Healthy Lending in a Sick Economy
Healthy Lending in a Sick Economy
The Great Recession has brought upon us the Great Credit Contraction. That means that commercial real estate lenders have become more cautious. The high loan to values (LTV’s) have been replaced by higher investment capital from borrowers. Lower credit scores have been replaced by higher minimums. Raw land and Construction loans have vanished. Stated Income and Reduced Documentation loans have left the lending stage making room for the Fully Documented loans. Appraisals are scrutinized from top to bottom and local economic data are given its deserved emphasis.
At first one may be inclined to think of all these events as a negative element that would impact an economic recovery. But this is far away from the truth. Our current economy can be easily described as an alcoholic man. The credit that’s been pumped into our economy during past decades (, Y2K, real estate boom) has had the equivalent effect – figuratively speaking – of alcohol abuse. The non-discriminatory credit expansion along with below market interest rates – made available by the central banks – has given wrong signals to individuals and businesses thus causing “malinvestments” and speculation. Our economy has become addicted to credit for too much consumption (and not enough production) and finally withdrawal symptoms are kicking in. There are certain unpleasant steps that are required to sober up and that is just one of the requirements necessary for an economic recovery.
For one that has been in the field of lending for a few decades he can probably attest to the fact that in reality today’s lending guidelines are not much different than what they were back during the 70′s, 80′s or even the early 90′s. They are in one word, conservative. Of course, if one compares current lending to only five years ago, the difference appears quite drastic. And drastic difference it is but not because today’s guidelines are way too rigid but because yesterday’s were way too loose.
So, where does this leave the entrepreneur or business man of today? To start with he needs to be prepared to play in the same field with the rest of the competitors. He must be well equipped to prove himself and his project worthy of new credit. This implies a well documented and up to date loan package. He must emphasize his strength and generously compensate for any minor weakness. His project must be sound and viable from an economic standpoint. His background must be rich in experience and knowledge. His financial strength must be outstanding, in other words, he must have some serious skin in the game. And finally all of the above requirements must be clearly described in the project’s summary without leaving any room for ambiguities. For more details on how to position yourself first in line for financing read my article, Reality vs Fantasy in Commercial Financing.
The conclusion is that lenders are not willing to take high risk anymore. The current credit deflation has decreased the pool of funds available for lending thus competition for money is fierce. This does not mean there is no more money to lend, it simply means that the current available funds will be distributed to those who can prove their competence and efficiency best.
