The Subprime Meltdown Reduced the Conduit & Capital Markets
Subprime mortgage loans were first introduced in the 1990’s creating new opportunities for credit-constrained borrowers to obtain home ownership. This opened the door for millions of consumers to own homes and access equity that otherwise would have been declined under conventional underwriting guidelines. The subprime mortgage market did not get overheated in the 1990’s primarily due to the lack of an established secondary market facilitating the sale of subprime mortgages. Financial institutions originating subprime mortgages were primarily restricted to their own available capital.
There were other factors that contributed to the out of control explosion of subprime originations between 2002 and 2007. The most compelling factor stems from Wall Street’s development of a continuous channel of liquidity. Wall Street accomplished this by collaborating and designing a securitization that was widely accepted and trusted: bundling and pooling subprime mortgages along with other AAA mortgage pools. Liquidity flowed very freely with no end in sight. Wall Street, Main Street and everyone in between earned huge profits.
Beginning in mid 2006, we saw the first signs of the deterioration of the subprime market. It started as a little ripple that led to the well-publicized tsunami in the last quarter of 2007. The confidence in Wall Street’s business practices was severely questioned. Bond Investors completely pulled out of the capital markets which caused major turmoil and upheaval in both the residential and commercial capital markets, changing the commercial financing landscape overnight. This volatility and turmoil has continued into this year and will continue through the 2nd quarter.
10-year Fixed Rates with 30-year Amortizations, Low Rates & No Prepayment Penalty.
The conduit and capital markets are no longer the most attractive option for financing multifamily and commercial income properties. This will most likely be the case throughout all of 2008. There are many banking institutions with strong balance sheets offering portfolio lending that welcome this opportunity to gain market share. Many of these banks have entered the Wholesale Multifamily and Commercial Lending platform on a national level. Most recently a large Federal Credit Union has also entered the Wholesale Multifamily and Commercial Lending platform, and will lend in all of the western states. They are priced very competitively with a complete menu of loan options. Their most attractive feature is they do not have prepayment penalties on any of their programs. Yes, you can obtain a 10-year fixed loan with a 30-year amortization, a low rate and no prepayment penalty.
Fannie Mae is going strong and offers both small balance and larger institutional multifamily loans. Fannie Mae DUS is now available to established mortgage bankers. Commercial mortgage bankers firms are competing in the same arena as the larger banks. Smaller institutions can offer the same pricing and fee structure thanks to Fannie Mae’s Multifamily Wholesale Lending platform now available through many of the DUS lenders. Fannie Mae’s Small Balance Multifamily Loans range from $500K to $5M. The Fannie DUS program starts at $5,000,000.
Now is the best time to establish a relationship with a reputable and established mortgage banking firm. Mortgage bankers have many correspondent relationships and are best positioned to offer you a complete menu of loan structures that fit your investment goals.
Marcia Upton is president and CEO of Bankers Mutual. She can be reached at 503.517.9071.
