The "Securitization Slowdown"
It's as if the marketplace has been "holding its breath" going back several weeks... basically because the Bear Stearns collapse. (You might have noticed this in your neck of the woods)
The nationwide market for Multifamily Properties continues to be strong when confronted with the residential real estate collapse. Occupancies are stable in most markets and rents are keeping pace with inflation. However, not very many properties are increasingly being bought and sold this quarter.
This is actually the reason... I call it the "Securitization Slow-Down"
Used to be that a lender would write a loan and quickly get that loan off their books through Securitization. The Securitization process bundled a lot of loans right into a larger "Security" and sold those to other entities as a safe solution to make good income. Things just didn't quite work out that way once the underlying loans went sour.
Securitization allowed lenders to create additional money by writing more loans and shift the risk to other entities. As the loans started to go south it had been the owners of the securitized loans that were left holding the empty sack ... not the ones who originated the loans. So now nobody trusts a Securitized Investment. No-one wants to take on problem loans that another institution originated.
In line with the Wall Street Journal ... In just the final year total assets in US Banks have risen by $1.2 Trillion ... mostly as a result of Securitization Slow-Down. Lenders are not able to securitize ... so the loans stay on the books.
How come this Important? Well ... whenever a lender writes a loan they intend to keep, they go concerning the process differently than should they intend to Securitize it. They're more careful at every stage of the loan process. This new caution has a negative affect on your Return on Investment.
LENDERS are doing two basic things differently now
1) Lower LTV's - Average LTV's have fallen from the 80% of the last several years to the current 75% or less. So, buyers have to put more cash in to the deal.
2) More Conservative Underwriting - The Lenders are moving expense estimates up and income estimates down over the board. This "new math" lowers the web Operating Income (NOI) projections from your own property ... Which lowers the Debt Coverage Ratio ... Which lowers the amount they'll lend to the buyer. So, buyers have to put more cash in to the deal.
More Cash Please ... The Double Whammy of lower LTV and lower NOI from more conservative underwriting ... means it will take a significantly larger pile of cash to get exactly the same building now than it did only a few short months ago.
Less Leverage = Lower Returns - With an increase of cash into the deal ... any Buyer's Return on Investment is lowered.
This naturally lowers the purchase price any Buyer is ready to pay. Sellers who've been used to top dollar for his or her properties are holding off on their sale because top dollar is significantly lower in this market than prior to the Credit Crunch.
The New Old - This new, more conservative environment isn't "New" at all. That it is a return to what's historically normal. Just like the way Price/Earnings Ratios returned to more normal following a DotCom bust. What has been distinctly abnormal is the superleveraged environment of the last several years. Lenders writing loans willy nilly knowing that they would keep these things Securitized and sold to someone else in just a matter of weeks.
So read more is not a new phase. It really is more like the style world ... what was old is now new again. The bell bottom jeans of my high school days are back in style.
Look for properties to begin coming back that you can buy and seller flexibility to return in the next almost a year as we all get accustomed to this New-Old situation. Eventually everyone - even the Sellers - will realize the times of easy credit and fat underwriting are over and prices will see a new level which makes sense in today's environment.
Won't be a long time before the market starts to breathe again.
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