b'Why COVID 19 is Making Collateral Certainty a Necessity for Closing Deals in Todays EnvironmentbyAnthony Romano IIIeScreenLogicn both residential and commercialsame: Collateral is king!The assetWhile there are several different methods underwriting, the world has evolvedsecures all loan products.If the first threeand valuation solutions, two products well beyond the practices of theCs fail, the only thing saving the lender fromare most common in CRE lending.The quintessential (and fictional) bankersubstantial loss is a properly collateralizedfirst solution is a traditional commercial George Bailey at the Bedford Falls Buildingloan.If proper due diligence was notappraisal (general or MAI), widely & Loan.Back then, lending decisions werecompleted during the underwriting phase,considered the most comprehensive and heavily based on personal relationshipsloss severity can be staggering. accurate in the industry.The method and a banker knowing the business andrequires a licensed appraiser, who may or character of the individual applying forCollateral Certainty includesmay not be MAI, and can include both a the loan.And while character is stillfour primary due diligence steps: comp-based and income-based valuation. considered as one of the Four Cs ofasset valuation The appraisal process can take 4-6 weeks underwriting, the two Cs that garnerand can cost, depending on property type, the most attention in todays underwritingenvironmental risk assessment size, location, etc., over $3,500.Valuing process are Credit and Capacity especiallyproperty condition inspection, and residential properties, particularly in in todays COVID impacted market. flood zone determination homogenous neighborhoods, is typically easier as comparable sales or listings are CRE lenders; including traditional banks,Let us focus on a couple of the moreoften readily available.However, valuing credit unions, and non-depository lenders,important pieces here commercial properties can be much more spend considerable time on credit andchallenging and laborious.But getting this capacity, reviewing borrower financialAsset Valuation.Regardless of loanstep in the collateral certainty process statements and tax returns for insight intoproduct, most commercial lending happenswrong, even by 10%-15%, puts the lender cash flow, debt-yield ratio, LTV, loan-to-costwith loan-to-value ratios at 70% or below.or investor at significant risk in the event ratio, and profit ratio.These and severalof default.other factors are assessed depending on loan type (e.g. conventional, SBA, bridge,Another, and increasingly common, construction, etc.). valuation product is the commercial evaluation because it is a faster, more cost-But what about the fourth C in oureffective, yet fully compliant commercial underwriting equation?Collateral.Withvaluation solution.Turn times for the country and the world in the throes ofcommercial evaluations often clock in at the COVID pandemic, how does this changeunder ten days and cost a fraction of a full the UW of different CRE asset classes givenappraisal.But as you would expect, rules the need to be properly collateralized. and regulations apply to different use cases. First, commercial evaluations can only be During my years with CoreLogic and Firstused on loans $500,000 and less (*unless the American, I watched banks and lenderslender is a credit unionthen loan amount take different positions on evaluatingcan be up to $1 million). Complicating things transaction collateral.Regardless of the institution, the universal mantra was thecontinued on page 12Points of InterestFall 2020Page 11'