Commercial Mortgage Debt Expands
Commercial mortgage debts have been rising, which points to some positive trends in the U.S. economy. This area of lending rose during the fourth quarter of 2014, and continues to rise in 2015. During the first quarter of 2015, non-residential mortgage originations increased by 1.5 percent, which translates to more than 40 billion dollars.
Commercial Mortgage Originations, Including CMBS, Rising …
Investor Groups
There are several major investor groups involved in the world of commercial lending. These are:
- Collateralized debts and asset backed securities
- Banks and thrifts
- Life insurance companies
- Government sponsored enterprises
- Federal agency sponsored portfolios
Mortgage Debt Numbers
Commercial debt and multifamily mortgages rose to high numbers over the last year. For example:
- Banks increased their portfolios by eight billion dollars.
- Mortgage bankers increased their holdings by ten billion dollars.
- Total commercial and multifamily debt rose to $2.68 trillion.
Reasons for Expansion
Commercial debt and multifamily mortgages escalated to higher numbers because of more favorable economic conditions, due to:
- Climbing property values
- Improvement in fundamentals
- Declining interest rates
Commercial Mortgages vs. Residential Mortgages
Commercial mortgages are different in many ways from residential mortgages. Not only do they provide funding for dissimilar commodities, but also the application process and loan structures differ. For example:
- Commercial mortgages are used to finance investment properties.
- Residential mortgages are used to finance primary residences.
- There are stricter guidelines in commercial loans.
- Documentation requirements are more extensive for commercial mortgages.
- Interest rates are higher with commercial loans.
- Governmental agencies don’t ultimately back commercial mortgages.
- Loan repayment terms are usually longer for residential mortgages.
Commercial Mortgage Process
When investors apply for commercial mortgages, they need to be prepared for the loan approval process, which can be extensive. Investors should gather their documentation ahead of time, and research terms and structures. For example:
- Documentation: Before applying for a commercial loan, investors should gather corporate documents, asset statements, leases, business taxes for the last several years, and personal tax records of investors.
- Loan repayment terms: There are different ways to structure the terms of commercial mortgages, and some include balloon payments.
- Length of loan: Commercial-mortgage loan lengths are typically shorter than residential mortgages.
- Down payment: A higher percentage of cash must be put down on commercial mortgages, so investors need to make sure they can afford the down payment.
- Prequalification: Investors should get prequalified so the process is streamlined when they do spot opportunities.
Commercial Mortgage Volume Up 29% Year-Over-Year: MBA
Because the economy is growing, more investors are taking advantage of opportunities to expand their portfolios both in investing in commercial real estate and the notes from those investments.
In order to buy multifamily housing complexes and other commercial properties, investors are taking on more debt. The debt total has increased by tens of billions of dollars, and continues to rise.
