The Day Underwriting Standards Mattered Most

October 16, 2025, was a day that reminded everyone why underwriting standards matter.

Regional bank stocks plunged after Zions Bancorporation announced a $50 million charge-off on two commercial and industrial loans from its California division, and Western Alliance disclosed borrower fraud with inadequate collateral. The S&P Regional Banking Index dropped 5.8% in a single session. Jefferies, exposed to the First Brands bankruptcy—where creditors claimed as much as $2.3 billion in assets had "simply vanished" from a company that filed with liabilities exceeding $10 billion—had already lost 18.7% of its value over the previous week.

The headlines screamed crisis. But here's what most investors missed: this wasn't a failure of private credit as an asset class. It was a failure of specific lending practices that sophisticated institutional investors had been warning about for years.

While regional banks scrambled to assess their exposure to opaque corporate loans and distressed commercial real estate, many prudent funds and family offices were actually accelerating their allocations to private credit. Just not the kind making headlines.

The difference? Discipline, transparency, and structural protection. Let’s dive into what this actually means.

The Banking Issue That Nobody Saw Coming (Except Those Who Did)

The current situation sits at the intersection of three problems that were entirely predictable:

First, there's the commercial real estate maturity wall. Over $957 billion in CRE loans are maturing through 2025, many underwritten when rates were at 3-4% and now facing refinancing at 7-8%. Regional banks hold 44% of their loan portfolios in CRE, more than triple the 13% concentration at larger banks. Office properties are particularly stressed, with delinquency rates hitting 10.4%, approaching the 10.7% peak during the 2008 financial crisis.

Second, there's the opaque private credit problem. First Brands Group, an automotive parts supplier, filed for bankruptcy after disclosing liabilities exceeding $10 billion. Creditors now allege that as much as $2.3 billion in assets had "simply vanished." Multiple lenders, including major Wall Street firms, had apparently failed to catch that "growth appeared to outpace the company's actual capacity." Translation: proper due diligence was in short supply.

Third, there's the yield-chasing behavior. With rates rising, lenders competed for deals by loosening standards: higher loan-to-value ratios, weaker covenants, riskier borrowers. Now we are seeing the risks that come with this kind of relaxed underwriting.

But here's what this crisis actually reveals: the problem isn't private credit. The problem is undisciplined private credit.

Because while regional banks face this reckoning, institutional capital is not pulling back from private credit. The pension funds managing billions, the family offices with multi-generational wealth, the insurance companies with sophisticated risk teams?

They're just being extraordinarily selective about which private credit.

The Institutional Thesis (And Why It Still Works Despite Market Stress)

Let me share what surprised me when I started tracking institutional investor behavior: private credit allocations didn't slow down when rates spiked in 2022-2024. They accelerated.

The numbers tell the story. Private credit has expanded meaningfully from roughly $1 trillion in 2020 to $1.5 trillion by early 2024, with projections pointing to $2.6 trillion by 2029. But this isn't yield-chasing. It's a response to fundamental structural advantages that become more valuable in volatile environments.

Here's why institutions kept allocating:

Floating-rate exposure provides natural inflation protection. Unlike fixed-rate bonds that lose value as rates rise, most institutional private credit adjusts with SOFR. When the Fed raised rates, institutional private credit portfolios saw income increase, not decrease.

Direct borrower relationships enable proactive risk management. When you're the lender in a direct relationship, you see problems early. You can restructure before default. You can require additional collateral. Compare this to regional banks discovering fraud after billions vanished.

Structural protections create downside cushions. Conservative loan-to-value ratios and substantial debt service coverage mean even stressed situations rarely result in principal loss. The Alternative Investment Management Association reports that while loan modifications increased from 8% to 12% in 2024, actual defaults remained minimal because sophisticated lenders restructured proactively.

In the case of real estate, asset-backing provides tangible value. You're not lending based on corporate earnings projections that can be fabricated. You're lending against real property generating real cash flows with real tenants paying real rent.

But here's the critical distinction the market is learning right now: these advantages only matter if you actually implement them.

The specific regional banks that are facing troubles today didn't lack access to private credit strategies. They made exceptions for fundamental issues that should have kept them from d. They made loans at 75% LTV when the risk profile of the deal should have kept them at 60%. They relied on financial statements that turned out to be fraudulent. They were concentrated in office spaces when the pandemic completely changed how the world works.

The Real Estate Credit Opportunity That's Actually Defensible

While banks face stress in commercial real estate broadly, a specific subset continues to perform exceptionally: stabilized multifamily debt to experienced operators in supply-constrained markets.

Let me break down why this matters and why it's fundamentally different from what's blowing up bank balance sheets.

The supply-demand fundamentals are structural, not cyclical. Freddie Mac estimates a 3.7 million unit housing shortage as of Q3 2024. This isn't speculation. It's demographics. Millennials and Gen Z need housing. Construction activity has declined significantly. The gap is widening, not closing.

Multifamily isn't office. While office delinquencies hit 10.4% on remote work trends, multifamily fundamentals remain strong. People need places to live regardless of where they work. Well-located, well-managed apartment buildings in growing markets continue to perform.

Experienced operators with proven track records are fundamentally different credit risks than over-leveraged developers. When you lend to an operator with $25-500 million in stabilized, cash-flowing properties and a track record through multiple cycles, you're not betting on future performance. You're underwriting current cash flows with substantial margins of safety.

This is where Nectar has positioned itself specifically, and it's worth understanding exactly why this approach differs from what's causing problems elsewhere.

At Nectar, our average  multifamily operators have:

• $25 million minimum in stabilized assets (proving track record and capacity)
• 56-65% combined loan-to-value (providing 35-44% equity cushion before we're at risk)
• Cash-flowing, stabilized properties (not development, not value-add, not speculative)

Compare this to what's failing:

Regional banks made construction loans at 75%+ LTV to inexperienced developers with aggressive future rent and cap rate assumptions. We provide subordinated funding at 60% combined LTV on cash flowing properties to operators who already have a portfolio of stabilized assets.

Private credit funds invested in corporate loans based on financial statements that turned out to be fraudulent. We lend against tangible real estate generating verifiable cash flows with third-party property management reports.

Banks concentrated in office properties that now face structural demand decline. We focus on multifamily in supply-constrained markets facing structural shortages.

The difference isn't subtle. It's fundamental.

The Technology Edge That Changes Everything

Here's where the private credit opportunity becomes accessible to individual investors: technology has solved the underwriting problem that made small-balance lending uneconomical.

Traditional due diligence on a $500,000 loan might take 60-90 days and cost $50,000 in legal and transaction fees. That math never worked for institutional capital, which is exactly why this market segment was underserved.

But AI-driven underwriting, automated bank statement analysis, and real-time property performance monitoring can reduce that timeline to 7-10 days and dramatically lower costs. This technological efficiency opens up two opportunities simultaneously:

First, it makes small-balance lending economically viable. Institutional lenders who wouldn't look at anything under $10 million can now efficiently underwrite $500,000-$5 million loans. This creates access to a market segment that was previously impossible to serve profitably.

Second, it enables fraud detection at scale. The First Brands scandal happened because lenders relied on periodic financial statements without real-time operational visibility. Technology-enabled platforms can monitor cash flows, occupancy rates, and operational metrics continuously, catching problems before they become catastrophes.

This is how platforms like Nectar can offer institutional-quality due diligence at accessible minimums. We're not cutting corners to make small loans work. We're using technology to maintain the same standards institutions demand, just more efficiently.

What This Means for Individual Investors Right Now

The market is teaching an expensive lesson: not all private credit is created equal.

The institutions who moved first into disciplined, transparent, asset-backed private credit are sitting on performing portfolios generating 12-15% returns with minimal stress. Meanwhile, banks and yield-chasing funds are writing off loans and suspending distributions.

For accredited investors, the opportunity is clear, but so are the requirements:

• Look for conservative underwriting standards. LTV ratios under 70% combined, debt service coverage above 1.2x, experienced operators with track records through full cycles.
• Focus on structural protection. Senior or mezzanine positions secured by tangible assets generating current cash flows, not future promises.
• Understand what you're actually lending against. Stabilized, cash-flowing real estate in supply-constrained markets is fundamentally different from development projects, corporate loans, or distressed office buildings.
• Verify the manager has skin in the game. Management should have significant personal capital invested alongside yours, aligning interests.

The question isn't whether private credit belongs in a modern portfolio. Institutions answered that years ago, and current market stress is proving them right. Disciplined private credit is performing exactly as designed.

The question is: which private credit, with whose risk management philosophy, in which specific market segment?

Because as October 2025 is demonstrating painfully clearly, those distinctions matter more than the headline return projections ever did.

Coming next: "A Field Guide to Private Credit Investment Options: How to Separate Quality from Yield-Chasing" where I'll break down the specific vehicle structures available to accredited investors, what questions actually matter, and where platforms like Nectar fit in the spectrum.

What we covered:

• Why the regional banking crisis proves the importance of underwriting discipline
• How institutional investors distinguished quality private credit from yield-chasing
• The specific structural protections that matter in stressed markets
• Why stabilized multifamily debt differs fundamentally from troubled CRE loans
• What technology enables in modern private credit underwriting

What's next in Part 2:

• Comparing BDCs, interval funds, direct lending platforms, and traditional funds
• The five questions that separate sophisticated managers from marketing
• Red flags and green flags in due diligence
• Where Nectar fits (and doesn't fit) in your allocation strategy

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