Banks Compete to Back CRE Private Credit

As banks increasingly look to back the private credit business, commercial real estate lenders are reaping the benefits.

Competition among banks is leading to better terms in the form of interest rates, leverage ratios and recourse available on the repurchase facilities and lines of credit they offer to CRE lenders.

“Not only are there more banks offering that product, but more of them are offering it at better terms and at lower costs today than if we were having that conversation 12 months ago,” said Matt Jones of Harbor Group International, which operates a $1.7 billion multifamily lending fund.

In addition to making their own real estate loans, banks have long provided so-called “back leverage” to all kinds of real estate private-credit lenders: mortgage REITs, private debt funds, collateralized debt obligations and the like.

But with the rise of private credit, stress in certain parts of bank lending portfolios and the implementation of Basel III Endgame regulations in March, banks are limiting their exposure to direct CRE loans while at the same time increasing the business they do backing lenders.

Larger allocations from banks — and more of them looking to get in on the business — means better terms for borrowers. That starts with more attractive interest rates, but it includes other terms like accounting methods.

Many credit facilities are mark-to-market, meaning lenders have to peg the value of their assets to the current fair market value price. This can be problematic when prices plunge, resulting in margin calls. Amid the competition, some banks are offering borrowers the ability to switch to a method where they mark down loans only when there’s a credit event like a missed payment or default.

Competition is also leading to better terms around liability and recourse.

Blackstone’s mortgage REIT, Blackstone Mortgage Trust, said earlier this year that it had moved nearly $6 billion worth of credit facilities to non-mark-to-market models, and had lowered the spread on its borrowing by 90 basis points over the previous year.

“That’s very significant,” company president Austin Pena said on BXMT’s February earnings call. “And we’ve been adding more credit facility counterparties, 15 different counterparties today, which really allows us to drive down the cost of that capital.”

Why banks lend

The banks with the biggest exposure to real estate private credit include JPMorgan, Goldman Sachs and Wells Fargo, according to figures from Fitch. (This includes loans to REITs, private debt funds, collateralized debt obligations, asset-backed commercial paper obligations and other mortgage intermediaries.)

Bank name	Loans to mortgage lenders ($ billions)
JPMorgan Chase	$65.19
Goldman Sachs	$41.78
Wells Fargo	$38.14
Morgan Stanley	$31.10
Citibank	$31.07
Bank of America	$29.83
Capital One	$14.60
U.S. Bank	$7.28
TD Bank	$7.05
Manufacturers and Traders Trust	$5.61
BMO Bank National Association	$4.06
HSBC Bank	$3.80
Truist Bank	$3.65
The Huntington National Bank	$3.29
Fifth Third Bank	$2.95
PNC Bank	$1.61
City National Bank	$1.60
East West Bank	$1.40

(Source: The Fitch Group)

Part of the reason banks lend to intermediaries has to do with regulations. A direct loan to, say, an office building is considered riskier than a line of credit to a mortgage REIT. That means that banks need to hold back more capital on their direct lending books compared to their intermediary lending.

That’s not to say that banks are entirely content to stay behind the scenes and give all the credit to their clients.

In some cases, banks make a point to let the end borrower know that they’re providing back leverage to the private lenders making a loan. And there have been instances where a borrower decides to go with a private lender and the bank asks which one, so they can see about providing back leverage on the deal, according to anecdotes from lenders.

Case for caution

The big risk with banks lending to private credit is the lack of transparency about how all these loans are tied into the broader financial system.

Oftentimes, the public and regulators only find out about the interconnections when things go south.

That was the case earlier this year when it was revealed that HSBC Bank suffered a $400 million loss on a U.K. mortgage-lending company that collapsed amid a mortgage fraud scandal.

HSBC had provided loans to the company, Market Financial Solutions, via Atlas SP Partners, a financing company backed by Apollo Global Management. It’s the sort of Wall Street daisy chain that private credit’s critics warn could lead to systemic problems during a crisis.

In the meantime, the lure of cheap bank money is juicing the real estate private credit business — and banks continue to sweeten the pot.

“The banks have really leaned into giving us tighter and tighter financing,” Jeffrey Dimodica, president of Starwood Property Trust, said on the company’s November earnings call. “They have room to continue to tighten.”