The market-moving events of Nov. 4-8 left the commercial mortgage-backed securities market surprisingly unimpressed, according to the Barron's/John B. Levy & Co. National Mortgage Survey.

For one, the Federal Reserve's surprise half-point interest rate cut initially made little impact on the CMBS market. Subsequently, spreads on interest-rate swaps (the basis on which most commercial mortgages are priced) narrowed by about one-tenth of a percentage point relative to benchmark Treasuries. Typically, CMBS spreads offset the moves in swap spreads — which are a derivative used to convert floating rates to fixed rates and vice versa — since swaps don't reflect real estate market fundamentals. This time, however, the CMBS market moved in tandem with swaps.

Neither did the mid-term elections elicit much reaction. The Republicans' sweep of the House and Senate gave a boost to the terrorism-insurance bill, which finally cleared both houses in mid-November. It now goes to President George W. Bush, who has made the bill a top priority and has promised to sign it.

Meanwhile, the CMBS market is beset by cross-currents — frenzied competition for new loans on one hand, offset by concern that investors who sought CMBS as a safe haven from corporate bonds will rotate out into other asset-backed sectors or corporates. Although the rest of this year looks reasonably safe, Mike Marriott, managing director at Credit Suisse First Boston, thinks “the first quarter could be ugly.”

Lower interest rates have had a positive effect on the market, boosting the number of properties sold. But real estate fundamentals have continued to deteriorate even as real prices have increased.

According to Torto Wheaton Research, the current jobless economic expansion “represents as great a danger to real estate recovery as a double-dip does.” Excess space in all types of real estate is likely to persist for at least another 12 months, the firm says. But, given the losses suffered by investors in the stock market, they may still prefer to stick with hard real estate assets, even as they work through this soft spot.

Heavy Supplies Ahead

No new CMBS transactions were priced in the first week of November, although the calendar between now and the end of the year is rather daunting. Analysts expect another $15 billion to be brought to the market before Christmas, with most of that occurring after Thanksgiving.

Such heavy supplies in so short a span could put upward pressure on CMBS spreads. “It's inevitable that spreads will widen given deal flow, holiday distractions and the attractiveness of other sectors,” observes Richard Avidon, assistant vice president at Alliance Capital.

But Paul Vanderslice, managing director at Salomon Smith Barney, offers a different view. “Insurance companies are in the unusual position of having excess cash, due in no small part to residential mortgage bonds paying off early. Their market presence will keep spreads in a tight range,” he says.

Fewer Delinquencies — for Now

With increasing real estate softness, loan delinquencies should be increasing, perhaps even materially. But according to Marielle Jan de Beur, vice president at Morgan Stanley, that isn't the case so far in the market for seasoned CMBS.

October delinquencies came in at 1.99%, which was just a hair less than the 2.04% recorded in September, according to Morgan Stanley. A loan is considered delinquent after it is 30 days past due.

But the other shoe is bound to drop. One institutional lender noted that his firm added about 20 new loans to its watch list this month. Although loans on the watch list are current on their payments, they are candidates for future defaults.

John B. Levy is president of John B. Levy & Co. Inc. in Richmond, Va. © Dow Jones & Co. Inc., 2002.

BARRON'S/JOHN B. LEVY & CO. NATIONAL MORTGAGE SURVEY

Selected CMBS Spreads*
	To 10-year U.S. Treasuries
Rating	11/11/02	9/30/02
AAA	92-93	109-111
AA	104-106	120-122
A	117-120	131-133
BBB	170-175	183-188
BB	450-475	450-475

Whole Loans*
Term of loan	Prime Mtge. Range 11/11/02	Prime Mtge. Rate	Prime Mtge. Range 9/2/02
5 Years	4.88-4.98%	4.88%	4.89-4.99%
7 Years	5.26-5.36%	5.26%	5.26-5.36%
10 Years	5.73-5.83%	5.78%	5.65-5.75%
For loans of $5 million and up, on amortization schedules of 25-30 years that can be funded in 60-120 days with 0-1 point.

*in basis points, or hundredths of a percentage point