Upheaval in the Commercial Mortgages Markets:

Metropolitan Life Insurance (6) (Photo credit: Wikipedia)

Upheaval in the Commercial Mortgages Markets:

It seems there is never a dull day at the commercial mortgages market. Just a year or two back, the state of affairs at this market had the various stakeholders frowning—credit rating agencies had issued warnings of increasing risks and volatility, investors were shying away, and lenders were becoming quite hesitant. The lull in the market was threatening to stagnate it. That is, till life insurance companies stepped in.
Coming to the Rescue

With major Wall Street investment banks almost capping off their lending activities in a volatile market and amidst scares of the European debt crisis, life insurers plugged the gap by turning into lenders. And with no competition to speak of, they have had a field day. According to the American Council of Life Insurers, life insurance companies together have underwrote mortgages worth a whopping $15.7 billion just in the second quarter of 2011. For instance, MetLife had issued real estate loans worth $8 billion in 2010 and had already loaned out more than this amount by the end of the third quarter of 2011.
This transformation in the outlook of life insurance companies came as a (pleasant) surprise to many. After all, life insurers are famously picky about lending and usually lend to only high-quality borrowers or against trophy properties as such. They keep the lion’s share of their loans on the balance sheet. On the other hand, investment banks can afford to underwrite riskier loans. The banks typically issue bonds against these loans and thus keep the risks away from their balance sheets.
Stepping Up to the Plate
It is thus natural that investment banks would hold a significantly greater percentage of the total outstanding debt in the commercial real estate sector than the life insurance industry. But things have changed. According to the Mortgage Bankers Association, the amount of loans issued by life insurance companies has been steadily increasing at rates close to 2 percent since 2011.

What’s in it for the Borrower?

Loans (Photo credit: LendingMemo)

So much for statistics. The borrower out there in the market is more interested to know what this shift in policies by life insurance companies augurs for them. An analysis looks to be in his favor.
Borrowers can hope to acquire loans at lucrative borrowing rates from life insurance companies. The latter commands a definite price advantage over Wall Street investment banks simply because most life insurers do not pool their loans and resale them as bonds. So they do not have to offer high rates to the buyers of these bonds. On the other hand, investment banks that tend to pool their loans into bonds have to attract buyers with high rates of interest. They in turn, pass on these high rates to the commercial borrower.
According to Fitch Ratings, this shift in policy by life insurance companies has augured well for them too—more than 99 percent of the mortgages held by life insurers have fared well in the market, courtesy their pro-active management of the mortgage portfolios. And life insurers still remain conservative about who they lend to, thus further minimizing their chances of risks.
The Numbers are Increasing
Buoyed by the performance of their mortgages, it is likely that more and more insurance companies will enter the market. Analysts also predict that many of them will collaborate with investment banks to expand their loan offerings without overshooting their asset limitations.
Meanwhile, borrowers are only too happy to make hay while the sun shines!