MortgageOrb checked in with Michael Singh, a managing director in the real estate investment banking group of Jones Lang LaSalle, to discuss the federal government's latest efforts to revive the financial markets. Meanwhile, according to Singh, despite best efforts, commercial mortgage delinquencies and problems associated with upcoming loan maturities will noticeably worsen as 2009 progresses.
Q: What are the market implications for the inclusion of commercial mortgage-backed securities (CMBS) in the new version of the Term Asset-Backed Securities Loan Facility (TALF)? Can this announcement be considered a major victory for the industry? How much will it actually help?
Michael Singh: Until the Federal Reserve further clarifies the program's details, it is difficult to gauge the full impact on the CMBS market. So far, discussions have focused on the top-tier (AAA) segment of the market.
While this potential increase in liquidity is a positive for holders of AAA securities, it does not help support lower-rated issues. In fact, it may further depress the their values, as what little money is available will tend to flow even more to AAAs.
While any support of CMBS can be viewed positively, TALF does not appear to address the current real estate funding crisis and lenders' unwillingness to issue new credits.
Q: The public-private investment fund (PPIF), another key element of the Financial Stability Plan, also seems to hold some potential for helping unfreeze commercial real estate lending. What must this strategy involve to ensure it provides maximum help to the market?
Singh: The market is also cautiously approaching PPIF, mainly due to limited program details. The idea of helping banks dispose of troubled assets is essentially good.
Whether the pricing makes sense and investors see sufficient yields to buy these assets, however, remains to be seen. If successful, this plan could help establish floor pricing of certain real estate assets, but as with TALF, the real question is how this program will translate into banks' lending again.
Q: News of a few recent CMBS issuances in Europe and one in the U.S. must be positive indicators. Given this development, would you revise your outlook for the return of CMBS?
Singh: It will take time to restore investor confidence in CMBS. Clearly, new-issue CMBS will be much more conservatively underwritten and reflective of current valuations, but structural changes will be required before it again becomes a viable financing avenue.
The most needed fixes discussed today revolve around the credit-rating process and risk sharing by loan originators. But ultimately, the CMBS market will find its way back into the mainstream of lending.
Q: How severe do you think the commercial mortgage refinance crisis that was so frequently predicted has become so far? How much will it worsen? Where are borrowers accessing capital to refinance?
Singh: So far, we are only seeing a ripple and not the wave so many have been expecting. There is no denying that the pending maturities could escalate to a crisis level, but we are not seeing it yet.
For various reasons, lenders and borrowers have been able to work through loan maturities, primarily by modifications and extensions. Lenders, in particular, have been slow to take back properties and recognize steep losses. Additionally, continued uncertainty about the government's plans has left market participants to adopt a wait-and-see attitude.
However, as time ticks on, pressure is building, and more and more loans will go into default. Despite the gloomy outlook, capital is still available.
The market under $10 million remains fairly liquid, with banks and credit unions writing shorter-term loans and the GSEs continuing to support multifamily lending. Portfolio lenders are also lending on a limited basis.
Q: How is existing CMBS faring? Steadily increasing delinquency figures have made headlines, but do you consider this trend significant? What can be done to mitigate it?
Singh: Delinquencies correlate, to a certain degree, with the health of the general economy. As the recession continues, job losses mount and tenant demand for space falls, landlords will be hard-pressed to service their debts.
Delinquencies will be an issue for all lenders, but CMBS will be hit hard, as these loans were generally underwritten at higher leverage, with little cushion to absorb falling rents and occupancies. This trend is especially true for more recent CMBS vintages that were underwritten at or near the peak of the market.
There is little that can be done to reverse this problem, given the fundamental changes in the economy. Eventually, loans will have to be written down, and investors will have to recognize their losses.