Commercial Mortgage Debt Hits New High: What Lenders Need to Know
The American housing market continues to recover slowly but surely. One part of the market that is doing particularly well is the commercial/multifamily market. This type of mortgage debt hit a new high in the first quarter of 2014, granting lenders a solid business opportunity — provided they understand the added risks in this market.
The numbers behind commercial mortgages
In the first quarter of 2014, outstanding commercial mortgage debt in the United States rose to $11.1 billion, according to a June 2014 report from the Mortgage Bankers Association. This was a 0.4 percent increase over the previous high set in the fourth quarter of 2013.
Banks, insurance companies and REITs all increased their holdings of commercial mortgage debt, generally viewing these properties as a good investment opportunity — especially when real estate prices remain relatively low. Mortgage-backed securities and other debt-backed securities, which buy commercial mortgage debt, decreased their holdings last quarter. However, the gains from other borrowers offset this decrease and pushed total commercial debt levels to a new record high.
Market benefits for lenders
The growth in the commercial/multifamily market comes at a convenient time for lenders. The single-family loan market is still a bit sluggish, especially as there are fewer first-time home buyers than before the housing crash. Younger Americans are somewhat reluctant to buy new homes because they seem to prefer the flexibility of renting or may be boxed out of buying a house because of existing student loan debt.
By providing more commercial mortgages, lenders can continue to build their lending portfolio and grow their earnings until the single-family market picks up.
Risk considerations for commercial mortgage debt
Commercial mortgage debt is generally riskier than single-family mortgages. These loans generally involve greater sums of money, which means that missed payments and defaults are much costlier. Since commercial loans are also for investment properties, the nature of these loans is a bit more speculative, which can also add risk. Lenders need to carefully study the details of a borrower before making a loan. One possible solution is to work with a qualified credit firm like Equifax that specializes in finding key data about commercial borrowers so that lenders can feel more confident when entering into a mortgage agreement.
Commercial mortgage loans will always bear some risk. However, with a little planning, lenders should be able to profit off this rapidly growing market.
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