The Commercial Mortgage-Backed Security Market Is Dead. Long Live The New Commercial Mortgage-Backed Security Market
TASA ID: 1813
Previously printed in The MidAtlantic Real Estate Journal and reproduced with their permission.
In the last quarter of 2010, we are beginning to see positive signs of the long awaited and much hoped for return of the CMBS market. At present, the recently enacted SAFE Mortgage and Dodd Frank Wall Street Financial Reform and Consumer Protection Acts appear to have done little to reign in the past practices of Wall Street firms and the conduits that originate and sell CMBS product. The most significant impacts that can come from the Dodd Frank Act are:
- A requirement that CMBS sellers or securitizers retain a 5% "skin in the game" interest at risk in what they sell and
- The removal of a past exemption that now formally designates the opinions of the credit rating agencies as real expert opinions subject to damages suits.
A six month waiver to the expert designation was granted by the SEC on July 22nd. Accordingly, until January 21, 2011, it can be business as usual for securitized debt issuers of new registered CMBS securities enabling them to obtain and publish the ratings necessary to sell new pools of CMBS.
Investor confidence is returning to the mortgage backed securities market. Early and best evidence is the fact that on August 2nd, just ten days after SEC Chair Schapiro granted the expert exemption waiver, Goldman Sachs completely sold a new $778.5 million issue structured as a somewhat traditional multi-property-multi-borrower pool at competitive pricing. Not long after, J.P. Morgan Chase announced that it was forming a $1 billion pool intended to close momentarily.
A recent study by CitiGroup Global Markets, Inc. indicated that $3.6 billion of new issues have been sold so far this year and that $4.6 billion is in the pipeline to close by year end. Early predictions for 2011 estimate that new CMBS volume will be in the range of $50 to $60 billion or about what it was back in 2000.
This recent increased investor confidence and return to the CMBS market appears to be due to the better yields available from CMBS in combination with an assumption that greater underwriting prudence will be employed by securitizers creating these new pools. The new issues that are being structured feature larger average loan sizes, less tranches and less complexity in comparison with 2005-2007 issue structures.
In anticipation of increased investor acceptance, previous CMBS players and originators- Bank of America/Merrill Lynch, Bridger Commercial, CIBC, Citigroup, Deutsche Bank, Goldman Sachs, J.P. Morgan, Morgan Stanley, Natixis, RBS and Wells Fargo/Wachovia- have been ramping up to create and sell new pools. Some are already closing or warehousing new loans. Other firms with little or no mortgage experience are also ramping up to originate and/or sell CMBS, including Cantor Fitzgerald, C-III Capital, Ladder Capital and Starwood Property. C-III, controlled by Island Capital, recently launched a conduit program targeting $400 million annually. The Cantor-Fitzgerald joint venture is targeting a $5 billion annual volume.
How the "expertization" of credit rating agencies plays out will have a major impact on the securities markets. One solution might be to create an FDIC- like insurance fund to support ratings. Another is to have the issuers pay into and create a fund to support defaulted RMBS/CMBS issues.
If an acceptable solution to the "expertization" problem isn't found by January 21, 2011, (a waiver extension notwithstanding), the agencies will again withhold their ratings and shut down the market. If the SEC backs down their "expertization" designation, the Dodd-Frank Act will have done nothing to reign in the credit rating agencies other than requiring the licensing of rating agency analysts.
If you are looking for a decent, long term, fixed rate, non-recourse mortgage, and up to 70% LTV, call your mortgage banker quickly. Long live the CMBS market.
This article discusses issues of general interest and does not give any specific legal or business advice pertaining to any specific circumstances. Before acting upon any of its information, you should obtain appropriate advice from a lawyer or other qualified professional.
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