No Credit Crisis Relief From Life Insurance Companies: 2010 Allocations For Commerical Mortgage Loans Actually May Be Smaller Than Announced
Some people point to this as a positive point on the credit crisis trend line:
- Life company commitment to commercial mortgage lending remains strong
- Generally, life companies generally have NOT decreased their commercial mortgage origination allocations for 2010 (when compared to 2009)
Question: is it correct to say that, at least for commercial mortgage credit from the life insurance companies, the credit crisis has softened a little bit? More money now is available?
I say “not really.”
It is a “now you see it, now you don’t” experience.
While I do not have hard, empirical data to support this statement, the typical life insurance company mortgage seems to be using 20%-30% of the 2010 mortgage loan allocation to renew, extend and modify loans currently in the portfolio. Unlike in the past, however, insurance companies are reaching "deeper" into their portfolio as they examine loans that might leave their portfolio at maturity. Instead of looking at loans maturing in the next 6 months, they are looking closely at loans maturing in the next 12 to 24 months. And then they use a significant portion of the 2010 mortgage loan allocation to refinance the best of those loans.
This means there is less money available for "new" borrowers currently seeking mortgage funds from life insurance company lenders. (Now you see it; now you don't.)
Why this "longer" look at the current mortgage loan portfolio?
- Life companies remain very sensitive, as they should be, about the effective of the “mortgage experience adjustment factorr” to their balance sheet. Thus, they remain very cautious lenders when it comes to commercial mortgage lending. They are my poster children for my "real money for real people" mantra (meaning, they continue to apply conservative underwriting standards, using the best loan-to-value and debt service coverage tests, etc.). So, they are motivated to retain the best mortgage loans on their portfolio; and will refinance them now (and not wait for them to mature in the next 12-24 months.
- Rating agencies are now focusing on, and up-dating, the capital adequacy tests used by them in evaluating real estate investment risk for insurance companies. For example, in April, Standard and Poors updated its asset stress capital factor analysis. The criteria are replacing S&P’s existing methodology for evaluating the capital adequacy of insurers related to their holdings of CMBS, directly originated commercial real estate loans and RMBS.
This plays out like this:
- Assume life company X has $1.5B in mortgage lending allocation for 2010; maybe as an increased amount over the 2009 allocation
- As it monitors it’s mortgage portfolio, it not only identifies loans at risk of not being able to find new sources of financing (to pay off the mortgage), but it also now has identified loans that are the “best”: great debt service coverage; great sponsorship; great tenant mix; great location; etc. In other words, it knows the relationships and projects that the life company does NOT want to lose at loan maturity.
- The life company renews, extends and modifies the terms of these best loans right now – even though the loan will not mature until 2011 or 2012
- Faced with a certain increase in interest rates over the next few years, this "best" borrower jumps at the opportunity to renew and extend at the current “low” interest rates
- These are loans that are NOT competing with borrowers needing funds in the next 6 to 9 months
- The result: a portion of the 2010 mortgage loan allocation is deployed
- Less mortgage money available in the market for near term or immediate loan maturities
- Then, add in improved rating agency evaluation standards and a better understanding of the risk position of insurance companies in commercial mortgages, the result is that real estate allocations now are under even more scrutiny (as real estate "competes" with other investment classes for the investment $ at insurance companies)
So, don’t get too “excited” as you hear or read that the credit crisis has “softened” due to life company “commitment” to commercial real estate mortgages.
More is NOT more in this instance.
More really is less.
Life insurance companies remain true to their conservative, careful nature.
Question: are you seeing this, too?
Please post you comment or question below.
