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Banks Struggle to Push Mortgage Originations Higher

Banks Struggle to Push Mortgage Originations Higher

Rising acquisition volumes and the return of development should spell good news for bank lenders. But stiff competition is taking some of the wind out of the sails of bank loan production.

“I would say that all banks would like to increase their lending business, but are not optimistic that there will be enough quality transactions in 2015 to meet their desires,” says Gerard T. Sansosti, executive managing director with HFF, a commercial real estate capital intermediary, in Pittsburgh. “I think they have all budgeted about the same volume that they did in 2014 with the understanding that they can do more if the business is there.”

One of the chief impediments to boosting volumes higher is the highly competitive lending marketplace. “The amount of liquidity in the market is unprecedented,” says Sansosti. There is significant liquidity at all levels of the capital stack on loans small and large, from low leverage permanent loans to mezzanine loans, bridge debt and construction financing, he adds.

In 2014, commercial/multifamily mortgage originations rose 12 percent to reach $2.64 trillion in debt outstanding, according to data from the Mortgage Bankers Association (MBA), an industry association. During 2014, banks increased their holdings of commercial and multifamily mortgages by 8 percent or $70 billion. Looking across the major holders of commercial/multifamily mortgages, that was the largest dollar increase and also the largest percentage increase by far. Life insurance companies increased their holdings by 6 percent or $19 billion, and the GSEs increased their holdings by 5.5 percent or $22 billion, according to the MBA.

However, the early word from the banking industry is that its members are cautious in their expectations for commercial real estate loan production in 2015. PNC Bank is one lender that expects its commercial real estate/multifamily loan activity this year to be roughly the same as last year, if not slightly lower.

“In general for commercial real estate, there are more sources of capital, and we are probably all crossing over into each other’s businesses more than we ever have,” says Marc McAndrew, executive vice president of real estate banking with PNC Bank.

For example, some life companies have started lending on construction loans. Banks are also originating five-, seven- and 10-year term loans, which has historically been more the life company and CMBS space.

That competition is to blame for tepid forecasts. “We saw in 2014 all of the major investor groups increase their lending activity,” says Jamie Woodwell, vice president, commercial real estate research, with the MBA. Banks and GSEs hit a new record in lending on multifamily properties, life companies have been lending more than they ever have before and CMBS lenders continue to bounce back. “So, there are a lot of capital sources out there looking to lend, and that is making it a pretty competitive market,” says Woodwell.

New kids on the block

Non-bank financial institutions such as Blackstone and Starwood are also having a bigger impact on traditional lenders, and that presence is likely to expand in 2015, 2016 and 2017, notes McAndrew. Those non-regulated financial institutions are usually active in a different space than the banks on a risk-return perspective. However, they do add more competition to the market overall. “It is another source of financing that is going to become increasingly available. So it should make it more difficult, meaning it puts more strain on risk and return on normal senior loans that banks do,” says McAndrew.

Another factor that is constraining bank lending is the fact that the industry is still exhibiting much more discipline in the commercial real estate space than it did during the previous peak years, in 2006 and 2007, adds McAndrew.

“People are more careful about what markets they go into and what clients they do business with,” he says. “We’re willing to do less if that competition doesn’t provide the level of risk and return that we need.”

At the moment, multifamily is clearly the most competitive sector of the financing market, both in new construction and permanent lending. In addition to Fannie Mae and Freddie Mac, banks, life companies and Wall Street firms also like the characteristics of the multifamily loan market.

There is definitely a higher level of multifamily construction happening across the country, and banks should benefit from that as construction lending is concentrated in the banks. In addition, banks should benefit from some of the disruption that is currently taking place at government agencies. Production caps at both Freddie and Fannie are expected to cause both of these sources to move to the sidelines for a few months and possibly the rest of the year, notes Sansosti. That shift is likely to create opportunities for both banks and CMBS lenders to increase their multifamily originations.

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