What investors really need

Question

What we really need is for local banks to start doing commercial loans on investment properties (SFH) again.

I know some states are still doing these types of loans. But here in Illinois, our local banks have completely abandoned their portfolio lending.

Any chance there's a national lending entity out there thats doing portfolio loans today?

Nathan Emmert · Answer

I understand that on appreciation plays or even tax write-offs...

I just wish institutes would look at cash flow better and understand the market.  If you've got a property providing significant cash flow each month, value dropping isn't likely going to cause you to give it up.  Why give up cash flow just because the property dropped in value?  That strikes me as silly.

Michael D. · Answer

Craig, I'm just now getting back to this thread. Thanks, that's great advice. I'll surely do that in a year or two when I'm at a better LTV.

Craig Grella · Answer

Michael,

When you get that loan down below the 65-70% mark you should renegotiate your guarantee.
PNC should be able to handle that for a small fee. If not, there are enough MF lenders out there who can handle the no-recourse carve outs for a good property at a low ltv.

Michael D. · Answer

Banks prefer conventional loans because they make a lot of money with zero risk. They just turn the loan around to Fannie or Freddie and pocket several thousand dollars. Thats hugely more appealing than making a few hundred bucks a month, tying up all their capital and carrying all the risk that you're talking about with a portfolio loan.

I just got an 80% commercial loan on a 9-unit from PNC, so I know it can be done. But I had to personally guarantee it and have a 1.8 debt service ratio.

James Hamling · Answer

Mike,

Some great points, information and perspectives being shared here for you that I would like to add to:

The big national banks are box checkers, they originate. This exists due to logistical control of loan officers; small banks have 4,5, maybe 1o max L.O.'s for a manager to watch and make sure there writing good paper. Now imagine a B.O.A. or Well's gets into portfolio loans, loans not sellable on the 2nd market to Fannie/ Freddie. They would have what, 5 or 6 thousand L.O.'s to check. And no, 60% LTV is not a safe lending line because what is the value?, for how long?, will it depreciate and how much?, if it must be taken back how much of the 35% will be eaten up in fees, depreciation, holding, repairs, management, etc etc. 
   See banks want to see you have skin in it because they want the security of knowing it's gonna hurt you to let the property go. Banks know that business people are there worst borrowers, business people will make a strategic default without a blink, it's business.

Big banks follow K.I.S.S., Keep It Simple Stupid. Big banks originate per 2nd market check boxs, make the loan, sell it off, and move on. It is simple, all there L.O.'s coast 2 coast can do it with no intensive oversight, and our politicians in all there infinite politicking have given them free access to all the free money they want. They have 0 motive to change.

Craig Grella · Answer

Steve,

I think the familiarity angle is a big part of those portfolio banks being able to offer a program that's a little out of the box. The commercial banks are box checker underwriters. For the most party, they're not going out of their way to dig into the numbers of a local market for a relatively small deal.  But the portfolio lender can get up close and personal, especially if they can reach out and grab that borrower's other business - deposits.

Steve Babiak · Answer

OK, you have asked - I'll offer an opinion.

Portfolio lending is very localized for good reasons.  Mainly, that smaller local bank will have some familiarity with the local area where they are lending; with that, they know what sorts of risks will be considered "acceptable".  The big national bank would have to gain that same level of expertise / familiarity at the local level across many regions, in order to be able to consider loans in the same manner as that smaller portfolio lending bank.

Now, those big banks are having trouble with many other aspects of their lending practices - certainly you can't expect them to become proficient in some area that is so different from what they can barely manage already!

Now, there is one other thing you have to understand.  Portfolio lending means that the loan stays with the bank that made the loan.  Those big banks don't want the risks associated with having to keep loans on their books - they prefer to lend where they can re-sell the loan so that somebody else actually takes on the risks.  This is so they can get a reward (they get paid in origination), and have minimal risk (somebody else buying the loan takes on the risks).

Mike H. · Answer

Definitely some good points there. I definitely question, sometimes, if its the sales pitch or more to the point the way I'm buying the houses.

I know I have had a couple lenders ask about how I'm buying the properties. I am using hard money and private money to buy the houses right now. And am able to roll the rehab into the loans.  Then I'm coming to them to refi them rate and term.

This has led to effective no money down deals on my investments. While my cash flow is still excellent, I don't think they are always that comfortable with that scenario.

My response to that though is if the LTV is 60 or 65%, then the LTV should be 60 or 65%. Although the fact is if I had 10k in a house or 0. That isn't going to have any affect on whether I default. And if I default, they're still going to have the same LTV on the deal regardless.

My other comment on the "controls" and the national aspect would be this. The controls are very straightforward - LTV and net cash flow. Purchase loans for investment properties should require 20% down with an LTV of 70% or better and net cash flow of $300 per month or more.

For refi's, rate and term only (i.e. no cashouts unless its owned over 2 years) with LTV of 70% or better and net cash flow of $300 per month or more.

With LTV's and net cash flow, it would be very easy to ensure a consistent lending practice nationally. Its just a matter of someone actually looking at the numbers to bear that out.
I would love to know what kind of default rates they'd find for investment property loans with the numbers above.

I'd bet they'd be pleasantly surprised. I could be wrong too though. But I'd be a little shocked to see an investor lose a house if it was making $300 a month. There are some stupid people out there though so nothing is 100% sure. :-)

And with the 5 yr balloons, the bank would take on a lot lower interest rate risk.

One thing people haven't talked about is what is going to happen to these banks when the interest rates do go up. If and when they head back up to the 6's, these banks are going to be kicking themselves.  They'll be locked in to 30 yr loans at 4 to 4.5%.  Versus an investment loan that can be reset after 5 years.

James Hamling · Answer

Mike,

The thing you have to remember with a large national bank is 1)when they offer a financial lending package they have to lend that throughout the whole network, and investment property is vastly different in 1 area as opposed to another, which leads to point 2)big national chains do not have the solid infrastructure in place to regulate the writing of those loans, because every one must be personally reviewed and rated as what, 9 out of 10 will be would-be novices with inaccurate numbers or actual cash flow well below there foretasted, that means a commercial lending agent will get swamped in new applications which will overload there system, and there in mess with there current commercial lending, possibly loosing accounts.

I know a commercial agent at a major national lender and the take is yes they "could" start doing some good business there, but they need the controls in place first to prevent from people writing the bad business as they had in the past, and it just isn't there.

With small banks, they have size on there side, not a massive management chain, so it is far easier because they have much more ability to make judgment calls.

Lately I am experiencing many small banks and credit unions doing much more portfolio lending, I would consider the question if it really is that in your area they are not opening up yet, or if your sales pitch is lagging and your getting polite rejections? Not saying you are, just saying it is fruit for thought.

There is also more then 1 way to skin a cat, say if they wont lend for the purchase and that is what you are seeking, how about using HM for bridge financing, rehab and rent or C4D, then seek lending on the owned property? Not all H.M. people run to file there notes, and you can always speak to your H.M. person to work out a deal. Getting financing on owned property is different then a speculative investment purchase.

Craig Grella · Answer

It seems to me banks are stuck using the lessor of two evil underwriting methods. The national banks handcuffed with the checkbox fannie/freddie credit based kind of stuff that has proven unreliable, and the local or portfolio lender who is faced with many markets around the country still declining in value. In general, banks are loathe to make a loan where the ratios are so uncertain even just a few months after close.

Throw in the investor component, and it gets even messier, because as Holdman pointed out, they are quick to walk (or should I say run?) from the property when the investment declines in value or stops cash flowing.

Even hard money has been affected. Where the hard money lender has been able to sell his take backs at a discount off retail and still recoup his investment, in a market with eroding value, he's finding his original 65% ltv loan is more like an 80% ltv loan now, and selling at 80% of retail price isn't exciting as many investors as it used to- because investors are regularly finding foreclosures and other auction properties at bargain basement prices.