Life Insurance Lenders
Life insurance lenders typically offer the lowest interest rates. They also have the ability to lock rates at application. These two characteristics are a huge selling point to borrowers. As such, life company lending is solid opportunity for many borrowers. This large deal volume allows life companies the ability to be very selective with their lending. Life companies generally only lend on properties that are new, well-occupied and located in desirable markets. Their maximum loan-to-value is usually 65%.
PROS & CONS
✓ Best Interest Rates
✓ Lock Rate at Application
✓ Only Reserve for RE Taxes
✗ Low Loan-to-Value
✗ Selective on Properties
Because life insurers are able to predict mortality rates, they invest in liquid and illiquid assets. Life insurers have a variety of reasons for investing in commercial mortgage loans. Three primary for investing in mortgages are: (1) increasing asset type diversification, (2) matching long-term assets & liabilities and (3) minimizing credit losses.
RECENT LENDING HISTORY
From 2004 to 2007, life insurance companies had a difficult time competing with other lenders. The life companies’ main competition: large banks & CMBS lenders. In 2008, virtually all CMBS lenders left the market due to a slowed economy and their lack of liquidity. In similar fashion, banks were forced to clear up their balance sheets. With a lack of mortgage capital in the marketplace, life companies took advantage by significantly increasing origination.
In 2009 and 2010, life insure mortgage origination increased by 87% and 48%, respectively. Although originations for life companies increased, they are still regarded as a “smaller player” in loan originations. In 2012, the outstanding commercial real estate debt held by life companies totaled $322 million (see the chart to the left). However, this figure represents only 10.4% of the total outstanding commercial real estate debt.
How were life companies able to take advantage? Life companies keep the bulk of their loans on their balance sheets. While on the other hand, CMBS lenders pool most of their mortgages and issue bonds against these loans. In the easy credit years, this allowed banks to transfer risk off their balance sheets, enabling them to underwrite more and riskier loans. However, when banks could no longer transfer the risk, life companies then took advantage.