Multifamily News - Level 3 Funny money for banks

Wells Fargo made the news in the WSJ recently. Many folks outside the banking industry don’t know how a Level 3 Asset would affect their bank.

Level 3 assets are generally loans than are classified as illiquid, hard to value or sell. Not at all a desirable asset.

Sort of like having a lot of garage sale stuff you know still has some value but can’t tell how much until someone offers you a price. You lose money on the original cost but make something. That’s a Level 3 Asset or funny money as it's called on Wall Street.

It is becoming clear that many of the largest banks are playing with funny money moving loans into this Level 3 asset class. Many mortgages are now just garage sale stuff. The drop in financial stocks was largely related to this issue.

More news in our commercial market. It is definitely hurt by the loss of NNN financing and other property financing options unless you have a client flush with cash. Cash is still a good thing in America.

The one bright spot is still the Multifamily investing and property leveraging is still at 80% LTV in the mid 6% range for larger loans. Fannie Mae and Freddie Mac are taking a beating but making money in this portfolio.

They have committed to expanding their multifamily loan programs. A couple of insurance companies have re-entered the market along with a few Hedge funds. Standards are higher but well worth the trouble while Hedge funds are looking for low leveraged deals.

More good news is we can still finance many properties at 75% but these programs are backed by investors who demand a higher return. It’s helpful to manage investors and owners expectations to avoid rate shock.

I am the first to tell a client that their own local bank is their best bet in this market unless the purchase requires a 30 year amortization or you want to buy multifamily.

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