Credit Unions Were a Bright Spot in the Capital Markets Last Year

“Credit unions have been the bright spot throughout the pandemic,” Chad O’Connor, senior managing director of capital markets at Marcus & Millichap, tells GlobeSt.com. While there were other active sources of capital through the pandemic, the credit unions have been the most active in providing liquidity to the market.

“They have had the smallest percentage of lenders withdraw from the market since the beginning of the pandemic, and I see them continue to be active in 2021,” adds O’Connor. Next year, he expects credit unions to remain a stable provider of capital, but there is one caveat. Credit unions tend to have limited capital allocations. That was an issue this year when many credit unions hit their allocations earlier than expected. Many of them have hit their allocations for the year because there is less competition in the market, and they are attracting more business than they have historically,” says O’Connor.

Other lending sources either paused or provided limited liquidity, particularly through the early months of the pandemic, and most have tightened underwriting standards. This includes higher debt-yields and a 5% reduction in loan-to-value. “Lenders are using higher vacancies and reserves to underwrite, likely leading to more conservative loan proceeds,” says O’Connor. Banks have also worked closely with borrowers to avoid an onslaught of defaults, particularly in the hospitality and retail sectors. In O’Connor’s home market of San Diego, he has yet to see a significant increase in strategic defaults or foreclosures.

These negotiations have helped to provide stability, but they have also had a downside for many borrowers. “Some strategic forbearance situations had come back to haunt borrowers, where borrowers opted-in for forbearance when they did not need to, and it showed up on their credit report in some fashion,” says O’Connor. “Whether or not the forbearance affects credit scores has made borrowing challenging to refinance in some instances because there are lenders that steer clear from applicants with proof of forbearance in their past.”

For that reason, O’Connor has advised clients against forbearance if at all avoidable. Many owners in San Diego had 90% to 95% rent collections through the pandemic, and therefore, were able to avoid distress options, like forbearance. “There are situations where borrowers had to take a forbearance. It was a solution for certain situations for Fannie Mae and Freddie Mac,” says O’Connor.