CMBS Issuances Unlikely To Spark Recovery… Yet

With the recent news of yet another commercial mortgage-backed securities (CMBS) issuance, is there cause for celebration in the commercial mortgage sector?

JPMorgan Chase Co.'s $500 million bond, backed by a total of 55 Inland Western Retail Estate Trust properties, wound up oversubscribed in its two AAA-rated portions, according to a Reuters report. Furthermore, for the first time since the onset of the credit crunch, investors were asked to purchase CMBS with a 10-year maturity.

This CMBS deal, like Bank of America's November CMBS issuance backed by Fortress Investment Group properties, is not expected to require use of the Term Asset-Backed Securities Loan Facility (TALF). However, despite these emergent signs of life in the CMBS market, federal support still appears to be in order for the broader commercial real estate sector.

Noting that ‘commercial real estate lossesâ�¦ weigh heavily on many small banks, impairing their ability to extend new loans,’ Treasury Secretary Timothy Geithner identified TALF aid for commercial mortgages as one of a limited number of key commitment areas for the 2010 edition of the Troubled Asset Relief Program (TARP), which was officially extended this week.

As many other components of the TARP are folded up over the next several months and high-profile banks continue to repay their TARP funds and pass their stress tests, weak areas remain, Geithner stressed in a letter to Speaker of the House Nancy Pelosi.

Commercial real estate is undoubtedly one of the trouble spots, with predictions for increased distress next year arriving almost daily as we prepare to enter 2010. The Urban Land Institute's Charles DiRocco recently told an audience in Pittsburgh that next year's transaction environment will be worse than that of the infamous early 1990s, reported the Pittsburgh Business Times. Value declines are expected to average more than 40% under their highs of 2007.

With that ominous backdrop, the Mortgage Bankers Association reported this week that CMBS delinquencies reached a record 4%.

In addition, according to some analysts and industry observers, even those eagerly welcomed successful CMBS transactions in recent weeks may not indicate as much progress toward recovery as originally believed.

Commenting on Developers Diversified Realty Corp.'s TALF-assisted Nov. 16 CMBS issuance, Annaly Capital Management Inc. executives Jeremy Diamond, Ryan O'Hagan, Robert Calhoun and Mary Rooney noted that the details of this deal – particularly its pricing and lender-friendly structures – prevent it from serving as that symbol of revival that we may be tempted to identify.

‘Whether this transaction will jumpstart the CMBS multi-borrower origination machine is a leap for many of the participants,’ the executives wrote in a recent commentary on the U.S.' current economic situation.

‘We would argue it has a way to go because investors want to focus on more simple transactions initially,’ they continued. ‘Single-borrower deals such as DDR fit that description. As for multi-borrower originations, there are still serious concerns.’

Interestingly, the executives identified the risk-retention amendment in the Financial Stability Improvement Act of 2009 as the cause of some of those concerns.

Although Commercial Mortgage Securities Association warmly welcomed a customized amendment that eventually reduced the risk-retention requirement for CMBS to zero, the Annaly group believes this modification could wind up hurting rather than helping the market.

‘All of the major contributors to the mortgage origination process will be incentivized to do larger volumes with weaker investor protections,’ they explained. ‘Their reward for success is short-term, while the assets they create are long term. Wouldn't it be best if the underwriter/originator/sponsor stayed along for the ride?’


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