More Competition Across High LTV Loans

U.S. commercial mortgage professionals are increasingly concerned about the competitive pressure presented by debt funds. This pressure can be seen in the higher average loan-to-value ratios (LTVs) for the mortgages originated by these groups.

Real Capital Analytics tracks debt funds in our “financial companies” category. These are non-depository financial institutions, and in the 12 months through Q1’18 these groups originated mortgages on existing commercial properties at an average 64% LTV. By contrast, lenders of all other types originated loans at an average 63% LTV.

The 100 bps difference in these measures may not seem like much, but it hides the skew towards higher LTV loans on the part of the debt funds: 20% of their loans are at LTVs of 80% or higher. For all other lender groups, by contrast, this 80%-and-higher range represents only 11% of their originations.

Higher LTV ratios represent higher levels of risk. The debt funds are gaining market share in some cases by taking on levels of risk that other lenders cannot because of regulatory constraints.

The overall share of lending tied to these debt funds is still low, but this competition in the debt markets so late in the market cycle raises concerns with respect to financial market stability.