Today’s commercial real estate (CRE) industry is thriving, with demands for CRE projects and the loans to fund them, projected to steadily grow as we head into 2020. Yet, despite the demand, there are several significant pain points that continue to hold back the industry and create problems for its keys players – the developers working the projects, the lenders funding the projects and the mortgage/insurance brokers and other consultants supporting them. Everyone wants to do more deals, grow business and revenue, but many of the outdated approaches and methods dictating today’s traditional CRE lending processes, like personal guarantee requirements on CRE loans, make this very difficult. With little having changed in the way we make loans today since the time of the Medici, it’s not hard to see why CRE lending seems to be standing in place compared to other banking and lending practices.
As we begin working on our resolutions for the New Year, now is the perfect time to take a critical look at some of these issues – these ghost of lost deals past that continue to haunt us – as well as the concerns of the present, so we can bring our industry into a bright, modern future. Change can be scary, but frankly in this case, the risk of change is much lower than the cost of clinging to what’s worked in the past.
Borrowers want loans that offer better rates and non-recourse options that free up their own balance sheets. Lenders recognize the need to adapt and want to work borrowers but are often stymied by their own lending policies as well as a lack of alternatives to solve the problems. Brokers want simple, flexible structures that allow them to work with their best clients more often and stay with those clients through the whole process. Everybody wants better risk mitigation and the ability to close more deals. With competition higher than ever for loans and deposits from both traditional lenders and the growing number of non-banks entering the market, it’s critical that banks and credit unions find new ways to grow revenue and deals that still optimize risk strategies, especially as we head towards a possible slow-down of the overall economy.
Luckily there is a solution that can help with all these concerns. With a commercial property loan insurance (CPLI) strategy, both CRE borrowers and lenders now have an effective alternative to the outdated and somewhat problematic personal guarantee requirements for CRE loans. Similar to how private mortgage insurance (PMI) works in residential mortgage lending, this institutional grade-rated loan guarantee insurance offers lenders enhanced risk mitigation and increased capital relief across their CRE portfolio, while providing significant, stronger credit and the opportunity to close more deals.
Furthermore, removing the need for a personal guarantee also benefits borrowers, offering the opportunity to improve borrowing terms and increased capacity for more possible deals. Removing the standard, traditional liquidity and net worth requirements associated with personal guarantees, offers borrowers the ability to see more available cash or equivalent assets and thus, they may now be open to pursuing further projects. This gives their chosen lender or broker the opportunity to work with them more often and close more deals.
Credit risk is also a key concern in CRE lending, yet little has changed in how it’s assessed and managed. Problematic personal guarantees offer little protection for today’s CRE lenders, with eight out of 10 admitting they never collect on them. It’s clear the traditional CRE loan system is fraught with problems and, until recently, has lacked the right tools for protecting lender’s interests. Lenders are good at dealing with capital, but it’s the insurance industry that’s best at assessing, managing and pricing risk. Implementing a CPLI strategy offers CRE lenders a simple, efficient and scalable solution – an investment-grade rated insurance policy designed to provide peace of mind and to pay claims in a timely manner with a clearly defined contract should the worst-case scenario occur.
I would like to invite you to join me for an upcoming series of webinars where we will address these issues holding back CRE lending, and the solutions that are hiding in plain sight. The first webinar titled “Foresight 20/20“ is scheduled for Wednesday, January 8. In it, we will look at some of the main concerns impacting CRE lenders, specifically Chief Credit and Risk Officers, how they can grow revenue and protect deposits while still optimizing risk as we head into 2020. Some key issues we’ll cover include:
- Best Practices for Optimizing Risk
- Keys to Protecting Deposits and Growing Profits
- Strategies for Managing End-of-Cycle and Recession-Proofing CRE Loan Portfolios
I hope you’ll join us. Register today!
