According to a June 12 report by Trepp, a CRE analytics firm, CRE loans that were originated a decade ago, when average mortgage rates were 4.58 percent, are now coming due, and in today’s market, fixed-rate CRE loan rates are averaging around 6.5 percent.
Banks that make CRE loans consider factors like debt service coverage ratios (DSCRs), which measure a property’s income relative to cash payments due on loans. Simulating mortgage interest rates from 5.5 percent to 7.5 percent, Trepp projected that between 28 percent and 44 percent, respectively, of currently outstanding CRE loans would fail to meet the 1.25 DSCR ratio today, and thus be ineligible for refinancing.
These calculations were done assuming current cash flows from properties stay the same and that loans are interest-only, but with vacancies rising, many landlords may have substantially less cash flow available. In addition, whereas interest-only CRE loans were 88 percent of the market in 2021, lenders are now switching to amortizing mortgages to reduce risk, which significantly increases debt service payments.
I haven’t seen a loan that meets the debt service coverage ratio in residential or commercial in over a year. Even with the ridiculous high rents they can’t offset the high interest rates. To solve the issue, on the residential side lenders came up with a new loan program to replace DSCR loans. They call it the Profit and Loss program. They allow you to submit an unaudited P&L with made up numbers so you can qualify. The new subprime which they renamed NonQM. They never learn because if you are a mortgage lender you have to find ways to originate loans. Or die. At Home Savings , internally, we called it feeding the monster. We needed to do $1b a month in new loans to cover costs.