3 Reasons Why Borrowers Do Not Like CMBS Loans
The CMBS marketplace has slumped amid new regulations and a growing stigma among borrowers.
New CMBS issuances fell by 34% in the first quarter of 2017, as new risk-retention rules enacted in March require lenders to keep 5% of the value of any loan on their balance sheets, rather than selling the entire pool as bonds.
In the midst of CMBS uncertainty, Hunt Mortgage Group launched its fixed-rate HFX program. Designed to offer an alternative to conduit loans, HFX gives Hunt the option to write loans with terms of seven years and the ability to lock spreads at the time of the application. The program maintains the advantages of a conduit loan, like non-recourse debt, a 75% loan-to-value ratio and competitive pricing, without the scrutiny of B-piece buyers and servicers uninterested in customer service.
Hunt has a $12.5B servicing portfolio and is a rated special servicer of loans. HFX adds to its high volume of business transactions and strong servicing capabilities.
“When we were talking about HFX in its infancy, we looked at CMBS loans and the aspects people disliked about CMBS,” Hunt Mortgage Group Managing Director R.J. Guttroff said. "We thought, how can we deliver the benefits without those risks?"
Guttroff boiled down CMBS grievances to three major complaints:
1. Spreads can change significantly before a deal closes
When borrowers get a quote from a conduit lender, it is for that point in time. During the 45-day period before closing, shifts in the financial market can lead to loan spreads changing significantly before the deal goes through. The borrower's rate can change up to two days before closing, according to Guttroff.
“The banks and other conduit lenders never call the borrower and say, ‘Hey, spreads are in, we are going to knock 10 basis points off your spread,’” he said. “The only time they call is when spreads are out and they have to increase them from anywhere from 10 to 50 basis points.”
Unlike CMBS shops, Hunt locks spreads for the 45-day period at no additional cost during the due diligence period.
2. Loan servicing is less than desired
Once the lender sells the CMBS loan, servicing is also sold. Borrowers have to interact with buyers that are less interested in establishing a customer relationship. They often complain that, when there is a problem, they cannot reach the servicer on the phone, and it can be difficult to negotiate with the servicer, Guttroff said.
With its HFX program, Hunt services the loans to maturity.
3. B-piece buyers can reject loans at the last minute
One topic less discussed, but an important aspect of conduit lending, is the “B-piece buyer." This group buys the non-rated portion of the securitization, which bears the first risk of loss. By taking this position, the B-buyer is afforded the right to remove loans from the pool. This gives them enormous power over lenders, and by extension, borrowers.
Before the 2008 financial crisis, when B-buyers would kick loans out from pools, lenders would still move forward and close loans. They would hold it and try to put it in the next securitization or sell it separately. In today’s financial climate, B-buyers are reviewing loans at earlier stages, often before they have closed. This could mean that the B-buyer, and not the lender, is making the ultimate credit decision.
“Kicked” deals are increasingly causing lenders to not move forward in making the loan. In the the past, a lender would risk finding an alternative home, but not anymore. Instead, the borrower is left at the altar.
“In most cases, the B-buyer will see the loans before they have closed, so there is a lot of risk from the borrower standpoint,” Guttroff said.
In HFX, Hunt retains the risk and is the B-piece buyer, reducing the chance of issues popping up later. If Hunt understands and likes the deal at the time of the application, the loan is approved, which reduces the borrower's execution risk.
“So it is like you are approved by the B-piece buyer at application, because we are effectively the B-piece buyer,” Guttroff said.
Hunt’s HFX program covers stabilized property types, including anchored and unanchored retail, office, industrial, multifamily and mixed-use, to name a few. Loans range from $7.5M to $25M and are available in major and secondary markets nationwide. For Guttroff, it is about creating a one-stop-shop alternative to CMBS.
“My sales pitch to my clients is, ‘If you have a problem, call me,'” Guttroff said.
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