RCA Insights

These Lenders Are Originating More High-LTV Loans

By on September 7th, 2018

U.S. commercial mortgage professionals are increasingly concerned about the competitive pressure presented by debt funds. This pressure can be seen in the higher average loan-to-value ratios (LTVs) for the mortgages originated by these groups.

Real Capital Analytics tracks debt funds in our “financial companies” category. These are non-depository financial institutions, and in the 12 months through Q1’18 these groups originated mortgages on existing commercial properties at an average 64% LTV. By contrast, lenders of all other types originated loans at an average 63% LTV.

The 100 bps difference in these measures may not seem like much, but it hides the skew towards higher LTV loans on the part of the debt funds: 20% of their loans are at LTVs of 80% or higher. For all other lender groups, by contrast, this 80%-and-higher range represents only 11% of their originations.

1809 FinCo LTVs MAIN_v2_150-01

Higher LTV ratios represent higher levels of risk. The debt funds are gaining market share in some cases by taking on levels of risk that other lenders cannot because of regulatory constraints. The overall share of lending tied to these debt funds is still low, but this competition in the debt markets so late in the market cycle raises concerns with respect to financial market stability.

In the next edition of US Capital Trends we examine trends in debt and equity capital flows for the first half of 2018. Interested in becoming an RCA client? Contact us to learn more. 

Alexis Maltin and Elizabeth Szep provided data analysis for this article.

Jim Costello

Jim Costello

Senior Vice President

Jim Costello has worked in the CRE space on issues of urban economics since 1990, including a 20-year stint at Torto Wheaton Research. Jim expanded the reach of the Torto Wheaton Research team developing forecasts of global market fundamentals. He also developed approaches to pair the forecast results with frameworks to answer investor questions on asset values and relative investment opportunities.

In the aftermath of the Global Financial Crisis, Jim provided advice to the Treasury Department and helped educate these professionals on commercial real estate performance. Jim is a member of the Commercial Board of Governors of the Mortgage Bankers Administration, where he helps policy makers understand the commercial real estate industry.

Jim is expanding the capabilities of the Real Capital Analytics team on issues of real estate market dynamics. Jim has a master’s degree in economics and is a member of the Counselors of Real Estate.