Les­son in high-pro­file fore­clo­sure: Re­sist temp­ta­tion to re­lax terms

Pre­ferred Bank’s ex­pe­ri­ence with an apart­ment de­vel­oper is a re­minder of how im­por­tant strict un­der­writ­ing terms will be as loan de­mand in­creases, rates rise and lenders try to outdo each other.

National Mortgage News - - Contents - By John Reosti

A high-pro­file fore­clo­sure in New York is high­light­ing the im­por­tance of dis­ci­plined un­der­writ­ing.

Pre­ferred Bank in Los An­ge­les dis­closed re­cently that it has be­gun fore­clo­sure pro­ceed­ings on a pair of lux­ury apart­ment build­ings in Man­hat­tan, a move that will dra­mat­i­cally in­crease the level of non­per­form­ing as­sets on its bal­ance sheet. The loans have an out­stand­ing bal­ance of $ 41.7 mil­lion.

If there’s a sil­ver lin­ing, it’s that the $ 3.8 bil­lion-as­set bank ex­pects the fi­nan­cial hit to be min­i­mal be­cause the loan-to-value ra­tio — the bal­ance di­vided by the ap­praised value at orig­i­na­tion — for each of the loans is below 70%.

Pre­ferred’s ex­pe­ri­ence serves a re­minder of how im­por­tant terms will be as loan de­mand in­creases, in­ter­est rates rise and lenders try to gain a com­pet­i­tive edge. Those who get too ag­gres­sive could be burned when the eco­nomic cy­cle takes the in­evitable turn for the worse, bankers and in­dus­try ob­servers said.

“If you’re go­ing to com­pete on com­modi­ties — that’s where the cy­cle starts to turn,” said Joseph Cam­pan­elli, CEO at the $ 2.1 bil­lion- as­set Need­ham Bank in Mas­sachusetts, adding that it can be tempt­ing to fol­low the pack in ar­eas such as rate and terms.

“Well, so-and-so is do­ing this rate, so let’s match it,” Cam­pan­elli said. “Or so-and-so is do­ing it with­out re­course, or do­ing a higher loan-to-value, let’s match it. That’s the slip­pery slope.”

The av­er­age loan-to-value ra­tio for com­mer­cial real es­tate deals in­creased to about 80% in the fourth quar­ter from 73% a year ear­lier, ac­cord­ing to Pre­ci­sionLen­der, a tech­nol­ogy firm that helps lenders fine-tune pric­ing and terms. The firm eval­u­ated more than $2 bil­lion in quar­terly vol­ume by its clients.

To be sure, many banks are stick­ing to their guns when it comes to LTV.

Cam­pan­elli and Ed­ward Cza­jka, Pre­ferred’s chief fi­nan­cial of­fi­cer, said they are see­ing very few signs that lenders are throw­ing cau­tion to the wind. “I don’t see any trends push­ing stan­dards in the op­po­site di­rec­tion,” Cza­jka said, adding that the av­er­age loan-to-value ra­tio in Pre­ferred’s $1.3 bil­lion-as­set com­mer­cial real es­tate port­fo­lio is 56%.

“One of the things we’re see­ing this go-around is a lot more liq­uid­ity go­ing into deals,” Cam­pan­elli said. “It’s not un­com­mon to do a deal at 65% loan-to-value.”

Need­ham, like Pre­ferred, is a sig­nif­i­cant com­mer­cial real es­tate lender with more than $ 400 mil­lion of CRE-re­lated loans on its books.

While Pre­ferred did not dis­close the rea­son for the fore­clo­sures, other me­dia out­lets have noted that Michael Paul D’Alessio, a de­vel­oper and one of the prop­er­ties’ own­ers, is fac­ing law­suits al­leg­ing that funds in­tended for a num­ber of projects were im­prop­erly di­verted for other uses.

D’Alessio is also be­ing sued by three New York banks — Greater Hud­son Bank, Westch­ester Bank and BNB Bank — that are try­ing to re­coup $6.4 mil­lion through an in­vol­un­tary bank­ruptcy pe­ti­tion filed re­cently in the U. S. Bank­ruptcy Court for the South­ern Dis­trict of New York.

The sit­u­a­tion at Pre­ferred shows how im­por­tant it is to fully vet a bor­rower and not just an iso­lated deal, in­dus­try ex­perts said.

“Prob­lems can cas­cade,” said Jon Winick, CEO of the Chicago ad­vi­sory firm Clark Street Cap­i­tal. “Trou­ble with one project drags down another one. … A bor­rower can be highly cov­eted and, all of the sud­den, no one wants to touch them.”

“What else does that de­vel­oper or real es­tate group have go­ing on?” Cam­pan­elli said. “If they’re over­lever­aged in other ar­eas, you would have to con­clude that, on a global ba­sis, the cash flows aren’t strong enough, even though the in­di­vid­ual project looks OK.”

Pre­ferred still con­sid­ers it­self a con­ser­va­tive lender, Cza­jka said, not­ing that the bank’s credit qual­ity had been uni­formly ex­cel­lent for years. While the bank is pursuing fore­clo­sure now, it is is keep­ing all its op­tions — in­clud­ing sell­ing the loans — on the ta­ble.

In its first-quar­ter re­port, Pre­ferred re­ported $3.3 mil­lion of nonac­crual loans, or 0.11% of to­tal loans.

Winick said he ex­pects loan-to-value ra­tios to be lower on large CRE loans, which seems to be the case with Pre­ferred’s deals. As a re­sult, the bank’s min­i­mal-loss fore­cast “seems rea­son­able,” but there are no guar­an­tees.

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