Matt, what got you interested in the credit side of multifamily lending?
In terms of real estate in general, I got my first experience when I interned for a local developer in college — a very small shop. I got to work directly with the principals and it was a really great experience at a very early part of my career.
I found that I was drawn to real estate because it wasn’t just numbers on a spreadsheet; it was “sticks and bricks” as they call it. It’s very tangible, and even today I think one of the most interesting aspects of my job is to get out and actually see the properties that we’re lending on, walking the neighborhoods, and getting a feel for how the property does — or in some cases — does not blend in with the market and the surrounding area.
In terms of multifamily credit, I got an economics degree in college, so I’ve always been a bit of a numbers guy and when I started my career, the credit side of the lending business was a natural fit.
Then, as my career evolved, I realized that in order to be a really good credit person, you have to be so much more than just a number cruncher. You have to be a problem solver, critical thinker, and even have a bit of a sales side to you as well. Balancing all that is a challenge, but I think it fits me well.
If you weren’t Chief Credit Officer, what would you be doing?
I’d probably be on the equity side doing acquisitions on multifamily properties. Outside of finance, I don’t know… I might have a wild hair and go to culinary school or something like that. I’ve definitely enjoyed cooking for my family and growing in that arena over the last 5-10 years.
What is your team’s approach to working with different kinds of clients?
This is a good question. I would say that since we understand that we are one of several lenders who essentially offer a very similar product (the Freddie Mac Small Balance Loan or SBL product), consistent service and execution are paramount.
Our goal is to understand the drivers of the deal very early on in the underwriting process. Of course, everyone is proceeds-oriented, but in this environment, many of our clients are also rate sensitive. So it’s imperative that we understand and communicate any factors that could affect their interest rate such as affordability or underwriting metrics like the debt service coverage ratio (DSCR) and the loan-to-value ratio (LTV).
Many clients are also deadline-driven, and in this environment, purchase transactions all have their unique challenges. We view it as our job to work with clients to ensure that we can hit all the contractual deadlines, so we can get deals to the closing table.
I’m very fortunate because I’ve got a great team who understands the nuances of the SBL program and takes pride in offering a “best in class” execution to our clients.
Relationship managers and BDOs often refer to Ready Capital’s credit team as the company’s “secret sauce.” Can you share with us why that is?
I think it goes back to what I said before about understanding that we’re one of several lenders who essentially offer a very similar product. Thus, we have to be both diligent and what I like to call “solutions-oriented” in our approach to underwriting. So, if we see a problem, we’re transparent and work with the client and Freddie Mac to find a timely solution. I think sometimes credit individuals in our industry have a tendency to say “no” or think it’s their job to say “no” and at Ready Capital, we don’t view it that way. Also, you can’t tell the story of the “secret sauce” without highlighting our top-notch originations and operations teams. We take pride in our synergy from the front–end screening team all the way through the back-end funding team, and I think our clients feel that.
What attracted you to the opportunity at Ready Capital? We understand you were with JP Morgan Chase before that.
I started out my career with JP Morgan and really enjoyed the training that I received there. I worked with a lot of great people and really cut my teeth in the industry. But I reached a time in my career where I was ready to learn and grow and keep progressing. Then, the Ready Capital opportunity came up, and I viewed it as almost a startup environment at the time, which was very intriguing to me.
I knew it would offer opportunities for growth in my career, but I think — and maybe most importantly –- I could also have a hand in shaping the culture of the organization here as opposed to a place like JP where the culture’s already ingrained, and you’re just kind of a cog in the system. I knew that I could have a little bit more of an impact at a place like Ready Capital, and I think I’ve definitely experienced that while here.
What are a few of the top credit exceptions you and your team encounter, and what do they mean to a deal?
I would say that unstabilized operations over the preceding 12 months is probably #1. That means that the property has been operating below 90% occupancy for the prior 12 months. And it’s likely due in large part to many clients acquiring value-add multifamily properties over the past several years, and executing a business plan to upgrade units, increase rents, and stabilize occupancy above 90% for permanent takeout. That’s really the bread and butter of our own bridge-to-agency SBL program, and so I think it requires us to clearly understand and tell the story of the business plan execution to Freddie Mac. On the plus side, many times the sponsors have created large amounts of value by investing money and increasing rents. So that really helps to contribute to the story and supports approval of the exception.
Other challenges there, though, are rising interest rates. They’ve added a layer of complexity over the past 12 months or so, making it harder and harder for proceeds to come by. So, it definitely makes the underwriting on those type of transactions that much more challenging.
Otherwise, I would say probably the number two credit exception we see is the multifamily experience exception, meaning someone doesn’t quite have enough multifamily experience in their background to meet Freddie Mac requirements at the time of the signed application. Most of the time this is due to someone being new to multifamily ownership or they have sold their prior multifamily properties to deploy capital into a new project. It’s imperative that we have a keen understanding of their background and experience to advocate for an approval with Freddie Mac.
What are some of the most common reasons that a deal will hit a snag or die on the vine? What can borrowers and lending consultants do to help avoid them?
Yeah, most common situation is probably negative sponsor credit history. If they have ongoing litigation or had prior issues with bankruptcy or judgments or even bad press. Or possibly something on title like a regulatory agreement. Whatever it is, it’s ideal to know that up front, so the best thing that people can do is disclose any and all issues as early as possible. It’s easier when we know what we’re getting into and can start to understand the potential mitigants that may exist to help us, then recommend the deal to Freddie Mac.
We’re going to discover it eventually, so it’s best to understand the story up front and figure out if it’s going to be something that can proceed with or if it’s going to be a deal killer. So, we don’t have to waste anyone’s precious time or money.
Regional banks are pretty overexposed at the time of this interview. What do you see as the current market opportunity for Ready Capital in the CRE lending space?
I think the agency product in and of itself is still a tremendous opportunity for Ready Capital, specifically the Freddie Mac Small Balance program. The agencies, and again, specifically speaking to Freddie Mac, have shown that in times of instability in the markets, they’re there to provide liquidity in the space and you know they’re going to continue lending. We saw it during the pandemic. And we’re seeing it again now during a time when a lot of regional banks are struggling.
With that, there’s certainty of execution, which is important. The other part that’s very important right now, especially with the SBL product, is the rate hold feature. In a time when we see treasuries and other rate indexes moving all over the place, someone can lock in their rate at the time they sign the LOI. As long as they perform appropriately and provide due diligence in a timely manner, we will get the deal underwritten and submitted to Freddie Mac within the 35 business days, and the rate will be held.
And we can eventually lock it once the deal is approved. We’ve seen plenty of instances where we will have a rate hold in place and rates in the market will move up 20-30-40 basis points over a 30-day period and our rate is held because of the program.
Could you tell us about a deal you feel particularly proud of and why?
We recently closed on a Freddie SBL purchase loan in Spokane, Washington. The deal came to us when their first lender couldn’t perform and had some unique wrinkles: a preferred equity member, elevated radon that required FM exceptions, and collections/occupancy dip due to seller mismanagement. The Credit team at Ready Capital were absolute rockstars and collaborated with legal counsel, engineers, the Sponsor team, and Freddie Mac to work through all the issues and craft terms that were acceptable to all parties involved. The deal was submitted to Freddie Mac within 4 weeks from Money Up and closed within 7 weeks!
Learn more about multifamily financing and other commercial real estate programs at Ready Capital.
Inside Ready Capital is a Q&A series with Ready Capital employees that amplifies thought leadership and other unique perspectives.