If you need debt for a project, Bank of America’s Katy Gnapp says her bank is open for business.

“We have money to lend,” Gnapp said at last week’s NAHB International Builders’ Show in Orlando. “Right now, there is not enough core loan demand to meet all of the supply from the banks.”

Gnapp, who is responsible for the underwriting, structuring and monitoring of the commercial real estate loans for the Central region of the Commercial Real Estate Banking Group at BOA, says the improvement in legacy loan problems has helped the lender become more comfortable with making loans. “We are seeing dramatic slowdown in [loan] deterioration,” she says. “The things moving into workout and REO portfolios are getting resolved in a much quicker way. We’ve have hit bottom with regard to the deterioration side.”

BOA isn’t alone with its appetite for core deals, as the “The Capital Markets: Financing Outlook for Apartments and Condos” panel noted at IBS. The activity of the insurers, especially after Newport Beach, Calif.,-based Pac Life did a $78 million loan, 13-year loan (three years for construction and a 10-year permanent loan) in Washington DC, was a major topic of discussion.

“HUD is interested in transit oriented development,” said Margaret Allen, CEO and owner of Baltimore-based AGM Financial Services, which is one of HUD’s lenders. “But that’s what the life companies are in into. They can move faster.”

Timothy L. White, Executive vice president and COO for Pittsburgh-based PNC Real Estate’s multifamily group, thinks insurers will be making more of these hybrid construction, permanent loans because they will have difficulty finding enough Class A assets to finance.

“Class A projects are less than 10 years old,” White says. “That’s shrinking pool without much being built. The way [for insurers] to get around that is to do more on the construction side and try to do more loans that convert to permanent.”

Lessons Learned

Banks and insurers have money to lend, but there is still one major catch: they want good deals. “We’re looking for loans that have less market risk than what we entertained in the past three years,” Gnapp says. “That didn’t work out well for us [last time].”

HUD (which added $10 billion in new originations last year (after totaling $40 billion in its first 60 years of existence) has changed its underwriting standards, according to Allen. The agency used to require 1.11 debt service and 90% of cost on a construction loan. Now, its construction loan terms are at 120 debt service and 83.3% of costs.

Gnapp says BOA’s lending policy itself hasn’t changed. “What has changed is our willingness to have exceptions to our policy and our willingness to take large market risk,” she says.

The largest losses for BOA were in its development and construction books. Gnapp says banks weren’t as good at doing the due diligence on their guarantor as they should have been. That’s changed lending attitudes.

“We’re less inclined to think about rent trending or more real estate dependent loans that are less dependent on guarantor [for recourse],” she says.

White says the problems with the guarantors forces banks to look at who they’re lending to. “We spend a lot more time looking at  the [borrowers’] REO schedule,” he says. “We want to know what the guy has coming up for maturity.”