Market Update – Interesting News on 80% LTV

By W. Karl Baker, CPA

Industry commercial lending underwriting criteria contain some “norms” that are universally agreed upon but applied differently from lender to lender.  One of those “norms” is the rule of thumb that lenders will loan at 80% of the value of the subject property in a purchase transaction with long-term financing, and then this metric is often scaled back to 75% for a cash-out refinancing, to hedge valuation risk.  

Lenders do not set these norms in a vacuum.  Private lenders sell the majority of their long-term loans and some of their bridge loans to the capital markets. These institutional buyers pool loans into packages and convert them to bond funds, called mortgage-backed securities.  Investors buy these funds with the expectation that they will obtain a return on investment commensurate with the risk.  This is a macro-economic way to put capital into the market, allowing property buyers and investors to finance their purchases with low-cost loan terms. Therefore this drives the market as to what is acceptable and what is not acceptable loan terms.  If the capital markets are spooked, then the capital flow will dry up.  Remember the Spring of 2020 when lending dried up?  This explains it.  So over the most recent months, these markets have been a little spooked on valuations.  

In the past several months due to the uncertainty of the real estate market, the norms have been constrained. Therefore the 80%/75% norms had recently been scaled back to 75%/70% to account for the compressions.  This was frustrating to the investor market because these changes happened immediately, without warning, and for many, it happened in the middle of transactions being executed and planned. Our take on it is this:  lenders internally stick to their 80% underwriting but knowing the real estate market is compressing, they’re baking into their underwriting the pending reduction in valuation in order to hedge risk somewhat.  

Until now…

We’ve noticed this week that the market has shifted with a return to the 80%/75% norms.  Lenders are dipping their toes back in the water by offering terms on these leverage amounts.  It’s probably a coincidence that this news comes at about the same time that the Fed funds rate increased last week. This is brand new news, so there are no editorials out yet, but our guess is that at least for now, the view is that valuations are reliable enough for the coming months that underwriting can rely on the numbers.  It’s also possibly a simple response to market pressures to return to 80% leverage criteria norms.  

We are sure this will not be the last change in the coming months. The market can shift at any moment, but we wanted to let you know about this development.

Stay tuned and please reach out to us if you have questions.  You can start with, 617-386-7127 or you can reach our current team at the following page:


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