Life insurance companies are once again neck and neck with the government-sponsored enterprises (GSEs) in an effort to snatch up prime commercial mortgage loans.
While Fannie Mae and Freddie Mac have remained dominant across all fields of commercial mortgage lending, life companies are finding more creative ways to compete with them on Class A, lower-leverage deals by offering more flexibility in underwriting where the two GSEs’ predetermined limits fall short.
A Tailored Approach
“There are a lot of features that [life companies] can offer on balance sheets that can be more unique and specific to any particular transaction,” says John Brownlee, senior managing director at HFF. “Insurance companies have continued to try to pick up their market share through offering competitive structures, possibly more [interest-only], more structuring capabilities, and more prepayment flexibility.”
Where GSEs often have their hands tied when it comes to loan limits and lender restrictions, life insurance companies have the ability to reassess and negotiate throughout the underwriting process on a case-by-case basis.
For example, HFF recently secured a seven-year loan through Northwestern Mutual for Pure Multi-family REIT LP on two garden-style apartment communities: San Brisas in Chandler, Ariz., and The Preserve at Arbor Hills in Plano, Texas.
Brownlee, who led the HFF team representing the borrower, says the reason his client went with the life company was partly due to the negotiable structuring available with a balance sheet lender that wouldn’t be so with an agency execution.
Quicker Rate Lock-Ins
Jake Roberts, vice president of capital markets at Marcus & Millichap, says another main reason borrowers go with life companies is their ability to lock in a rate at application. GSE financing takes much longer, leaving rates open for change.
“Agencies are taking at least three weeks to get a rate lock done,” says Roberts. “Someone who had locked three weeks ago with an insurance company could have locked at 30 basis points lower than if they had waited to lock now with Fannie or Freddie, just because rates have gone up.”
Quick rate locks are particularly attractive to borrowers looking for a long-term fixed-rate construction-to-perm loan, which Roberts notes are more available right now.
Life companies are also easier to deal with in the long run. As balance sheet lenders, life companies won’t sell the loan, meaning borrowers have access to the lender if they need to revisit the loan for any reason, from relieving collateral to restructuring payments.
According to Q10 Capital, life companies are finding commercial mortgage investments more attractive, with corporate bond yields declining and the government mandate that Freddie Mac originate 10 percent less in multifamily volume, making life companies eager to get the best deals.
“It’s really been a battle back and forth between the insurance companies and the GSEs all year long, and I still see that continuing through the rest of the year,” says Brownlee.
The second quarter of 2014 saw a 34 percent increase in originations from the first quarter, which included a 32 percent increase for multifamily properties, according to the Mortgage Bankers Association’s Quarterly Survey of Commercial/Multifamily Mortgage Bankers Originations.
And that pace isn’t slowing down going into the end of the year.
“We haven’t seen the slowdown that we've typically seen in the third and fourth quarters from the insurance companies, many of which got huge allocations towards real estate this year,” says Brownlee. “Although they’ve put out a lot of money already, they still have a strong appetite for multifamily.”