Origination is not the scarce resource

Anyone who has spent time in Australian private commercial mortgage lending knows the shape of the market. It is served by specialist firms rather than by banks, and those firms are good at the thing that is hardest to industrialise. They know their regions. They know which builders finish and which do not. They know what a site is worth on a Tuesday when the valuation says something else.

That capability is real and it is widely distributed. It is also, on its own, not an investment proposition.

The part that does not travel

What does not travel between those firms is the discipline applied behind the origination. Two lenders of similar size and similar standing can run materially different credit processes, and from the outside the difference is close to invisible until something stops performing. An investor allocating to any one of them is underwriting that firm's judgement at least as much as the loans on its book.

This is not a criticism of the lenders. A firm built around origination optimises for origination. The credit process is often the founder, a spreadsheet and twenty years of scar tissue. That works, and it does not scale, and it cannot be inspected.

What follows from it

If origination is abundant and standard is scarce, the structural answer is to stop trying to buy both from the same party. Leave origination where the knowledge is. Move credit approval to one place, write it down, and apply it the same way to every loan that comes in, whoever introduced it.

That has two consequences worth stating plainly. The first is that a lender who introduces a loan does not decide whether it is funded. The second is that an investor is no longer underwriting one firm's judgement, because the judgement being applied is the same regardless of which firm brought the loan through the door.

Neither consequence is comfortable for everyone. A firm that is used to being the final word on its own loans will find it is not. That is the trade, and firms that run a disciplined process tend to make it willingly, because a consistent counterparty is worth more to them than an occasional one.