By Craig Page
LOAN RISK MANAGEMENT DURING A DOWNTURN: A CALCULATED SCIENCE
Service organizations that work well in commercial lending utilize all tools available to mitigate risk, especially in preparation for any potential economic downturns. Extensia has this proficiency finely honed. We know how to mitigate risk, diversify portfolios, and analyze trends.
Looking to the Future
Since each state’s governor has been given latitude to reopen their state according to their own timetable, it remains unclear how much more time COVID-19 stay-at-home requirements in some states will remain in force or how long it will be before most people are back to work. Even the effectiveness of the bail-out bills, designed to ease the pandemic’s economic impact, will not be apparent for another 6-12 months. But we do know, at least for now, it’s not business as usual. Unemployment and other disruptions are being felt nationwide and are producing ripple effects throughout all areas of the economy.
Though there is no way we can be certain of the pandemic’s impact on the overall economy, Borrower’s responses to this year’s events have been more immediate and proactive that responses during the 2008/2009 recession. Borrowers appear to see the downturn as (more) temporary. They are also responding more proactively in that they are willing to ask for assistance rather than wait for their situation to become even more critical. Given their willingness, it is essential to have candid conversations with Borrowers early on regarding any potential impact to rental income and not make the mistake of ignoring warning signs, as many did a decade ago.
When it comes to more sophisticated assessments of risk factors and potential risk factors affecting commercial real estate, it is clearly beneficial to work with a Servicer that is experienced in knowing the questions to ask and the analysis that must be performed to achieve the desired outcome. Servicing organizations such as Extensia are available to guide credit unions through these more advanced analyses and the difficult Borrower conversations that often ensue.
Geographic & Risk Diversification
Credit unions are impactful both for and within the communities they serve. They specialize primarily in depository accounts, residential lending, auto loans, and credit card services. As not-for-profit financial institutions, credit unions can leverage their member’s deposits to offer competitive lending rates. Though commercial lending is typically not a credit union’s core business, those that expand into it will see commercial lending rates that are beneficially higher than auto or residential lending rates. Commercial loans can also help credit unions diversify their risk and increase their internal rate of return.
To assist our credit union partners, Extensia’s proprietary participation lending website presents commercial real estate lending opportunities that credit unions may not otherwise be aware of or have the ability to take advantage of without the benefit of this platform. Additionally, Extensia provides the risk assessment and loss mitigation tools and experience that allows credit unions to participate in successful ventures without unnecessary exposure to risk. With its current loan portfolio spanning 42 states, Extensia can provide loan opportunities inside or outside the credit union’s field of membership. This flexibility brings the advantage of diversifying risk geographically. Because commercial loans are larger and more complex than residential loans, more than one Lender typically participates. This kind of collective participation helps the Lender limit their risk by investing in as many or as few property types as fit within their production goals and risk guidelines. Each credit union has the freedom to choose the degree to which they want to participate in a particular commercial loan being offered. Extensia then undertakes the servicing of the loan on behalf of the entire group of Lenders, collecting and remitting monthly mortgage and impound payments, if called for in the loan documents, and preparing monthly reporting packages that include collection, delinquency, tax, insurance, and risk rating reports. Additionally, Extensia conducts annual physical inspections and collects property operating reports and Borrower financial statements and tax returns as part of the loan review process. To ensure the information we provide is effectively summarized and useful to the credit union, Extensia compiles its analysis into a comprehensive five-page institutional-quality summary report with historical references, backed by a supporting-documentation package.
Best Steps Forward
Benjamin Franklin had it right when he said, “An ounce of prevention is worth a pound of cure.” Lenders should never wait until a property has cash flow problems. They should always take the initiative to either use the available data to look for early indicators or have a loan Servicer, such as Extensia, perform this service. After years of identifying and responding to downward trends based on empirical data, we also have the experience to open positive and effective discussions with Borrowers on the Lender’s behalf.
As credit unions asses the current downturn, Extensia wants them to understand that—although there are indeed inherent risks in commercial lending—there are real and practical ways to mitigate that risk. Our best advice for our partners, or any Lender, is to be proactive and, perhaps, associate yourself with a trusted commercial servicing organization that can help examine and respond to all the various loan indicators.
Commercial lending is still very much worth consideration for the credit union community. Additionally, for those organizations sitting on capital, commercial real estate investment provides an opportunity to distribute those funds back into the community.
Even if a credit union is new to commercial lending, Extensia has a thorough orientation and training process that will help that credit union understand the requirements and procedures. Extensia has been helping credit unions increase their production pipelines for over twenty years, and we would love the opportunity to help each and every credit union meet its own individual production goals. Our mission is to serve our customer-partners as the most trusted commercial real estate member business lending CUSO in the country.
“Extensia helps our company take out new loans, refinance existing loans, and even modify an interest rate to a more competitive level.”