Portfolio Lending

Portfolio lenders not only originate mortgage loans, but also hold a portfolio of their loans instead of selling them off in the secondary market. A portfolio lender makes money off the fees for originating the mortgages and also seeks to make profits off the spread between interest-earning assets and the interest paid on deposits in their mortgage portfolio.

Portfolio lending includes loans from Life Companies and Pension and Endowment Funds. Many sources do this type of lending, but not many banks have interest in portfolio lending due to their difficulty matching assets and liabilities.

Most Life, Pension, and Endowment Companies do not carry large in-house staff for real estate loans. Instead they maintain small teams or advisors for real estate and bond trading. Portfolio loans typically involve high quality assets, a strong/major market and sponsor, and low leverage. Portfolio lenders avoid special purpose properties and focus on multi-family, retail, industrial and office buildings.

Life, Pension, and Endowment Companies typically offer competitive rates for low leverage loans in the 50-70% LTV range with long-term stable leasing. Life, Pension, and Endowment Companies offer loans 10 years or longer and may contain extension options.

The cardinal rule for portfolio lending is preservation of capital- no matter how the capital is invested, it must not lose value. Portfolio lenders employ conservative underwriting for this reason. There is also relatively low risk in portfolio lending due to exposure they take, resulting in low leverage. Portfolio lenders have a long term view of success, so invested capital is not subject to market rate fluctuations short term.

The benefits of portfolio lending include an on-going relationship with the lender. Portfolio lenders also have more jurisdiction and discretion as to what happens to the loan throughout its lifetime. There are simpler loan documents, as well as low fees and legal costs compared to CMBS loans. Portfolio lenders do not require high reserves and will rate lock early in the application process. These lenders are able to engage in unusually long terms lasting 15 to 25 years.

Drawbacks include the conservative lending standards. The application and closing process may be slower than that of a comparable CMBS loan. Portfolio lenders try to balance their risk and return instruments, which requires careful consideration in investments.

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