Tuesday, September 23, 2008

Know Your Lenders That Are Lending and Goldman Sachs

Some Late Breaking News On Goldman Sachs and Warren Buffett

The "Oracle of Omaha", Warren Buffett, has agreed to invest at least $5 billion into Goldman Sachs in the form of perpetual preferred stock that is paying 10%. He is also receiving warrants to buy $5 billion in Goldman Common at a strike price of $115. The fact that Buffett, a conservative investor who only invests where he has a high level of comfort, has this type of confidence in Goldman is a great sign for that stock.

The futures are higher on the news although his confidence in Goldman does not necessarily translate into a bailout plan or improvement in the underlying situation at the other problem financials. We'll be watching for developments on all fronts.

Somebody Knew Something

As a former trader watching the market yesterday afternoon, the news of this deal was more likely than not already in the marketplace before it was announced. Let's take a look at the way Goldman closed and the volume that it traded between 3:50 and 4:00. This with the market not rallying.

At 3:50 Goldman was at $119, and at 4:00 it closed at $125 after trading as high as $125.95. This with a down market not rallying and with a large volume spike in Goldman. Hmmmmm.

What Good Is A Great Loan If You Can't Get It Funded?

As we discussed many weeks ago, one of the keys of the commercial mortgage market is knowing the correct lender to bring your loan to. Once upon a time, the decision making process was relatively easy, particularly if you did not have a lot of experience on this side of the market.
There were many conduit lenders out there that would take your loan that fit their parameters, underwrite it, fund it, package it and sell it to Wall Street. Your rate might not have been fantastic compared to your local S&L, but the loan would get done in a relatively easy manner.

We all know that this type of lender does not exist anymore (although some say they do). We have gotten back to, in most cases, where real estate is once again local, as are the lenders that you will bring a loan to. These local lenders are typically portfolio lenders, which means that they are not selling your paper, but are keeping it on their balance sheet.

Because of this fact, their underwriting was always a little more stringent and careful than the conduit lender that was merely packaging and selling.the loan. That hasn't changed and in this environment has only gotten tougher.

This leads me to a short "know your lender checklist":

-What property types are they partial to? Multifamily, mixed use, special use, etc.
-What loan amounts will they go up to? Don't bring a $2 MM loan to a bank that has a maximum of $1 MM.
-Once an appraisal is completed, what is the maximum LTV they will go to off of it, assuming that the DSCR is good?
-What is the minimum credit score that they will look at? Will they come down to 660 or do they require 700+?
-What geographic areas do they like to lend in? For example a certain local New York lender will draw a 50 mile radius out from their headquarters and not go outside of it.
-Do they like properties that are owner occupied or only those that are investor owned?
-Understand that just about every lender will require an appraisal that is done by someone on their approved list.
-Understand that the days of exceptions are pretty much behind us for now. If the minimum DSCR is 1.25X, your DSCR of 1.15X will probably stop the deal in its' tracks.
-After you do your homework, you will know which lenders require what things on a loan.

As always, you want to impress upon the underwriter that you know what you are doing, and more importantly that you know what they are doing. Whether you are an investor or broker you will hopefully be dealing with this bank many times in the future, and you want them to be happy when you call. They will be happy because they know that you are only going to bring them loans that they can do if all of the due diligence works out.

Things A Lender Might Say

Loans R US
Originally uploaded by GBowen

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