Credit Competition

Hedge funds are particularly active in making loans to help fund mergers and acquisition deals, Falb says. “Historically if there was a $200 million debt need as part of a leveraged buyout, that would have been provided by four or five banks,” he says. “It’s now being provided by one or two banks and ten or fifteen hedge funds.”

Insurance Companies: Writing Smaller Mortgages

Insurance companies have always needed to invest premium dollars, and have done so by loaning money to fund large real estate transactions. In years past, large insurance companies primarily made loans with a minimum amount of around $20 million.

Such companies continue to make the same kinds of loans. “The largest of the insurance companies remain the most conservative with respect to what risks and property types they’ll accept for a mortgage,” says Dave Austin, president of Minneapolis-based mortgage brokerage MFG Mortgage Services, which originates loans and sells them to an investor list that includes insurance companies.

Now, though, there are many more companies in the insurance business, Austin says, which are smaller and have less money. So they offer smaller mortgages—some as low as $750,000.

Though the mortgages are smaller, the favorable terms are identical to those of notes owned by larger insurance companies. “They’re still offering the terms and rate structures that larger companies are offering on large loans: thirty-year amortizations, ten-year fixed-rates and terms, at 130 to 180 basis points over the ten-year Treasury bill rate,” Austin says.

“We just closed the purchase of a small shopping center,” he adds. “It was a $3.2 million purchase, and we originated the loan for 80 percent of the purchase at 130 basis points over the ten-year Treasury. At the time, that equated to 5.9 percent.”

Even better, Austin says, the buyer—a first-time investor—didn’t have to personally guarantee the debt, a guarantee that bank borrowers often have to make. “The borrower is ecstatic,” he says. “Small real estate investors are benefiting from this.”

Improvements to technology have also helped insurance companies profit, says David J. Means, chairman of MFG Mortgage Services. Electronic communications and better analytical tools let mortgage brokers quickly analyze and communicate a deal’s salient details. Instead of creating a 1,000- to 1,500-page document, Means says, they’re able to summarize a deal and send it electronically to the ten or twelve investors MFG thinks will be most interested. “We’ve invested a lot of money in technology,” Means says. “It’s all electronic, so investors typically put our stuff ahead of the piles  on their desk. We can get done in weeks what used to take months.” Because they’re working more quickly, they can afford to make more small deals.

It’s helpful, too, that insurance companies’ lending activities aren’t bound by any guidelines. “Banks need to define a level of risk and stay within it,” Austin says. “For insurance companies, that’s an internal decision made by the lending committee, which can be a committee of one. It’s not a regulatory issue.”

Brokerages: Making up the Margins

Large brokerage firms are also competing with banks—and with insurance companies, Krohn says. They’re offering commercial financing, often at prices that other lenders find hard to match.

“They can be very competitive if you happen to latch onto a piece of business that they’d like,” Mueller says. “I had a customer who is still a working capital customer, but we lost their real estate deal to a brokerage. Their rate was just so low I couldn’t compete.”

Lower returns from the corporate bond market are driving large brokerage firms into other debt markets, suggests Brian Kujawa, senior vice president at Minneapolis-based North American Capital Markets, LLC, which offers consulting services to financial institutions. Better technology and regulations issued by agencies that include the National Association of Securities Dealers and the Municipal Securities Rulemaking Board have made the bond market more efficient and transparent, he says.