Uncertain Waters: Scorecard on the CMBS Market
By now you should be well aware of this "bad" fact stemming from failure or lock-down of the CMBS loan market:
- Between now and the end of 2012, more than $600 billion CRE loans will mature in EXCESS of the average 3-year historical gross originations from all non-commercial CRE lenders. In other words, in the absence of a CMBS loan origination market, +$600 billion of CRE loans will mature with no historical source for pay-off (See PDF).
In other words, if the loan is within the tight bandwidth of the best underwriting standards (for example, high debt-service coverage and low loan-to-value), then the loan probably will find a refinancing source. If it is not, then there simply isn't credit available to repay the loan. Thus, the lender\servicer has two choices: extend the loan or foreclose.
This gives you a good perspective of the "why" behind the "extend and pretend" approach adopted by banks and CMBS servicers.
So, for all those loans that are not in the tight bandwidth, where are we on the all-important topic of jump starting or replacing the CMBS market? (Show us the money)
Here's a quick scorecard that indentifies a few recent milestones:
- New CMBS Issuances!! Yes, two new issuance of CMBS hit the market last week. It has been nearly two years since the last sale of new CMBS issuance. While it is an important first step, the DDR Depositor LLC Trust 2009 Commercial Mortgage Pass Through Certificates (series 2009 DDR1) signals little hope for the typical CRE investor: this CMBS pool is a single sponsor structure, with low loan-to-value (@ 62%), great debt-service coverage (@ 1.4x), and a significant percentage of investment-grade tenants (@23% of total square footage and @15% of base rent). And the same can be said of the second issuance, which was the Bank of America Large Loan Trust 2009-FDG. The BoA deal was a single, seven-year, fixed-rate non-recourse loan to entities of Fortress Funds. Neither issuances, however, involved a pool of small loans from a wide variety of borrowers. While something is better than nothing, these two issuances do not signal immediate help to the typical owner (Link to CMSA summary). Bottom line: great news for Wall Street; no help for Main Street.
- Basic Changes to the CMBS Model - Risk Retention. The Hill seems to be listening to the CRE industry. In September, the CMSA issued a white paper (PDF) giving input on the 2009 Financial Regulatory Reform proposals currently being studied by Congress—but from the perspective of the commercial mortgage market. Last week, the House Financial Services Committee passed an amendment to the reform bill that (i) places the risk retention requirement at 5% and (ii) recognizes third-party investors (who purchase the first-loss position and re-underwrite all loans during pooling) as proper holders of the risk retention piece. This is a important victory for the CRE industry.
- Rating Agencies in the Spotlight. Part of the reform includes changes in the role and function of the rating agencies. My perspective is that we really haven't heard much from the most important player in the mix: the investor. (The party who literally "buys" the CRE investment, whether in the form of a CMBS bond or a limited partnership interest.) For a hint of the investor's perspective, read this white paper (PDF) from the Council of Institutional Investors (website). It strongly argues for more accountability on the part of the rating agencies. At the very least, this points to the fact that the "re-examination" of the CMBS recipe is wide ranging. And with topics such as rating agency liability on the table, I doubt that there will be a quick fix. And, as noted above, the "table" is located on the Hill, which is not a friendly banquet hall for commercial real estate . . . .
- More Extend and Pretend. What does a "no quick fix" mean? Navigating the CMBS ship through the political process will NOT be a quick trip. Consequently, for loans that are nearing maturity, or are in distress, the rescue plan will involve the current lender for the next 12 months. At the loan level, it will take creativity and a thorough understanding of the market and the lender\servicer constraints (such as the new guidelines for banks or the PSA limitations for CMBS servicers), in order to keep the loan out of foreclosure.
Please post your thoughts or comments on other key markers that you've seen.
