengthen banks and financial institutions' balance sheets.

As a side note, Both Fannie and Freddie stepped up to the plate making financing on multifamily rental apartments available to many property owners in 2008 and 2009. The GSEs became slightly more user-friendly and competitive and delivered fairly-priced loans on stabilized multifamily rental properties. In the short term for sure, the GSEs will continue to dominate the market for higher loan to value loans--above 60% to 65%.However, the operative word here is stabilized. For many multifamily loans in lease up, or that are underperforming for some reason, the GSEs were not the financing solution. That was left to the regional banks. These non-stabilized assets were financed with some sort of recourse to the principals. In 2008 and 2009 non-stabilized, non-vanilla loans could only be financed with banks, if at all. Now, with the life companies reentering the market--and it may well be a stampede by the end of the year--pre-stabilized deals may once again have a home.

Mark Scott is president of Commercial Mortgage Capital located in Livingston. He can be reached at mscott@newcommercialmortgage.com. The views expressed here are the author's own.