JP Morgan Buys Banc of California’s Residential Mortgage Portfolio As CRE Loans Become a Distress Opportunity

Earlier this week Banc of California announced it and PacWest Bancorp would merge in an all-stock deal funded in part by a $400 million equity raise from Warburg Pincus and Centerbridge Partners.

More recently it has emerged that JPMorgan Chase & Co has entered into an agreement with the Banc of California to buy $1.8 billion of single-family residential loans at a discount, sources told Bloomberg.  Banc of California and PacWest plan to sell about $7 billion of loans, mortgage bonds and other assets in their securities portfolios to pay down off $13 billion worth of borrowings, Bloomberg also reported. 

For the CRE industry, there are two important questions. One is what it means for banks in general, as they have been important sources of financing for the industry. The other is what it means for CRE loans, because when banks are ridding themselves of them, their values will fall and that’s not good for the future of the industry.

Back in May, having lost three-quarters of its market value since the beginning of the banking crisis in March, PacWest sold off its CRE loan portfolio to Kennedy-Wilson for $2.4 billion. As Reuters had reported, that was a $200 million discount from the outstanding balance of $2.6 billion. And then the real estate lending arm went to Roc360 for an undisclosed amount, which likely meant less perceived value than anyone wanted to admit.

Banc of California had, as of June 30, 2023, $1.27 billion in commercial real estate loans, $1.65 billion in multifamily, $264.7 million in construction, and $786.1 million in warehouse lending. That’s 55.5% of all its lending. The bank said that the combined company created by the merger will continue to lend to real estate.

So, there is value remaining in commercial real estate lending, but it all depends on where a bank stands. Banc of California can run 55.5% of lending in various aspects of commercial real estate. PacWest had to dump all the CRE lending to pull itself out of trouble and even then, needed a merger as a rescue.

The bad news for CRE is that as loans get cut in value, markets are saying that lenders need to strike better deals and get tighter with credit. But BlackRock is happy. Gary Shevlin, a vice chairman at the firm, called it a “huge opportunity” in an interview with Bloomberg. He also pointed to the mismatches between the expected duration of assets on the books, including commercial real estate, and liabilities to clients. Banks are shrinking their balance sheets as a result and private equity firms will be snapping up a lot of the value at a discount.