Intense Competition Between Lenders
Competition among bank and nonbank lenders has reached an all-time high as each side beefs up their arsenal of financing options. In response to the competition from nonbank financiers, banks have developed more creative financing solutions. The evolution of commercial lending has advanced from conservative traditional financing solutions to more flexible client-centric solutions that adapt to the needs of each borrower.
Flourishing Nonbank Lenders
The post-2008 financial recession caused massive contractions to the traditional bank lending models as they migrated back to low-risk fixed-rate-only loans bound by strict risk profiles and lending criteria. This created a void that was quickly filled by nonbank financiers like mortgage REITS, hedge funds and private equity firms. These risk tolerant players offered vastly diverse financing options with looser lending standards without the constraints (or safeguards) of regulatory oversight. Ambivalent track records and lack of transparency is a major risk factor that must be taken into consideration moving forward.
Systemic Risk Outweighs Return
Nonbank financiers can be aggressive with an affinity to gravitate toward riskier financing options including mezzanine debt, unitranche and equity to feed their appetite for returns. The looser lending criteria may seem beneficial for some borrowers, but they also take on additional systemic risk — the same loose criteria is applied to other borrowers. Thus spreading the risk between clients, unbeknownst to them. Banks, on the other hand, offer the structural sturdiness and stability of a reinforced ecosystem that is regulated with established track records. This factor becomes more significant as the global de-leveraging cycle approaches.
The Elephant in the Room
The U.S. Federal Reserve (Fed) has telegraphed its intent to follow through on unwinding its $4.5 trillion balance sheet while simultaneously raising interest rates. Initial forecasts call for three interest rate hikes in 2018, with speculation of a potential fourth. They have also initiated the balance sheet unwinding process currently up to $10 billion monthly with a 60/40 split between treasuries and mortgage-backed securities (MBS). The Fed plans to accelerate the unwinding up to $50 billion by October 2018. While treasuries can be rolled off the balance sheet at expiration without re-investing, essentially burning the printed money, MBSs take two to three months to show up. Liquidity is the looming issue with MBS as any thinning liquidity will result in rising yields and volatility.
Borrowers deserve to have the confidence (and transparency) that their lenders have the means, structural stability and ability to navigate volatile tailwinds. Cutting edge banks on the leading edge of innovation can develop financing solutions ahead of the curve.
Innovative and Adaptive Financing Solutions
Banks that are on the forefront of innovation have undergone the transformation into hybrid conventional and non-conventional solution partners to expand the capacity to engage clients with the stability and compliance that encourages confidence and financial stability that banks are established with. Diversification through multi-asset class financing adapted to the needs of the client is the modern day mantra.
Enhanced Bridge Loans
Bridge financing has traditionally been the territory of nonbank financiers due to the risky nature of these products. However, transformative banks have undertaken the leap into this arena with various types of bridge financing including bridge-to-permanent financing.
Seasoned Long-Term Focused Solutions
The capacity to accommodate the long-term needs of a client's strategy is the depth required to gain the edge on nonbank financiers. Seasoned expertise provides permanent, long-term, non-recourse commercial mortgage loans pooled and secured through commercial mortgage-backed securities (CMBS) markets. Placement directly to insurance and pension funds require the foundation of an established banking infrastructure.
Data-Driven Deep Learning Business Intelligence
Understanding the needs of borrowers from an atomic level enables deeper personalization that's further augmented by cognitive learning technologies like artificial intelligence. Big data-driven analytics that connects correlations undetectable to the naked eye enable banks to integrate the most relevant and applicable predictive analytics in order to develop real-time risk models and craft hybrid financing solutions around them.
Banks Versus Nonbank Lenders
The advantage of banks over nonbank lenders is stability, reputation, history and an established track record. The biggest pitfall with nonbank financiers is the less regulated nature of these entities and the lack of transparency that magnify their structural risk compared to fully regulated and compliant banks. While nonbank financiers were able to heavily capitalize during the zero interest rate policy (ZIRP) cycle, the forthcoming rising interest rate and global de-leveraging cycle call for borrowers to reevaluate the structural stability, transparency and track record of their nonbank financiers moving forward. Thoughtful and prudent action to safeguard assets through engagement with established banks is the key to avoid being blindsided.
To discuss this topic, or for more expert insight on your next commercial real estate opportunity, contact your mortgage banker or relationship manager.