Posted: 3:51 pm Tue, July 17, 2012
By Mark?Anderson
Tags: commercial mortgage-backed securities, Dougherty Funding, Herb Tousley, Jim Hoopes, Joe McBride, NorthMarq Capital, Sean O?Connell, Shenehon Center for Real Estate, Trepp LLC
Wall Street capital needed for volume, flexibility
Commercial real estate investors are well aware of the excesses that went on in the heyday of the commercial mortgage-backed securities (CMBS) market several years ago.
But oh, are they eager to see that market back on its feet.
The majority of CRE investments during the busiest years of the last decade were financed by the CMBS issues, which totaled almost $231 billion in new securities at the market?s peak in 2007.
This year, when many of those 2007 five-year term loans are coming due, the CMBS market has issued just $18 billion in new securities. By the end of 2012, the market will probably issue no more than $35 billion, almost $200 billion short of the 2007 mortgage volume that?s going to be rolling over in the next few years, according to Joe McBride, an analyst with Trepp LLC, which monitors the commercial real estate finance markets.
?How are you going to refinance all those deals? that are going to be maturing, asks Herb Tousley, director of the Shenehon Center for Real Estate at the University of St. Thomas.
Other players in the lending market are providing a partial answer, stepping in to boost their share of the mortgage business. Commercial banks have been aggressive about deploying dollars into CRE markets, and life insurance companies set a record last year, originating $66 billion in commercial mortgages.
But the life insurers? record output was still dwarfed by the almost $200 billion drop in CMBS issuance between 2007 and 2012.
Jim Hoopes
?Certainly, the CMBS market has to return to help feed a recovery,? in the CRE market, said Jim Hoopes, a senior vice president at NorthMarq Capital in Bloomington.
The urgency for that recovery hasn?t fully arrived yet, though. Hoopes and Tom Crowley, a mortgage banker with Dougherty Funding in Minneapolis, said there hasn?t been a flood of property owners approaching them to refinance CMBS loans.
?We just haven?t seen a lot of the five-year maturing loans yet,? Hoopes said.
Part of the explanation is that lenders are postponing dealing with those loans. Many of the loans written between 2005 and 2007 were underwritten aggressively, with long interest-only periods and high appraised values, McBride said.
The outcome is a high portion of underwater loans, and lenders are extending terms hoping to recover some of their lost value before writing them off.
?They?re kicking these loans down the road,? Crowley said.
A weak acquisition market has also taken pressure off the lending market?s dollar capacity, according to Hoopes.
But a big increase in refinance demand looms, he said.
?During the next three years there?s going to be a very high volume of loan maturities ? that?s what you see nationally and Minnesota isn?t going to be different,? Hoopes said.
Relaunching the CMBS machine to meet that demand faces challenges, though.
Sean O?Connell
The CMBS market shut down and laid off its people in 2008 and 2009, and it will take time to rebuild the segment?s infrastructure and staff, said Sean O?Connell, director of real estate and structured finance research at St. Paul-based Advantus Capital. New Dodd-Frank rules regulating the industry aren?t completed, either, leaving the conduits that assemble CMBS pools uncertain about their obligations and costs.
But controlling risk in a market that was a key contributor to the real estate crisis will be a crucial step in recovery.
The CMBS product brought Wall Street investors into the commercial mortgage market by dividing its loan pools into low-risk, low-yield senior tranches and higher-risk subordinate pieces. Investors are lining up to buy the senior pieces, O?Connell said, but those high-risk subordinate pieces ?haven?t found an investor home yet.?
That?s partly because of the performance of the existing CMBS securities. Trepp said in recent reports that delinquencies in existing pools climbed more than 10 percent for the first time. In Minnesota, those climbed to 13.2 percent in May and 11.7 percent in June. Delinquencies at life companies remain near 1 percent.
But the risk comes from wider sources, too. The conduit companies that create the mortgage securities want to be able to buy hedging products to limit the credit risk in their loan pools. But in a global market ?filled with risk ? whether from Europe, the Middle East or Washington, D.C. ? that?s become almost impossible, O?Connell said. ??Volatility in the world is very high, and there?s no way for Wall Street to hedge all that risk.?
Borrowers also are seeing more risk in the CMBS market than they like.
Bankers and life insurers can predict their cost of funds and fix interest rates shortly after a loan?s approval. But the cost of funds for CMBS lenders is set by the investor market, and lenders are forced to push pricing back until closing, adding up to 60 days of uncertainty for borrowers.
?That leaves borrowers subject to market fluctuations, so you may sign a deal today but you won?t know the loan terms? until much later, Hoopes said.
In spite of those headaches, commercial real estate investors want a CMBS revival, not just to bring more dollars into the market but to provide flexibility that other CRE lenders don?t provide.
Crowley expects to write his first post-meltdown CMBS loan soon on a project that he said was too large for his banking correspondents, but wouldn?t fit the narrow lending guidelines of life insurers in the market.
?If there?s the slightest real estate imperfection, institutions like life companies won?t touch it,? Crowley said. ?The conduits were overly aggressive, but they?re critical to keeping the real estate market active.?
Disappearing CMBS market
The CMBS market was the largest source of commercial mortgage funds in the middle of the last decade, but new issuance of mortgage securities virtually stopped during the recession.
Years: 2005-07 / 2008-10 / 2011
CMBS issued: $589.6B / $26.5B / $23.7B
Source:? Trepp LLC?
Flexible loans, but high risk
CMBS lenders offered generous terms, but the result was higher loss rates than other lenders, such as life insurance companies.
Delinquencies: 3/31/2012 / 6/30/2012
CMBS national*: 9.68% / 10.16%
CMBS Twin Cities*: 11.57% / 11.66%
Life insurance companies**: 0.14% / NA
* from Trepp LLC ?(delinquent 30 days or more)
**March 31, from Mortgage Bankers Association of America (delinquent 60 days or more)
Source: http://finance-commerce.com/2012/07/cre-industry-still-awaits-cmbs-return/
barnes and noble nook 12 days of christmas a christmas carol arkansas football player dies anne mccaffrey anne mccaffrey amazon promotional code
No comments:
Post a Comment
Note: Only a member of this blog may post a comment.