Insurance companies’ fists are clenched tight around their cash, and many won’t be opening them to commercial borrowers anytime soon. Even worse – current commercial borrowers might find it tough to refinance, leading to more foreclosures.
With prices whipsawing around, the economy wallowing in a gutter somewhere and many insurance companies in bad financial straits, many insurers say they won’t originate any new loans for the foreseeable future. The more optimistic of the bunch – those who do plan on lending – are sticking to the most stable borrowers out there.
But at this point, anxiety over originating any new loans is almost understood within the industry. A fresh layer of worry comes from the loans due next year. Brokers and insurers say borrowers will mostly have to refinance, but many will get turned away – and that might lead lenders to foreclose on commercial properties.
“We are going to try to make every possible effort to make maturing loans be repaid in full,” said David Henderson, Boston-based senior portfolio manager with Allstate Investments, who also said that given economic forecasts, Allstate likely won’t originate any loans in 2009.
As to whether the company’s current borrowers will be able to repay outstanding loans: “We’re going to get an answer really quickly,” he said, and added that the company will consider whether to foreclose on a case-by-case basis.
Who Will Pick Up The Slack?
It’s all worrisome to George Fantini of Boston brokerage company Fantini & Gorga, who frets in particular about all the loans – from now-sidelined conduit lenders as well as insurers – that will come due this year.
“There’s no even slightly positive outlook as to who will pick up the business,” he said. “That is really where the stress point is in 2009.”
Hopefully lenders will agree to refinance instead of foreclosing, said Russell Schildkraut, principal of real estate capital advisory firm Ackman-Ziff, who said that about $70 billion in loans will be coming due in 2009. Foreclosure is costly in both money and time, and many of those properties will take a while to re-sell – why not just extend the loan?
“I can’t see how [foreclosure] is going to make sense,” he said.
Life insurance companies’ borrowers are relatively good at making payments, according to a recent report from the Mortgage Bankers Association. About .06 percent of insurance companies’ borrowers default on their loans, compared to .63 percent of commercial mortgage backed securities lenders and 1.38 percent of banks.
Loans might get rolling again if the economy improves, as some sources noted. But that recovery will take longer if nobody’s lending, Fantini said.
“It’s very circular, and the discouraging thing about this situation is Â… it’s not clear what’s going to undo it.”
The Sunnier Side Of The Street
The pessimism is intense, but not everyone sounded such gloomy notes. Tim Kenny of MassMutual’s Babson Capital acknowledged that capital would be hard to come by in early 2009, but that his organization planned to make loans to “stabilized core properties,” and expected to see a loosening of credit as the year went on.
“We’ll wade into the water, bit by bit,” he said, adding he was optimistic about the lending environment.
David Durning, managing director for originations with Prudential, said the insurer would definitely be making loans, and both he and Kenny pointed to volatile real estate price tags, not the overall economy, as the immediate reason for a halt in loans.
Real estate lenders can get a better idea of how much buildings are worth based on how much they’re selling for – the trouble right now is that so few pieces of real estate are actually selling. That makes pricing these properties into more of a guessing game, and lenders get skittish. Getting a better fix on prices should help lenders feel more confident about making deals, Durning said.
The Mortgage Bankers Association, too, put the current lending situation in perspective. Jamie Woodwell, a vice president of commercial real estate research with MBA, said yes, loan originations were down about 27 percent in the third quarter 2008 compared to last year, and the slumping economy was partially to blame for that.
But that 27 percent drop is also attributable to the abnormally large amount of loans made in the few years preceding this one.
In 2007, Real Capital Analytics reported that $339 billion changed hands, compared to $225 billion in 2006, $200 billion in 2005 and $129 billion in 2004, he said. The 2008 numbers thus far are partially a cooling-off after above-normal activity.
Many industry watchers are still sticking by darker view.
Henderson of Allstate said at the beginning of 2008 his company’s economic predictions were much gloomier than most others, which made them stick out from the crowd.
“I think that’s no longer the case,” he said – the crowd has since caught up.
