The commercial mortgage market continued on an unprecedented volume kick during May, according to the Barron's/John B. Levy & Co. National Mortgage Survey of the commercial mortgage-backed securities and whole-loan markets. Based on the large number of deals in the CMBS pipeline, it is entirely possible that CMBS volume for the first six months of 1998 will come very close to the $44 billion record for all of 1997, which was in itself a more than 30% increase over the previous year!

In late May, First Union and Lehman Brothers priced a $3.4 billion conduit offering, which was the second-largest CMBS transaction to date. This extraordinarily well-diversified securitization was supported by more than 700 loans and attracted a large number of buyers. Eventually, more than a hundred separate accounts bought bonds. The bonds were quite well received in all tranches, but the major talk was about the Class-B tranche, rated Baa2 and BBB, which priced at a remarkably tight 1.55% over the Treasury curve. Before this securitization, mezzanine bonds, usually rated BBB down through BB, had been facing some softness. But in the First Union/Lehman transaction, these bonds were oversubscribed, and the pricing was surely .05% to .10% tighter than most analysts had predicted.

The CMBS market continues to talk about the influx of large new potential buyers into the market. The newest 800-pound gorilla to take a detailed look at the market is Federal National Mortgage Association (FNMA). Fannie's competitor, Freddie Mac, has been quite active in the market as of late. Fannie is talking with Wall Street firms to determine the types of issues that they might buy, though they have yet to make their first purchase. Other large buyers include hedge funds, which are becoming more active at the senior tranche level. Long Term Capital, the Greenwich, Conn.-based fund headed by former Salomon Brothers trader John Meriweather, is among the most active buyers.

At the end of May, Citicorp Securities and Donaldson, Lufkin & Jenrette priced a $442 million securitization for CRIIMI MAE. What made this relatively small deal interesting is that it is the first time that CRIIMI has securitized its well known "no-lock" loans, which are open to prepayment the first year with a modest, fixed prepayment penalty. The CMBS market has taken a shine to transactions which are closed to prepayment for a long period of time or defeased for the entire loan term, and so it wasn't clear how the market would regard this securitization. Some buyers seemed to compare this deal to other asset-backed securities, such as home equity loans which have no prepayment penalties. Given the underwriting quality and wider-than-normal spreads, they found the transaction to be attractive. The Class A-3 rated AAA/Aaa was priced at a spread of 1.12%, which was at least .30% higher than if the loans were replete with the more traditional lock-outs and prepayment penalties.

On the whole-loan side, volume continues to be extraordinarily strong. Many life companies are now having serious discussions about how to harness their correspondent/broker network so that they can produce both loans for their own portfolio as well as for the conduit market. No less than three large life insurance companies - John Hancock, Prudential, and Teachers Insurance and Annuity Association - have already done this quite successfully, so there are plenty of examples for the others to follow. Interestingly, whole-loan players noted a distinct up-tick in the number of borrowers who were requesting floating rate loans. Normally, with fixed rates this low, borrowers would not opt to take on the additional rate risk that a floating-rate loan carries, but floating-rate loans can generally be prepaid with virtually no penalties, and many real estate types are eyeing a sale to the REIT market which prefers unleveraged properties.

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