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Rick Tobin's Blog

By Rick Tobin | Broker in Los Angeles, CA

Are Commercial Loans Easier To Fund Today Than Residential Loans?

Are commercial real estate loans easier to find than residential loans today? Had I asked that question back in 2007, most people would have then said “No way.” Today, many investors and brokers may have to really think about it first prior to giving an answer one way or another.

In Southern California, upwards of 55% of all homes purchased in 2012 may have been acquired with either all cash or FHA loans partly since the secondary markets are so restricted. A very high percentage of these home purchases were for homes priced below the conforming / FHA loan limits of $417,000. Many of these all cash buyers were investment or hedge funds, domestic and foreign.

Obviously, the mortgage lending markets have tightened up significantly since 2007 with the Jumbo Mortgage market (loans above $417,000 in many regions of the U.S.) dramatically shutting down the most in recent years due to less secondary market investors.

In 2012, the Jumbo Mortgage market began to slowly increase partly due to the record low interest rates, and the improving residential home prices related to lower home inventory numbers and increased demand from both U.S. and foreign investors. The weaker U.S. Dollar has helped attract lots of foreign investors from regions such as Canada, China, Europe, and Mexico.

More sellers and builders have considered and / or used “seller financing” options (i.e., creating a new 1st mortgage, a Contract for Deed, All Inclusive Deed of Trust (AITD), or using private money sources) in order help sell their properties at a faster pace.

Yet, there is a brand new lending rule in effect which I am still trying to learn myself which may adversely affect residential property lenders, sellers, builders, and brokers. This new rule is The Dodd-Frank Wall Street Reform and Consumer Protection Act (DFA), which began on January 21, 2013.

The rules related to DFA note that no creditor may make a residential mortgage loan without first making a reasonable or good faith determination that the customer may have the ability to repay the loan based upon several statutory factors.

Some sellers may be exempt from DFA if they sell less than three (3) properties every year or they may be considered “Mortgage Loan Originators.” Please confirm with your personal advisors since these guidelines are brand new here in 2013.

Some of these qualifying DFA (Dodd-Frank Act) factors that may determine if a seller may provide various forms of seller financing options may include:

1.) The seller did not build the home. This may hurt many small to mid sized builders.

2.) The loan must be fully amortizing with balloon payments potentially being completely prohibited. How may sellers really want to offer seller financed terms for more than one (1) to five (5) years as opposed to 20, 25, or 30 years instead with no balloon options?

3.)The seller determines that the buyer is able to later repay the loan. This new option may turn sellers who offer financing options into strict “bank underwriters.” One of the many benefits associated with seller financing in years past was related to the ease of qualifying options.

4.) The loan must have a fixed interest rate for a minimum of five (5) years.

5.) The loan must also meet other guidelines established by the Federal Reserve Board. As of now, I do not know what those additional seller financed lending guidelines may be though. How do we find out?

Since the last real estate market peak near 2007, both the residential and commercial market sectors have sadly experienced massive price declines. In many cases, homes, retail shopping centers, land, hotels, and other types of properties have had their values cut in half or more.

As it relates to the commercial property sector’s last market peak near 2007 or 2008, many of the existing 5 year fixed commercial loans may be ballooning or coming all due and payable in 2013. In many cases, commercial loans are fixed for shorter 5, 7, and 10 year terms so they must be refinanced or paid off more often than residential loans.

Upwards of 4,750+ CMBS (Commercial Mortgage Backed Securities) with loan balances near $55 billion may need to be refinanced in 2013 alone. Sadly, a very high percentage of these same potentially ballooning commercial mortgages may not have sufficient income to service the existing mortgage debt.

In addition, there may be an additional 6,300+ non-CMBS commercial mortgage loans (according to Bloomberg Financial News) with balances of almost $79 billion that may be coming all due and payable in 2013. Which of these properties may qualify for a new commercial loan though today?

In many situations, the existing commercial mortgage debt may currently exceed the conservative market value today in 2013 based upon the income and expenses for the existing properties. Yet, some mortgage lenders or servicing companies may accept partial payoffs almost akin to a residential "Short Sale" by way or either a sale or a refinance. Property owners may wish to consider trying to remain somewhat optimistic in spite of their challenging financial position today.

Most banks still don't want to foreclose on their properties so they may better realize today that a partial payoff may be much better for them than a foreclosure. Many lenders today may agree to some type of a discounted payoff which may be a "Win / Win" for all parties.

The most encouraging part of the commercial real estate industry today is that interest rates continue to hover near records low rate ranges (3% to 5%+). With lower interest rates today, then borrowers may lock into this historically low rates and potentially improve their monthly cash flows significantly.

If lending may hopefully ease up later this year as it relates to both residential and commercial properties, then sales and property values may begin to increase more so than in years past. Once again, it is the availability of capital that may best determine the direction of U.S. property values.

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