Realizing CRE Lending Growth with a Commercial Property Loan Insurance (CPLI) Strategy
Today’s commercial real estate (CRE) industry has continued to see an upswing in growth. Despite concerns of a projected economic slow-down, the demand for CRE projects and developments has been steady, as is the demand for the loans needed to fund them. Representing a significant revenue opportunity, and once almost the sole purview of traditional banks and credit unions, these institutions are now facing competition from an influx of non-banks, fintechs and other alternative lenders entering the market. What’s more, many of these new lenders, often held to lesser oversight and regulatory scrutiny, can be more flexible in their offerings, making them attractive to potential borrowers.
With rising competition from these new players, as well as from traditional lenders, today’s banks and credit unions need every advantage to gain ground and succeed, and that means adopting a more modern strategy in their CRE lending approach.
Adapting for Today’s CRE Lending Market
With 2019’s positive financial trends, demand for capital from CRE developers continues to climb. A recent report on the U.S. market from CBRE suggests the outlook for all major CRE types remains very positive for the year even this late in the cycle, and Deloitte reports a steady rise in global CRE investments and U.S. CRE investments growing by 11 percent year-over-year to $122 billion last year.
While these projects represent a tremendous revenue opportunity for lenders, they can also present a dilemma. Because of capital reserve requirements and tighter, thinner margins from growing competition, many of today’s banks and credit unions are being forced to choose between limiting their overall CRE lending or increasing their risk exposure by loosening loan credit standards, which is not something most lenders (especially their chief credit and risk officers) wish to do.
Most lenders have no issues underwriting credit risk when it comes to residential mortgages; these loans can be mitigated with private mortgage insurance (PMI) rather than taking on all the risk against lender’s portfolio. To reduce this risk when it comes to CRE loans, financial institutions traditionally require what is known as a personal guarantee from the individual borrower or sponsors requesting the loan, placing the borrower’s personal balance sheet on the line in case of default. However, personal guarantees are at best problematic, and at worst almost completely ineffective in protecting the lender; a common reality for most, and yet, until recently, the only tool available for them.
Personal guarantees offer little protection for CRE lenders when it comes to recouping losses, with most lenders openly admitting they rarely collect on them during the default process. Unfortunately, the idea that a personal guarantee strengthens a loan is a somewhat firmly embedded industry myth. What’s more, they can even prove to be adversarial when it comes to maintaining a positive customer relationship. In addition, even with guarantee, borrowers can still leverage or often negotiate a Discounted Payoff (DPO), dragging out the collection process, increasing the costs for the lender and reducing what they may manage to collect, all with the risk of uncertainty.
Today’s banks and credit unions need an updated method for how they assess, manage and mitigate loan risk related to credit, an approach closer to the insurance industry. While most financial institutions are very good at accumulating and distributing capital, insurance companies are the ones that excel when it comes to assessing and managing risk
Banks and credit unions already recognize the need for better risk management in other areas of banking, like with PMI for residential loans and SBA for C&I loans, but have yet to do so with CRE loans. While banks and credit unions want to adapt to meet the demands of the current CRE lending market, until recently there have been few if any alternatives to reliance on the outdated personal guarantee. However, lenders now have the option of adopting a Commercial Property Loan Insurance (CPLI) strategy to better manage risk. Similar to how PMI works for residential loans, CPLI allows lenders to transfer the risk of their CRE loans, lowering exposure and even offering additional capital relief to make more loans.
Covering the top 25 to 40 percent of a qualified CRE loan amount (the riskiest portion), CPLI offers significant protection for the potential lender against losses in the event of default and with no risk of certainty. As with PMI in the residential....-->
Today’s commercial real estate (CRE) industry has continued to see an upswing in growth. Despite concerns of a projected economic slow-down, the demand for CRE projects and developments has been steady, as is the demand for the loans needed to fund them. Representing a significant revenue opportunity, and once almost the sole purview of traditional banks and credit unions, these institutions are now facing competition from an influx of non-banks, fintechs and other alternative lenders entering the market. What’s more, many of these new lenders, often held to lesser oversight and regulatory scrutiny, can be more flexible in their offerings, making them attractive to potential borrowers.