We are all looking for solutions: Solutions to the economic situation, solutions to the investment equation, solutions to our personal financial condition, solutions to problems we never knew we had.
The loss of jobs together with household wealth and income that has occurred over the past two years has only one precedent in our country’s history: The Great Depression.
The government reaction with regard to the commercial mortgage market has been underwhelming. With over $290 billion of commercial mortgages maturing in 2009 and 2010, the credit crunch is real and is forcing banks, special servicers and insurance companies to extend and amend….pretending that capital will return to the marketplace by the time these loans come due again – as well as the deluge of loan maturities already scheduled to occur over the next three years – which will not happen without the revitalization of the CMBS market.
It is clear that the banks and insurance companies cannot replace the capital lost when the CMBS market collapsed. Everyone in commercial real estate has a vested interest in the creation of a new and improved structure for mortgage-backed securities which uses the tremendous infrastructure that has been developed and provides appropriate safeguards in order to make CMBS attractive to investors, profitable for the participants and practical for the borrower.
Many of our industry organizations like the CMSA, the MBA, the Real Estate Roundtable and others are weighing in on these matters but the bondholders, the B-piece buyers, the servicers (primary, master and special), the rating agencies, the SEC, the IRS and the FASB are all working in a crisis mode – and buried under legacy asset issues….such that it is difficult for them to look into the future without a jaundiced eye.
We all recognize that the mechanisms put in place to prevent a meltdown did not work so we have to start with a clean slate. The following issues all need to be addressed:
Ø Creation of Generally Accepted Rating Principles including standardized underwriting standards and an industry oversight mechanism which could be modeled after the accounting profession;;
Ø A bond structure whereby loan originators and investment banks retain an interest in the bond pool to prevent aggressive and sloppy underwriting and execution;
Ø Imprudent loan structures that do not provide for future cash needs, like leasing reserves, or aggressive underwriting or sizing should result in the need for increased subordination levels over deals that do not provide these protections;
Ø REMIC rules and Pooling and Servicing Agreements need to be written to enable timely portfolio and asset management when loans become troubled.
Ø Bond pools and loan structures need to be simpler whereby conflicts of interest are eliminated;
If we are to resurrect the CMBS market, these issues and many more must be addressed. We need to start a dialogue to bring out the best and brightest ideas to establish a workable structure to revitalize the Commercial Mortgage Backed Securities market. With hundreds of billions of loans maturing in the next five years, this is one of the most critical projects we can execute to provide an exit for the legacy assets on the books today.
I implore our industry organizations and government regulators to start an open dialogue with all industry professionals – through blogs, conferences, meetings and any other way for us to get the great CMBS financial engine running again.
Please let me know your thoughts
Subscribe to:
Post Comments (Atom)
Paul:
ReplyDeleteThis is an excellent paper and I appreciate your thoughts. My thoughts are as follows:
1) It is just touble that the rating agencies are compensated by the same people who benefit from their ratings. This has to be redirected.
2) As far as the return of the CMBS market, I currently see some very positive fundamentals happening. In Mar of 2009 the overal yields which AAA CMBS Bonds (mostly legacy bonds) were trading for was +16%. Presently these same bonds are now trading under 9%....this is within 2-3% of providing attractive senior debt pricing. Imaging what today's investor would pay for a cleanly UW pool of new bonds...we are very close in pricing.
2)Due to the swing in momentum from years of loose underwriting, any new pool which might come to market will be pressured by all parties to UW clean and transparent. Rent rolls will be reviewed many times, historical P&L's relied upon, etc... I would think that a bond investor might settle for a lesser yield knowing that the pool is backed by quality underwriting at todays price levels.
I think we are very close. Morgan Stanley is presently in the market with a couple $100M of 5yr fixed rate loans pricing at 8-8.50%..a minimum $20million loan amount. This is how the machine is restarted....get it rolling and then pop the clutch!
Bob Bradley