Lenders' Insatiable Appetite for Commercial Real Estate
RELEASED APRIL 2013
SELECTED FINDINGS FROM THE 2013 Q2 SPECIAL REPORT ON APARTMENT LENDING AND CREDIT RISK
MULTIFAMILY LENDING MARKET SHOWS SIGNS OF OVERHEATING
» CREDIT PROFILE OF CURRENT LENDING POINTS TO RISING MATURITY DEFAULTS
The credit risk profile of new apartment mortgages weakened over the course of 2012, owing in part to competition for lending opportunities between the government-sponsored enterprises (GSE) and lenders without preferential access to capital, including banks, life companies, and the conduit.
Term defaults are limited by underwriting to in-place cash flow and a low probability that cash flow will decline. Defaults on current originations are instead clustered at maturity, reflecting interest rate and policy risks that are largely mispriced in conventional credit risk models.
Many markets remain highly dependent on the GSEs for financing. However, clearer guidelines for the conduct of the GSEs in well-contested segments of the market are consistent with long-term loan performance and asset price anchoring to fundamentals.
Several of the best performing apartment markets have also registered the largest increases in risk-taking by lenders and investors. Washington DC, Austin, and San Jose are among the markets climbing in the Q2 credit risk rankings. Across markets, the most observable decline in credit quality was for balance sheet and conduit loans made in direct competition with agency lenders.
About the Report The national and market-level findings of Chandan Economics’ 2013 Q2 review of lending activity are based on loan-level stress tests of nearly 3,900 apartment mortgages made over the last year by banks, life companies, conduit lenders, and agency lenders. The aggregate principal balance of the pool is $27.3 billion. Clients can download the full report, including market rankings, on the Debt & Credit Analytics » Debt Trends screen.
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