Market Update - Interesting News on 80% LTV
By W. Karl Baker, CPA Industry commercial lending underwriting criteria contain some “norms” that are universally agreed upon but applied differently from lender to lender. One of those “norms” is the rule of thumb that lenders will loan at 80% of the value of the subject property in a purchase transaction with long-term financing, and then this metric is often scaled back to 75% for a cash-out refinancing, to hedge valuation risk. Lenders do not set these norms in a vacuum. Private lenders sell the majority of their long-term loans and some of their bridge loans to the capital markets. These institutional buyers pool loans into packages and convert them to bond funds, called mortgage-backed securities. Investors buy these funds with the expectation that they will obtain a return on investment commensurate with the risk. This is a macro-economic way to put capital into the market, allowing property buyers and investors to finance their purchases with low-cost loan terms. Therefor...