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November 02, 2018  

Nonbanks Win Growing Share of Loan Market

Nonbanks doubled their share of commercial mortgage originations over the past year, according to a survey by CBRE.

Debt funds and other “alternative” lenders accounted for 27% of the volume of nonagency loans brokered by CBRE in the third quarter, up from a 12.9% market share a year earlier. Commercial banks also posted an increase. But commercial MBS shops and, to a lesser extent, insurers, saw their pieces of the pie shrink.

The nonbanks’ rising market share dovetails with anecdotal evidence that they have been aggressively originating construction and bridge loans. Because CBRE’s loan-brokerage volume is substantial, its figures are seen as reflective of the broader market.

Overall, CBRE found that lending activity, including agency originations, rose sharply in the third quarter. Its so-called “lending momentum” index — which is pegged to a base value of 100 that represents lending activity in 2005 — rose to 252 in September. That was up nearly 25% from June and 13.1% from a year earlier.

A spike in property sales boosted third-quarter originations, outweighing the negative impact of rising interest rates and a cyclical decline in refinancings. “I think there’s still a large discussion about it being late in the cycle,” said Brian Stoffers, CBRE’s global president of debt and structured finance. “But on the sales front, things picked up a bit in the third quarter.”

He added that one concern is the cost of currency hedging for overseas investors. Foreign institutions may reduce their investments in vehicles that write U.S. mortgages if the cost of insuring against drops in the value of the dollar relative to their home currencies continues to rise.

Market-share figures can be volatile from quarter to quarter. Commercial banks captured almost 40% of nonagency lending volume in the third quarter, up from 27.9% a year earlier but down from 48.1% in the second quarter. CMBS lenders saw their share plummet to 14.6%, from 36% a year earlier and 14.8% in the second quarter. The share for insurers fell to 18.6%, from 22.9% a year earlier and 20.7% in the second quarter.

The remaining 27% share in the third quarter was captured by other types of lenders, a catchall category that includes alternative lenders, such as debt funds, REITs and finance companies. In addition to being twice as high as a year earlier, the share was up from 16.4% in the second quarter.

CBRE’s quarterly survey also found that loan spreads ticked up in the third quarter, but remained below year-earlier levels — indicating that competition is still fierce and that lenders are willing to accept thinner profits to win deals. Excluding multi-family debt, spreads on seven- to 10-year, fixed-rate mortgages with leverage of 55-65% averaged 184 bp, up 6 bp from the second quarter. But they were down 42 bp from a year ago.

The average spread for apartment loans was 161 bp in the third quarter, up 4 bp from the previous quarter but down 6 bp from last year. The survey noted that Fannie Mae and Freddie Mac are close to last year’s record-setting pace for purchases of multi-family loans. Some expect the agencies’ regulator, the Federal Housing Finance Agency, to restrict their activity in 2019 (see article on Page 1).

Across the board, underwriting standards edged downward, the survey found. Debt-service coverage ratios slipped to 1.41 to 1, from 1.51 to 1 in the second quarter and 1.53 to 1 a year earlier. The percentage of loans that included some interest-only period rose to 66.2%, from 61% in the previous quarter and 57.8% in last year’s third quarter. Debt yields were down to 8.66% in the third quarter, from 9.89% in the second quarter and 10.09% in the third quarter of 2017.