MBA Members Head FDIC Roundtable on CMBS Market
Author: Tobias, Leanne and Schwarting, Katie
Source: Mortgage Bankers Association of America
Date: 09-18-2003
MBA Members Head FDIC Roundtable on CMBS Market
MBA staff joined bankers, real estate industry representatives and regulators gathered in Washington, D.C., on September 12 to assess the state of the real estate capital markets at the Federal Deposit Insurance Corp.’s Commercial Real Estate Roundtable. The event, which attracted more than 120 real estate professionals, was hosted by Richard Brown, chief economist of the FDIC.
The conference featured a real estate capital markets discussion led by a panel drawn from MBA member firms, including Stacey Berger, executive vice president of Midland Loan Services, Bethesda, Md.; Sally Gordon, vice president and senior credit office of Moody’s Investors Service, New York City; John Levy, president of John Levy Co., Richmond, Va.; and David Worley of Wachovia Securities and chief risk officer of Wachovia’s Capital Markets Real Estate, Charlotte, N.C.
Capital markets panelists agreed that the growth of real estate securitizations had bolstered real estate underwriting practices across the U.S., strengthened information transparency, and improved capital availability in commercial real estate markets. The growth in the market for commercial mortgage-backed securities (CMBS) has led to the dissemination of better and more comprehensive market data and led to more efficient pricing of risk. CMBS provides a model that spells out pricing risk, allowing for greater accuracy and returns, and creating more realistic expectations. This helps investors to marry up the product and their appetite for defined amounts of risk, Worley said.
Levy, creator of the monthly Barron’s<.i>/Levy commercial mortgage survey, agreed that data enhancements had led to better underwriting processes for commercial real estate and enhanced the ability of portfolio managers to respond to market and submarket developments. The result, said Levy, is a downturn in loss frequency and severity for commercial real estate loans. “Real estate has grown more mainstream and real estate performance more solid,” Levy said.
Gordon noted that the growing availability of real estate market information has finally created a baseline of historical data to interpret market moves. Information transparency reduces the amplitude of the real estate cycle while increasing the frequency with which assets and asset classes are repriced, she said. Reassessment of market, submarket and property type risks takes place rapidly, she added, while repricing occurs almost continuously.
Panelists agreed that hospitality properties were proving problematic in the current downturn, affecting both the availability and pricing of CMBS capital for these assets. Health care properties have virtually disappeared from current CMBS deals. Other property types currently perceived as higher-risk include golf courses, certain telecommunications facilities and parking garages, according to Gordon.
Although the evolution of the CMBS market has enhanced the liquidity of commercial real estate, the CMBS structure can still pose challenges for investors and borrowers, panel members agreed. The management of servicing advances, a unique feature of CMBS deals, could prove problematic in the near term should property cash flows decline. In addition, the CMBS market is just now being tested on all parties to the transaction’s ability to perform under conditions of property stress. Gordon noted that there is increased risk in rising legal issues, with each court jurisdiction having different laws and interpretations of the laws surrounding real estate transactions.
Long-term borrower satisfaction also is an emerging issue, according to Berger. While pension fund lenders typically have the flexibility to extend additional financing to borrowers over time, the REMIC rules do not permit such modifications for CMBS. Pension investors, life companies and commercial banks have the flexibility to restructure existing commercial real estate debt. By contrast, Berger said, CMBS structures must remain fixed. The development of more flexible CMBS vehicles over time will help to address borrower satisfaction issues.
Copyright © 2003-2002 Mortgage Bankers Association of America
Other Recent investment news
For this market, help hasn’t quite arrived yet
Dec 8, 2008According to a recent UBS report, the Fed has taken 72 actions since August... » read article
Paralyzed CMBS Market Wiggles a Toe
Mar 20, 2008A $1.2 billion commercial mortgage-backed securities (CMBS) offering... » read article
Lennar's New Homes Fetch 60% Less as U.S. Market Slump Deepens
Jan 11, 2008Lennar Corp.'s November sale of 11,000 properties in eight states set a price... » read article