As expected, lenders have tightened up loan requirements, but unlike 2008/2009 (GFC — Great Financial Crisis), the market hasn’t frozen up. During the GFC, liquidity dried up. Since the beginning of this year, the FED has been pumping billions of dollars into the credit market to avoid a replay of 2008/2009. Some of this liquidity has come by way of a program called the Primary Dealer Credit Facility, which was used during the GFC and again as the stock market cratered in February/March.
When the economy shut down in March and April, lenders had to retrench. The CRE lending market didn’t close up shop, but it looks much different than it did pre-COVID-19.
More Stringent Lending
While lenders did initially pause in March, they have started stepping back into the fray. With so much still unknown about the country’s economic future, lenders obviously want to do more to reduce their risks.
Borrowers can expect a larger cash reserve requirement. Six to eighteen months are a common debt service reserve (principal and interest payments) requirement. These requirements used to be for unproven or risky properties or those in transition. Going forward, new commercial and multi-family mortgages can expect larger cash reserve requirements.
Once a property shows its cash flow stability for a certain number of months, reserves can be released. How much reserve a lender may require will depend on:
Circumstances specific to the loan
Strength of the borrower
Cash reserves for debt servicing aren’t the only thing borrowers may be hit with. Some lenders now require six to twelve months of tax and insurance escrow reserves on top of any other cash reserves. Metrics have tightened as well, including underlying collateral, LTV ratios, debt yields, and debt service coverage ratios.
Reliability Of A Property’s Cash Flow Plays A Larger Role
Lenders will also want to know more about tenant payments. How many tenants are paying partial, full, or no rent? What do projections for tenant payments look like? Lenders want to determine delinquency exposure.
As property owners look for financing options, lenders will have a difficult time evaluating the value of a property under such uncertain economic conditions. This is why lenders are trying to offset risk through other means.
The New Borrowing Landscape
With higher cash reserve requirements, many borrowers will be looking at lower returns. The ability to exploit leverage to the same degree as the pre-COVID-19 economy is no longer available. Sponsors may have to consider different deal structures to maintain returns. Some deals may be off the table due to requirements, which are sponsor and property dependent.
As government stimulus (unemployment booster checks) runs out in July and depending on how the job market does, there’s a risk of delinquencies increasing. Within the next couple of months, the lender landscape may be set to change once again.
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