The life-of-loan model, as its name suggests, is one in which the lender commits to the total life of the loan. A private lender oversees the transaction from term sheet through maturity, acting as the servicer and ultimately investing in the B-piece security. Essentially, the nonbank lender provides a single-source solution under one umbrella, something that remains quite uncommon today in commercial real estate finance, particularly in the small- and mid-balance transaction sectors.
Lenders of this type signal to their borrowers that they share a vested interest in the success of their loans. For this reason and others, the model has proven highly attractive to both borrowers and the commercial mortgage brokers serving them. In the last few years of the lengthy bull-market run, single-source lenders saw more transaction volume flow through their pipelines. Today, as these lenders navigate the uncertainty in real estate (and in all aspects of life) caused by the COVID-19 outbreak, these life-of-loan lenders can apply their broader knowledge of the market to deal directly with the current-day distress. Specifically, they are identifying ways to better serve borrowers and brokers, and to assist them in navigating their financing options.
The origination process with a life-of-loan lender is not significantly different from any other type of lender. The difference comes into play after the loan is funded. Regardless of loan type, once the loan funds, many lenders sell it to another party and have no long-term interest in its performance. The party that acquires and services the loan wasn’t part of the initial process and is therefore only interested in collecting on their investment by ensuring the borrower pays on time.
As a servicer, the new entity is not invested in the loan. Their customer-service department is likely to be less focused on the needs of the borrower. Certainly, they would not be watching the market and contacting the borrower when interest rates might be favorable for refinancing. The servicer might not necessarily have the experience to walk a borrower through updates to Fannie Mae’s or Freddie Mac’s programs.
By contrast, with a life-of-loan lender, the focus is on what’s best for the borrower. The lender has a financial interest in the borrower’s success. This occurs naturally, whatever the property type, whether it is an office building, retail building or multifamily housing.
For a couple reasons, customer service is the centerpiece of a single-source lending business. First, the model was born in part by general frustration. Many borrowers struggled to keep track of who was servicing their loans, and how to easily reach and work with the servicers. Second, the life-of-loan lender’s relationship with the borrower goes beyond the closing of the transaction. Unlike the competition, these lenders establish a longer-term alliance with the borrower and mortgage broker. Good customer service is mandatory for keeping these relationships on good footing and avoiding issues with repayment and default.
Both of these points are highly relevant to today’s challenging market. Lenders with stronger borrower relationships are more readily accessible. They are ideally positioned to help customers work through repayment challenges, navigate relief programs (such as those recently introduced by Fannie Mae and Freddie Mac following the virus outbreak) and, ultimately, ensure the success of the loan over the long run.
The life-of-loan lender typically uses technology to remain in close contact with their borrowers over many years. During the origination process, this usually makes for a speedier and smoother loan closing as all parties have more online access to information. Once the loan closes, borrowers have remote access to loan information at any time.
Although technology and automation won’t replace the personal relationship that develops over time, it does allow the lender to more easily track the loan and the borrower. As the market conditions change, the borrower may be a good candidate to refinance. The lender can quickly communicate these options and work with the borrower through any decisions, regardless of whether the borrower is technically sophisticated or not.
The value of technology has been made clear during the COVID-19 crisis, which has confined most people to their homes. Lenders that invested in robust technology platforms prior to the pandemic were able to continue processing loans and efficiently handle all servicing. Moreover, the borrower has online access to their account information and status. They can more easily get access to their options as market conditions change. That is something they are unlikely to get from a competitor that is only focused on selling loans or servicing them.
Life-of-loan lenders work with borrowers from start to finish. By nature, their business model dramatically improves their understanding of borrowers, including borrower challenges and needs. These lenders help fund the loan, thus capturing key information about any given borrower’s real estate asset and business plan, as well as any existing impediments to finance. They’re servicing the asset for an extended period and are the contact if there are any issues.
Lenders of this type enjoy multiple touchpoints with the same customer and are thus in a prime position to retain that customer for future financing needs. For example, current market conditions are moving more favorably toward refinance opportunities. Life-of-loan lenders are being called by their existing customers to discuss options. These lenders can swiftly process the best option.
Life-of-loan lenders are private lenders, not banks, although banks may be a competitor in this space. Historically, however, banks have been focused on retail banking and deposits as their primary focus areas, and may not provide the same level of service or flexibility.
Qualified borrowers of all types can obtain a commercial mortgage from a single-source private lender. Naturally, the borrower who plans a long-term investment in an asset will be more interested in this type of relationship. Initially, these loans are not typically more or less expensive, but a borrower can save significantly when refinancing with a lender that holds their current loan. As the servicer, the lender already knows the borrower as well as the property and its financial health. So, the life-of-loan lender can often complete the refinance more quickly and at a lower cost.
The ongoing relationship is beneficial even when refinancing is not the chosen route. Borrowers have been struggling today due to market conditions that are out of their control. They are much less likely to fall under the radar of a single-source lender. As with a refinancing scenario, the lender is in the best position to work with the borrower, develop a repayment plan and avoid default. With the unfortunate economic havoc the coronavirus is wreaking, the value of this relationship is clear.
Ultimately, the benefits of an ongoing relationship and understanding of your borrower increases your chances for repeat business, reduces the likelihood of default and improves the lender’s return on investment. It provides an enhanced, more personalized experience for the borrower. Mortgage brokers also benefit in a win-win for all parties.
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Expertise in distressed debt is what will further separate these life-of-loan lenders from the pack during the current downturn. Single-source lenders with deep loan-workout experience are arguably best positioned to bring guidance, capability and solutions to borrowers when they need it most.