Let's ask the experts:

What's up for multi-family lending?

It’s difficult for multifamily owners, developers and investors to get new loans in the wake of the recession and credit crunch.  Even cash-flow positive projects are finding it hard to refinance maturing debt.  Demographic trends, however, indicate a growing need for multifamily housing.  What’s on the horizon for multifamily lending?  Will opportunities open up and what will be the trade-offs for borrowers?  To gain perspective, MBG is asking different players in the multi-family housing finance system. 

Our first interview is with Bloomington-based Bridgewater Bank’s CEO and lead founder, Jerry Baack:

MBG: Since the general perception in the real estate field is that multifamily is the most stable and strongest sector, why aren’t more lenders going after this business?

BAACK: There is an overall lack of awareness, and few lenders have a thorough knowledge of the multi-family industry.  Several other lenders were overly aggressive with underwriting criteria and interest rates during 2002 – 2007.  They have now determined that this asset class is no longer attractive. 

In general, regulatory pressures have caused many institutions to overly scrutinize all types of credit requests leaving lenders leery about venturing into new markets, especially where they may have limited experience.  Many banks are also carefully managing balance sheet liquidity focusing on current loans and not generating new loan growth.  Unfortunately several banks are overwhelmed with uncharacteristically high levels of problem loans and are using resources to manage non-accruing assets instead of building for future growth.

MBG:  Why are loan to value ratios dropping to 75 percent or even lower?

BAACK:  Banks were too aggressive in the past.  Seventy-five percent LTV ratios should be the norm, not 80 percent.  Banks are dealing with tightened underwriting standards driven both by our own accord, and to a lesser extent, by regulatory pressures.  The high incidence of problem loans has caused banks to take less risk and provide a larger cushion for unforeseen changes in real estate values. 

MBG:  Your niche appears to be experienced real estate owners.  How are you dealing with newer, less experienced borrowers?

BAACK:  Our large client network has many experienced real estate owners; however, our portfolio is not limited to those investors.  For the less experienced borrower, we spend more time in the underwriting process ensuring there is a solid strategy and a capable team in place to manage the project.  We may look for some previous experience with smaller projects or 1-4 unit family dwellings.  In some cases, we may require the less experienced investor to engage the assistance of a property management company.

MBG: The lack of liquidity has dramatically slowed the amount of real estate transactions.  Give us your “crystal ball” version of when that may ease up.

BAACK:  When we start to see more improvement in some basic economic fundamentals, like unemployment, capital spending and manufacturing, we will start to see a trickle effect starting with the larger banks.  The change won’t be overnight, and my expectation is that we will see a gradual increase in the number of transactions starting the 3rd and 4th quarter of 2010.