Are commercial real estate loans easier to find than residential loans today?Â Had I asked that question back in 2007, most people would have then saidÂ â€œNo way.â€ Today, many investors and brokers may have to really thinkÂ about it first prior to giving an answer one way or another.
In Southern California, upwards of 55% of all homes purchased in 2012Â may have been acquired with either all cash or FHA loans partly since theÂ secondary markets are so restricted. A very high percentage of these homeÂ purchases were for homes priced below the conforming / FHA loan limitsÂ of $417,000. Many of these all cash buyers were investment or hedge funds,Â domestic and foreign.
Obviously, the mortgage lending markets have tightened up significantlyÂ since 2007 with the Jumbo Mortgage market (loans above $417,000 in manyÂ regions of the U.S.) dramatically shutting down the most in recent years dueÂ to less secondary market investors.
In 2012, the Jumbo Mortgage market began to slowly increase partly dueÂ to the record low interest rates, and the improving residential home pricesÂ related to lower home inventory numbers and increased demand from bothÂ U.S. and foreign investors. The weaker U.S. Dollar has helped attract lots ofÂ foreign investors from regions such as Canada, China, Europe, and Mexico.
More sellers and builders have considered and / or used â€œseller financingâ€Â options (i.e., creating a new 1st mortgage, a Contract for Deed, All InclusiveÂ Deed of Trust (AITD), or using private money sources) in order help sellÂ their properties at a faster pace.
Yet, there is a brand new lending rule in effect which I am still trying toÂ learn myself which may adversely affect residential property lenders, sellers,Â builders, and brokers. This new rule is The Dodd-Frank Wall Street ReformÂ and Consumer Protection Act (DFA), which began on January 21, 2013.
The rules related to DFA note that no creditor may make a residentialÂ mortgage loan without first making a reasonable or good faith determinationÂ that the customer may have the ability to repay the loan based upon severalÂ statutory factors.
Some sellers may be exempt from DFA if they sell less than threeÂ (3) properties every year or they may be considered â€œMortgage LoanÂ Originators.â€ Please confirm with your personal advisors since theseÂ guidelines are brand new here in 2013.
Some of these qualifying DFA (Dodd-Frank Act) factors that may determineÂ if a seller may provide various forms of seller financing options mayÂ include:
1.) The seller did not build the home. This may hurt many small to mid sizedÂ builders.
2.) The loan must be fully amortizing with balloon payments potentiallyÂ being completely prohibited. How may sellers really want to offer sellerÂ financed terms for more than one (1) to five (5) years as opposed to 20, 25,Â or 30 years instead with no balloon options?
3.)The seller determines that the buyer is able to later repay the loan. ThisÂ new option may turn sellers who offer financing options into strict â€œbankÂ underwriters.â€ One of the many benefits associated with seller financing inÂ 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 FederalÂ Reserve Board. As of now, I do not know what those additional sellerÂ financed lending guidelines may be though. How do we find out?
Since the last real estate market peak near 2007, both the residential andÂ commercial market sectors have sadly experienced massive price declines.Â In many cases, homes, retail shopping centers, land, hotels, and other typesÂ of properties have had their values cut in half or more.
As it relates to the commercial property sectorâ€™s last market peak nearÂ 2007 or 2008, many of the existing 5 year fixed commercial loans mayÂ be ballooning or coming all due and payable in 2013. In many cases,Â commercial loans are fixed for shorter 5, 7, and 10 year terms so they mustÂ be refinanced or paid off more often than residential loans.
Upwards of 4,750+ CMBS (Commercial Mortgage Backed Securities)Â with loan balances near $55 billion may need to be refinanced in 2013Â alone. Sadly, a very high percentage of these same potentially ballooningÂ commercial mortgages may not have sufficient income to service theÂ existing mortgage debt.
In addition, there may be an additional 6,300+ non-CMBS commercialÂ mortgage loans (according to Bloomberg Financial News) with balances ofÂ almost $79 billion that may be coming all due and payable in 2013. WhichÂ of these properties may qualify for a new commercial loan though today?
In many situations, the existing commercial mortgage debt may currentlyÂ exceed the conservative market value today in 2013 based upon theÂ income and expenses for the existing properties. Yet, some mortgageÂ lenders or servicing companies may accept partial payoffs almost akin toÂ a residential "Short Sale" by way or either a sale or a refinance. PropertyÂ owners may wish to consider trying to remain somewhat optimistic in spiteÂ of their challenging financial position today.
Most banks still don't want to foreclose on their properties so they mayÂ better realize today that a partial payoff may be much better for them thanÂ a foreclosure. Many lenders today may agree to some type of a discountedÂ payoff which may be a "Win / Win" for all parties.
The most encouraging part of the commercial real estate industry todayÂ is that interest rates continue to hover near records low rate ranges (3% toÂ 5%+). With lower interest rates today, then borrowers may lock into thisÂ historically low rates and potentially improve their monthly cash flowsÂ significantly.
If lending may hopefully ease up later this year as it relates to bothÂ residential and commercial properties, then sales and property values mayÂ begin to increase more so than in years past. Once again, it is the availabilityÂ of capital that may best determine the direction of U.S. property values.