RIOAC 10-18-10: JP Morgan Chase

Today was another of the Nick Lieberman interview series.  The guest speaker was Scott Schweer of JP Morgan Chase bank.  Schweer heads up a team that specializes in loans to Multi Family Investment Properties, mainly apartment complexes.  More on Mr. Schweer in a bit, but there were a few interesting takeaways.  Number 1, the financial qualifications of the borrower are taking a greater importance in the underwriting process.  We’ve seen this across the board with banks for all types of acquisition loans (Businesses [SBA 7A], commercial properties [SBA 504], and Multi Family Investment Properties).   Number 2, loan transactions are up significantly in 2010 compared to 2009.  In particular, the stabilization of the rental market in most parts of California are one reason Schweer’s group is doing increased business in the Multi Family space.  To support this notion, Schweer mentioned that JP Morgan Chase only has 31 Multi Family properties in Foreclosure in California in a 40 Billion Dollar Multi Family Portfolio.  That is a small percentage.  As an fyi, the majority of those 31 foreclosures are in the Central Valley, with a few based in the Inland Empire.  The last noteworthy nugget concerned Debt Coverage Ratios.  JP Morgan Chase is underwriting loans with average debt coverage ratio (DCR) of 1.2 to 1.25.  In simple terms, there has to 1.2 to 1.25 times the debt service payments in income from the property to qualify the loan.  A DCR at 1.2 to 1.25 gives the borrower some room to manage debt service (loan payments) in case of vacancies and rent reductions.