Regional and community banks provide an essential pipeline of funds for their communities, but the higher-for-longer interest rate environment creates challenges for their balance sheets. Just as homeowners stick with their low mortgage rates rather than refinance or move, commercial real estate borrowers behave similarly. The result: less liquidity for the bank and a portfolio that may be overly concentrated in commercial real estate.
“Our Structured Products team works with regional banks to figure out how they can recycle their capital or inject capital back into the bank through a loan portfolio sale,” says Leena Amin, senior managing director of Greystone’s Structured Products Group. “The solution might be securitization, or it might be some other transaction that helps them get the best return for their portfolio of multifamily loans while they continue to lend.”
Many regional or community banks have hit capacity issues with commercial real estate lending or may have found themselves overexposed, according to Greg Darling, managing director of Greystone’s Structured Products Group.
“Regulators are giving them feedback that they need to reduce their commercial real estate exposure,” Darling says. “Our group offers solutions that efficiently address this concentration risk.”
Analysis and Options
A key metric for community banks is their commercial real estate exposure to capital ratio. Typically, any ratio greater than 300% will warrant further regulatory inspection, Darling says.
Greystone’s Structured Products team reviews a bank’s loan portfolio and structures the loans into different tranches to sell them to investors with varied risk profiles. “The bank then has more optionality than they would have if they were trying to sell their entire portfolio. Securitization is a vital tool that helps banks manage liquidity,” Darling adds.
“These are complicated scenarios that we can work through,” Amin says. “Unlike a whole loan sales brokerage, we can analyze and advise community banks about their alternatives depending on the specifics of their portfolio. We also have the ability to buy their loans ourselves if that’s the best solution.”
Often, a Freddie Mac Q Series transaction is the ideal option.
“Freddie Mac provides a guarantee of a portion of the portfolio which helps it sell and execute in the capital markets much more efficiently,” Amin says. “Freddie Mac's guarantee is known by the investor community, so they are more willing to consider it when those bonds go to market.”
There are four options we like to make sure our community bank clients know about, says Max Garelick, a director in Greystone’s Structured Products Group.
“If multifamily loans meet agency credit standards, they can be guaranteed by Freddie Mac through the Q program which is often the most efficient way for banks to divest the risk,” Garelick says. “Another path is to securitize through a private-label CMBS structure where credit ratings help investors assess risk.”
A more esoteric option is a synthetic risk transfer, which can give a bank the ability to meet regulatory requirements and release capital, Garelick says.
“A synthetic risk transfer works almost like an insurance policy,” Garelick says. “A Credit Linked Note or Credit Default Swap references a portfolio the bank owns, but unlike with a securitization or sale, the loans never leave the banks' balance sheet.”
The fourth option is for Greystone to consider deploying its capital to purchase loans.
Relationship Banking
Greystone’s Structured Product Team, which has been in place for over a year, brings together individuals with years of previous working experience in-house at Freddie Mac as well as in investment banking and investment management to guide clients through their options end-to-end.
For example, in September 2024, Greystone assisted Webster Bank with a $303 million Freddie Mac Q-Series securitization that was collateralized by 19 loans secured by 31 properties with 1,236 units.
“We were able to analyze Webster's portfolio and help them select a pool of mortgages that worked for our client and investors,” Garelick notes.
A similar transaction with Cedar Rapids Bank and Trust, also completed in November 2024, was a $157 million Freddie Mac Q Series securitization that was collateralized by 52 loans secured by 48 properties with 3,356 units in 18 states. Given the unique loan structures, the path to securitization was complex, but it showcased a lot of creativity and expert guidance from all counterparties. This transaction was the second of its kind for CRBT, Darling says.
“The ‘quarterback’ element of what we do is critical,” Amin says. “We provide white glove service based on our experience in worlds that community banks may not be familiar with. In the end, our goal is to help them reallocate capital and come out stronger so they can achieve their goals.”
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