Commercial Mortgage Lenders – The Credit Crunch Continues – Hard Money Vital to Health of the Sector

The health of the economy has improved over the last several months. Technically speaking the recession may be over; Rams Home Loans Renting we may be growing GDP (gross domestic product) once again. But, unfortunately, the credit crunch continues.
Many banks are very worried about further deterioration commercial real estate values and growing commercial mortgage delinquencies. They fear that more large Real Estate Construction Jobs percentage write downs of their CRE portfolios may be necessary threatening their statutory solvency. Banks on the edge are very wary about lending.
Other banks, even healthy ones, along with insurance companies are sitting on their capital as they await the coming wave of new regulations out of Washington. Regulators are enforcing current rules more strictly than ever while promising even tougher lending laws are on the way. Lenders won’t lend in earnest until they understand what the regulatory environment is going to look like. While the administration encourages lending with their words they are discouraging it with their heavy handed actions.
The traditional, money center lenders just aren’t lending the way they should be. The commercial mortgage backed securities (CMBS) markets, formally a huge provider of liquidity, are, likewise, dysfunctional. We are still in the midst of a serious credit crisis.
Eventually the credit mess will be sorted out. The new regulations will be negotiated down to manageability and, as the economy continues to get better; lending will again become a profitable enterprise for banks, Hartford insurance concerns and Wall Street investment houses. But what does a commercial real estate investor do in the mean-time?
For many borrowers the answer has been private lending. Privately funded, often called “hard money” commercial mortgage loans are funded by private individuals or privately held companies.
These unique lenders often hold the loans they write in their own portfolios rather than sell them to the secondary mortgage bond market. Private lenders are not regulated by the State or Federal Government so they enjoy much more flexibility and can fund loans much faster than banks can. Multi-million dollar loans can close in less than 10 days if the deal works for the hard money lender.
The downside to private lending is that rates and points are significantly higher than bank interest rates and that much more equity is requires. Private loans almost always top 10% with at least 3 origination points and loan-to-value ratios rarely exceed 65%.
The credit crisis has caused many good loans to be rejected by banks. Further, falling property values make it even more difficult to qualify for traditional financing. Hard money lenders are often able to fund deals that banks are being forced to turn away. Private lending has become a vital part of commercial real estate finance.
Private lenders tend to make short term “bridge” loans that run for 12-36 months. Payments are usually interest only and are sometimes held in reserve to guarantee payment. For some commercial real estate property owners this bridge loan is just what they need to fix their credit situation or simply wait out the credit squeeze.
Borrowers would rather get a nice, low interest bank loan with good terms and conditions, but that kind of financing is just not readily available today. Private lending is now main-stream finance and, for many struggling investors, may be the only-game-in-town.

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