2017 Trends Finance

BATON ROUGE
REAL ESTATE FINANCE TRENDS 2017

Brian S. Andrews, CMB® – Assistant Director of the Real Estate
Research Institute, Department of Finance, E.J. Ourso College of
Business at Louisiana State University
With members of the Student Real Estate Association at LSU

FROTHY, SOAPY, BUBBLY?
Although a ‘bubble’ in home
prices for the nation as a whole
does not appear likely, there do
appear to be, at a minimum,
signs of froth in some local
markets where home prices
seem to have risen to
unsustainable levels.
A Lot of Cash Chasing Deals
Wildcards
Insert text here
Commercial/Multifamily Mortgage Debt Outstanding
Up by
$162 billion
Over 2015
Up by
5.8%
Over 2015
Jamie Woodwell, MBA's Vice President of Commercial Real Estate
Research
"Commercial and multifamily

mortgage debt outstanding
grew roughly in line with
property values in 2016”
8% versus 6%
Research
"Looking just at multifamily

properties, an 11 percent
increase in property values
was met with a ten percent
increase in mortgage debt”
11% versus 10%

Research
"After years of property prices

outpacing mortgage debt
growth, we expect the two to
move in concert going forward. ”
Balances by Sector – All Properties
Balances by Sector – Multifamily
New Loan Origination
Brian Stoffers, Global President, CBRE
“The commercial real estate

lending market has shown its
resilience throughout the
course of the year, which made
for a stellar end of 2016.”
“Life companies and several

other capital sources have
stepped in as attractive options
for borrowers as banks
continue to tighten their
underwriting standards.”
“We expect this momentum to

carry into the early part of 2017
as we wait to learn more about
the policies put in place by the
new administration.”
Bank Lending
Bank Lending
Banks Up Pace of Construction

Lending for Second Consecutive
Year, Raising Concerns for
Regulators
Two-Year Trend Expected to Continue through 2017

Bank Lending
Construction &
Development Lending
Up by
Over 2015
Bank Lending
C&D Up by C&D Up by
8%
Over 2015 at
15%
Over 2015 at
LARGE SMALL
BANKS BANKS
Bank Lending
“The FDIC is particularly concerned for small community

banks. In fact, the FDIC Community Bank Study showed
that, over a 26-year period, such small community
institutions specializing in CRE lending had a failure rate of
2.25 times that of the average community bank.”
Bank Lending
“Regulatory scrutiny of C&D and commercial real estate (CRE)

exposure appears to have intensified over the last year with
regulators reiterating ‘guidance’ on total concentrations.
Regulators are carefully reviewing underwriting, stress testing
and monitoring practices, as well as reiterating regulatory
guidance on C&D and CRE concentrations.”
Bank Lending
Historical evidence demonstrates that financial

institutions with weak risk management and high
CRE credit concentrations are exposed to a
greater risk of loss and failure.
Bank Lending
In general, financial institutions that succeeded during difficult

economic cycles took the following actions, which are consistent with
supervisory expectations:
• Established adequate and appropriate loan policies, underwriting

standards, credit risk management practices, and concentration
limits that were approved by the board or a designated committee
Bank Lending
• Conducted global cash flow analyses based on reasonable (not

speculative) rental rates, sales projections, and operating
expenses to ensure the borrower had sufficient repayment
capacity to service all loan obligations.
Bank Lending
• Performed market and scenario analyses of their CRE loan

portfolio to quantify the potential impact of changing economic
conditions on asset quality, earnings, and capital.
Bank Lending
• Assessed the ongoing ability of the borrower and the project to

service all debt as loans converted from interest-only to
amortizing payments or during periods of rising interest rates
Bank Lending
• Implemented procedures to monitor the potential volatility in the

supply and demand for lots, retail and office space, and multi-
family units during business cycles
Bank Lending
Non-Traditional Non-Bank Lenders
Non-Traditional Non-Bank Lenders
Whether the cause is heightened regulation, including recently

implemented Basel III rules governing high volatility commercial real
estate (HVCRE) loans, or simply traditional bank lenders proving
themselves more selective over the course of this current cycle,
another financing trend that’s expected to continue in
2017 is the rise of nontraditional, nonbank lenders.
Rey Mashayekhi,
Commercial Observer
Jan 4, 2017
Interest Rate Index Update
Residential Finance
Mortgage Rate Update
Mortgage Rate Update
Most Everything Else?
Things to Watch For in
2017
Changes in Regulation and Policy
Maintaining a Critical Balance
Changes in Changes in
Home Income
Prices
The Non-Banks
“U.S. Home Refinance Originations Post 20
Percent Annual Increase in Q4 2016 Even as
Purchase Originations Decline”
Non-Bank Share of Purchase Loans Increasing, Traditional Bank Share

Decreasing; VA Loan Share Pulls Back from Record High; FHA Loan Share
Down to Two-Year Low
The top two purchase loan originators in Q4 2016 were non-banks Quicken
Loans and Caliber Home Loans, followed by Wells Fargo, Fairway and JP
Morgan Chase
Change over 2015:
Quicken +4%; Caliber +21%; Fairway +19%

Wells Fargo -5%; JP Morgan Chase -15%
In the third quarter of 2016, banks accounted for
less than half
of the mortgage dollars extended to borrowers
The first quarter that banks, credit unions and other

depository institutions have fallen below that threshold
in more than 30 years.
So What?
The shift reflects banks’ aversion to risk,
especially in the mortgage market, which has left
an opening for independent lenders among home
buyers with lower credit scores.
Banks also remain fearful of legal and regulatory
threats that have cost them tens of billions of
dollars in mortgage-related fines and settlements
in recent years.
The independent firms aren’t taking on the same
sorts of risky loans that prevailed before the
crisis. But their growing role does give rise to
potential new dangers.
Chief among them is whether nonbanks have
enough funds to weather a significant economic
downturn in which missed payments on
mortgages spike.
“We are not taking on credit risk—the loss is
borne by [government] agencies.”
“As long as there is a government guarantee, that
is a powerful leveling factor that keeps the flow of
funds going.”
So What Do We Do in
2017?

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BATON ROUGE

REAL ESTATE FINANCE TRENDS 2017

With members of the Student Real Estate Association at LSU

"Commercial and multifamily

"Looking just at multifamily

11% versus 10%

"After years of property prices

“The commercial real estate

“Life companies and several

“We expect this momentum to

Banks Up Pace of Construction

Two-Year Trend Expected to Continue through 2017

“The FDIC is particularly concerned for small community

“Regulatory scrutiny of C&D and commercial real estate (CRE)

Historical evidence demonstrates that financial

In general, financial institutions that succeeded during difficult

• Established adequate and appropriate loan policies, underwriting

• Conducted global cash flow analyses based on reasonable (not

• Performed market and scenario analyses of their CRE loan

• Assessed the ongoing ability of the borrower and the project to

• Implemented procedures to monitor the potential volatility in the

Whether the cause is heightened regulation, including recently

Non-Bank Share of Purchase Loans Increasing, Traditional Bank Share

Change over 2015:

Quicken +4%; Caliber +21%; Fairway +19%

The first quarter that banks, credit unions and other

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