Definition: Points are a one time charge assessed at closing by the lender to incrcapacity the lenders earnings on mortgage loans. One point equals 100 basis points, or 1% of the loan. Referred to as a “par loan’ if no points are charged by the lender.
Lenders use the debt yield ratio to evaluate the risk involved with lending money to a property owner. By definition, it is the return the lender would receive if the borrower defaulted on the loan and the lender had to foreclose on the subject property. Calculated in percentage points, it is the return the lender makes from the real estate after the foreclosure. Therefore, debt yield is inversely related to risk.
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Since its inception, CMBS lending has been the go-to mortgage product for larger properties with sponsors that want non-recourse financing with high leverage, low interest rates, and lenient underwriting. However, since the market collapse in 2007 and the passage of the Dodd-Frank “Risk Retention”, things have changed. Although still more permissive than conventional or insurance products, CMBS underwriting standards have become more stringent, leverage points have been lowered, and interest rates can fluctuate greatly depending on treasury indexes and bond investor demands.
