CMBS Market Back in 'Real Time'
Author: Michael Murray
Source: Mortgage Bankers Association
Date: 01-10-2008
CMBS Market Back in 'Real Time'
Tightening underwriting—falling loan-to-value levels and higher debt service coverage ratios—combined with increases in subordination levels, will likely take the commercial mortgage-backed securities market back to its halcyon days of 2004, post-recession and pre-liquidity crisis.
“Although some of the changes in underwriting standards have been fairly modest, we expect they will to continue to improve, perhaps at an accelerated pace, in 2008 for one simple reason—issuers will find it increasingly difficult to place bonds collateralized by loans that are too aggressively underwritten,” said Alan Todd, head of CMBS research at JP Morgan Securities, New York. “As new loans are originated with stricter standards, we expect DSCRs and subordination levels will increase while LTVs fall.”
The scenario ultimately "sets the stage for a fixed-rate CMBS market that will look remarkably like it did in 2003-2004,” according to Todd. “This implies that as we move through 2008 [probably in the second half of the year] newly issued deals will contain conservatively underwritten collateral and will also be well enhanced,” he added.
"We’ll be going back to 2004-like levels, but it will be a long way from where we were in 2007,” said John Levy, principal of John B. Levy & Co., Richmond, Va.
In 2004, U.S. CMBS volume for the year was $93 billion compared to U.S. CMBS originations at nearly $240 billion in 2007, according to Levy. In 2008, he expects sales volumes to be dramatically lower. “For 2008, we’ll probably be lucky to get $100 billion or a 60 percent reduction,” Levy said.
Todd said that combined with wider CMBS spreads, the CMBS market in the second half of the year would likely represent an excellent buying opportunity, but at this time “we feel it is premature [for clients] to reenter the market.”
“Until more liquidity returns—the dislocation between cash and synthetic instruments moderates and issuers/originators are no longer purging their balance sheets of loans originated last year—we expect spreads will have difficulty staging any meaningful or sustainable rally from their current levels,” Todd said.
“Today, selling needs to take place based on actuals," Levy said. "In fact, actual financial statements are the real estate market’s new, new thing.”
“Although some of the changes in underwriting standards have been fairly modest, we expect they will to continue to improve, perhaps at an accelerated pace, in 2008 for one simple reason—issuers will find it increasingly difficult to place bonds collateralized by loans that are too aggressively underwritten,” said Alan Todd, head of CMBS research at JP Morgan Securities, New York. “As new loans are originated with stricter standards, we expect DSCRs and subordination levels will increase while LTVs fall.”
The scenario ultimately "sets the stage for a fixed-rate CMBS market that will look remarkably like it did in 2003-2004,” according to Todd. “This implies that as we move through 2008 [probably in the second half of the year] newly issued deals will contain conservatively underwritten collateral and will also be well enhanced,” he added.
"We’ll be going back to 2004-like levels, but it will be a long way from where we were in 2007,” said John Levy, principal of John B. Levy & Co., Richmond, Va.
In 2004, U.S. CMBS volume for the year was $93 billion compared to U.S. CMBS originations at nearly $240 billion in 2007, according to Levy. In 2008, he expects sales volumes to be dramatically lower. “For 2008, we’ll probably be lucky to get $100 billion or a 60 percent reduction,” Levy said.
Todd said that combined with wider CMBS spreads, the CMBS market in the second half of the year would likely represent an excellent buying opportunity, but at this time “we feel it is premature [for clients] to reenter the market.”
“Until more liquidity returns—the dislocation between cash and synthetic instruments moderates and issuers/originators are no longer purging their balance sheets of loans originated last year—we expect spreads will have difficulty staging any meaningful or sustainable rally from their current levels,” Todd said.
“Today, selling needs to take place based on actuals," Levy said. "In fact, actual financial statements are the real estate market’s new, new thing.”
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