Starting more than a year ago, dramatic repricing of mortgage markets still leads to a downward spiral of property values of which the full impact is yet to be felt. Lenders and buyers alike are trying to understand new pricing realities based on more conservative mortgage underwriting. Furthermore, given today’s unpredictable markets, lenders seldom rely upon any current sales transactions for appraisal purposes. Most properties sold prior to the mortgage market meltdown are based on metrics using more favorable mortgage terms and leverage not available now.
Affordable Housing Expert Widens Institute’s Research Capabilities
Lenders are more selective than ever with current underwriting techniques reflecting very conservative parameters. And in particular, higher leverage fundings based on project values of the last couple of years are shunned. Instead, most lenders prefer internal valuation/underwriting models rather than simply applying debt service coverage and leverage restrictions to externally-generated valuations (e.g., purchase contracts and third-party appraisals).
The expanding financial crisis hitting global markets as a result of domestic housing continues to torpedo the income-property mortgage market. Lenders and borrowers alike are frantically seeking answers to questions about where markets are heading including pricing, values and acceptable leverage levels.
The old cliché – “Cash Is King” is as true now as ever given the sparse availability of leverage. Nearly all real estate financings, both acquisition and refinancing, are restricted to funding projects with existing, in-place cash flow. Cash-flow projections, projects with value calculations based on appreciation (e.g., land) and other ventures lacking sufficient current income ventures are shunned. Lending is severely restricted as the Real Estate Capital Institute® estimates over 80% of conventional funding sources are temporarily out of the market.
Jeffrey A. Davis, a healthcare industry finance veteran joined the Real Estate Capital Institute's Advisory Board. Jeff's real estate finance career spans more than 30 years including working with Baird & Warner Realty Finance Group and starting his own firm, Cambridge Realty Capital in 1983, headquartered in Chicago and Los Angeles. His expertise is in the field of senior housing including independent living, assisted living and congregate care financing. He has financed in excess of $2 billion of healthcare projects during his career.
The start of the mortgage meltdown over a year ago continues wrecking havoc on the real estate capital markets. In particular, accurate property valuation is nearly impossible as buyers and sellers are sidelined due to limited debt availability.
The commercial real estate capital markets are tightly strapped into the Wall Street roller coaster with rates jumping up and available funds tumbling down.
Swooning financial markets continue dislodging all sectors of real estate capital with a vengeance. Funding sources retreat from income-property lending on a daily basis because of liquidity concerns, profitability, overexposure and a host of other factors plaguing this sector. No conventional lenders are immune including banks, life insurance companies, savings institutions and private funding sources.
The real estate correction is just that... a true correction of values based on historical norms.