Do Credit Unions Belong in MBL?
by Chuck Anderson
In this article we are going to explore the types of loans a credit union should consider when planning its MBL program.
You have probably already heard a great deal about commercial real estate loans, or CRE. These are essentially a purchase or re-finance mortgage of a commercial property, and as with residential mortgage lending, there is a difference between owner-occupied and non-owner occupied financing.
There are business loan underwriters who would disagree, but we contend that the primary source of repayment for all CRE loans is the fair economic rent of the property. In other words, whether the owner is occupying the property or not, the underwriter should first be looking to the fair economic rent of the property as the primary and tertiary sources of repayment for the mortgage. Why? Ultimately because when the lender ends up with the property, the value of the property for re-sale is generally predicated on the capitalization of the fair economic rent. There are two kinds of buyers: owner-occupied buyers and investors; and there are generally a lot more investor-buyers than owner-occupied buyers. Now, that is not to say that in underwriting an owner-occupied CRE loan, the underwriter cannot consider additional income from the business entity and owner-guarantor of the business entity, but, in our opinion, those are secondary sources of repayment. The underwriter has to remember when foreclosure rears its ugly head, everything, the credit union’s potential loan loss calculation; the potential buyer’s offer; and the regulators are going to be looking at the fair economic rent as key. So, when you’re looking at CRE, the fair economic rent is not the only consideration—but it is a huge consideration.
So, what are the pros and cons of CRE lending?