When the credit crunch sidelined Wall Street lenders this year, commercial real estate borrowers returned to life insurance companies for loans.
But far from merrily doling out the deals, some brokers say life companies’ ultra-rigid underwriting has kept loan volumes low.
The result: frustrated would-be borrowers who now have fewer options – and, some say, a worsening credit crunch.
“It’s getting worse by the day,” said George Fantini of Boston-based real estate brokers Fantini & Gorga, who says he’s struggled to place loans with skittish life insurance companies.
“The mindset is ‘Our money is precious, we’ve been able to avoid a big disaster, and we don’t want to take much of a risk.’ That’s their deal.”
When conduit lenders bowed out, banks and life insurance companies stepped up to do more lending. But now, Fantini said, banks have pulled back from lending, and life insurers are sticking to only a few hand-picked loans, leaving most borrowers out of luck.
Fantini and other brokers and life insurance executives say most companies are only making loans with a 60-65 percent loan-to-value ratio, when many borrowers simply need lenders to put more money up.
“They need more juice than that,” Fantini said.
Of course, loan volume varies from company to company. James Murphy, principal of Boston broker New England Realty Resources, said he’s seen no unusual conservatism from life companies this year. His company’s loan volume is up 35 percent, Murphy said.
Still, many life insurance executives admit they’re holding back or have given up on real estate lending completely for the time being.
David B. Henderson, Boston-based senior portfolio manager for Allstate, said his company has put all commercial lending on hold since last spring. Last year, Allstate did several billion dollars’ worth of loan originations, he said, but this year’s poorer insurance and annuities sales have left the company with less capital to work with, in addition to the industry-wide fear of touching anything but the most surefire lending deals.
TIAA-CREF is still doing deals, but Richard Coppola, head of commercial mortgage investments, said the company is only lending to top-tier borrowers – but then, that’s all everyone else is lending to, either. They aren’t competing with conduit lenders anymore, but they do have to contend with other life insurance companies for the same borrowers.
TIAA-CREF intends to originate about $2.2 billion in loans in 2008, he said, and it will probably take the full year to complete all its lending – but that’s longer than many expected.
“We would have thought that we’d be wrapping things up by now, frankly.”
But what happens to the less-than-top-tier borrowers, the ones who need more than 65 percent loan-to-value ratios?
The answer is, more or less, “I don’t know,” says Coppola and other lenders. Some can go get mezzanine loans, Coppola said, but those gaps are hard to fill.
That might be making life companies nervous: Those troubled borrowers’ woes could spill over into the rest of the industry, Coppola said, much the way residential mortgage-backed securities troubles reverberated into the commercial market.
“That’s a little scary,” he said.
