Stalled Loan Financing: What Can a Commercial Mortgage Broker Do?
Nov 16, 2016
Stalled Loan Financing: What Exactly Is the Issue?
A Stalled Loan Can Have Many Causes:
Qualification Issues - Sometimes a commercial loan gets all the way to underwriting with all of the boxes checked and the standard criteria met, then suddenly things seem to stall. When you do hear from the lender, they mention that they need additional information to make a decision. A lender's risk tolerance is structured in context with the other commercial loans they have already accepted. The atmosphere can change as other borrowers refinance or get behind on payments.
Loan Structure Issues - Private money lenders will often join forces to combine multiple types of capital in an effort to structure a large commercial loan. The capital of all these different lenders is organized into a structure called the "capital stack". Each layer of the stack represents a varying set of legal rights to the assets and income of the loan. A lender's position in the capital stack determines who receives priority of payment in the event of a default. Sometimes banks will offer other lenders the ability to participate in a commercial loan or they will assign them a portion of it. If two banks participate in a loan then the original lender maintains ownership of the loan but if a portion of the loan is assigned then the ownership is shared between the two lenders. If the originating lender's financing or risk calculations specify that a portion of the loan must be sold or shared with other banks then this additional process can cause the loan to stall, particularly if they have trouble finding a buyer.
Secondary Mortgage Market Uncertainty - The secondary mortgage market is mostly composed of large, third party investors known as aggregators. That aggregator packages loans into various mortgage-backed securities. These aggregators for loans are sensitive to changes in interest rates, inflation data, and property valuations. If there is a great deal of uncertainty in any of these areas then it may cause the loan to stall. As the value of real estate dropped rapidly in 2008 and inter-bank liquidity dried up, many pending loans stalled as the secondary mortgage market struggled to understand the changing landscape. While this is an example of the secondary mortgage market at its most extreme, smaller disruptions can still cause commercial loans to stall.
Interest Rate Increases - If federal interest rates are expected to increase then lenders will often tighten their standards. Traditional lenders have approval processes which are several months long. Pending commercial loans can easily stall if an interest rate hike was not figured into the original calculations and it suddenly is confirmed. The commercial lender may need to go back and recalculate.
Seasonal Variability - Most lenders have annual internal goals in the form of loan amounts or volume of deals that they need to complete each year. If you submit a loan towards year-end, your loan approval may be stalled until the following year when the lender issues new goals for the year.
Stalling Out: Next Steps
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