This gain took place as government-sponsored enterprise activity is being held back by their regulator’s lending cap and their own tighter lending criteria.
Fannie Mae and Freddie Mac are now being more careful about who the borrower and sponsor of a property are before approving them, says Terrill Gates, CEO of Virtus Real Estate Capital. The cap has contributed to this new attitude.
They are lending more dollars to a smaller group of borrowers.
But while the agencies are tightening their belts, the banks and the conduits are picking up the slack, he continues.
In 3Q13, loans made for commercial bank portfolios are up 32% in dollar volume over 2Q13, says the Mortgage Bankers Association. Conduit loan originations are up 8%, while life companies originated 6% fewer loans and GSE volume is down 37%.
Total origination volume is flat compared with 2Q13, MBA says.
Conduits are making adjustments for lower risk borrowers, including removing lock box requirements and requiring a lower debt yield, Gates says in an interview before the MBA released its numbers. Virtus is a private equity real estate sponsor.
It is easier to obtain commercial financing as lenders have more capital available and they are willing to put it to work, he says.
Banks are being more aggressive as well. In the past they looked to trade rate for higher leverage. Now they are using risk-adjusted models in underwriting, Gates says.
There is a 29% increase in commercial and multifamily lending on a year-over-year basis and the driver is a 124% increase in loans secured by health care properties. Lending on office properties is up nearly 70%.
An area Virtus specializes in involves financing properties which host charter schools. The problem here is that many small lenders do not understand the property type and they have to deal with different regulatory requirements on state-by-state basis, Gates explains.
Virtus is able to get financing from banks, but typically they want a long-term triple-net lease with the school as an underwriting condition.