A recent article in the New York Times pointed out that, in the midst of a volatile commercial mortgage market, life insurance companies are increasingly becoming lenders in the area. Data from the second quarter of 2011 shows that the life insurance industry underwrote a total of $15.7 billion new commercial mortgages.
That is reportedly the largest number since those numbers started being recorded in 1964. It is also double the amount of commercial real estatemortgage underwritten in the first quarter of 2011 and almost 26 percent greater than the record number of $12.5 billion recorded in 2005.
Why are life insurers taking advantage of the commercial real estate mortgage market? For one, there has been a great lack of interest among investment banks, who have been hit hard by the struggling economy. Life insurers usually take a conservative approach to investments, but many life insurance companies are now taking advantage of favorable conditions in the commercial mortgage underwriting market. Less competition with the investment banks has allowed them to make safe loans on properties meeting their careful guidelines.
According to sources, investment banks have been less active in the commercial mortgage market by a weak economy and the debt crisis in Europe, and a poor market for bonds backed by mortgages. The latter factor came into play over the summer. Another factor is the good performance of life insurer’s mortgages, 99.6 percent of which were in good standing at the end of 2010. Conservative lending practices and active management of mortgage portfolios is part of the reason for this.
While there are some limitations life insurance companies face by getting into the commercial mortgage market, borrowers may benefit from the shift in the market since life insurance companies are often able to offer better rates than investment banks.
Source: New York Times, “Insurers See an Opening in Commercial Mortgages,” Julie Satow, October 18.