The commercial mortgage market has joined the rest of the fixed-income world in having a bad case of indigestion, according to the Barron's/John B. Levy & Co. National Mortgage Survey of institutional investors in the whole-loan and commercial mortgage-backed securities (CMBS) business. The problems were especially acute in the CMBS arena, although the whole-loan business was not unaffected.

Boiled down to its simplest terms, there were just too many borrowers in the market while investors were not anxious to add to their investment portfolios. The rush to get new transactions into the market was stimulated by both concerns about inflation and the Federal Reserve's anticipated response as well as continued Y2K fears. Most investment bankers and institutions are trying to push most of their second-half volume into the third quarter in order to have as little disruption as possible from any year-end computer glitches.

Right now, the CMBS business feels, at best, "choppy." Buyers are on the sidelines and investment banks do not seem to be interested in taking any risky positions. To be sure, it is the summer doldrums, and the fact that most institutional investors were more interested in their beach plans than in new investments played no small role. However, money managers are quick to point out that this market turmoil is not close to the panic that existed last September and October. Though spreads dramatically widened in both cases, there is a lot less leverage in the system currently. Plus, most investment banks are sitting on a fairly low level of CMBS loans as opposed to last fall when CMBS inventory was full at virtually every house.

The old saying "be careful what you wish for, you just might get it" seems particularly appropriate for the commercial real estate business these days. Real estate bankers and investors have yearned for a tighter connection to the capital markets for years, assuming that this would smooth out their ability to access loans and equities. Now that the capital market access is here on both the mortgage and the equity side, it hasn't turned out as neatly as most had hoped. Access to capital is more dependent on broad macroeconomic trends than how well the real estate industry in general is doing as last fall's and this current crunch have overwhelmingly demonstrated.

Underwriting standards have tightened as major conduit originators are trying to make sure that each loan that they make can be sold easily in a securitization. Interestingly, this tightening is all happening at a time when commercial mortgages are performing extraordinarily well. For example, for the 12 months ended June 30, commercial mortgages showed a delinquency and default loss of a scant 0.18%, according to the Giliberto-Levy Commercial Mortgage Performance IndexSM. This level hasn't been seen since the late-1960s.

Politics is said to make strange bedfellows and so apparently does the CMBS business. Earlier this year, most CMBS analysts were talking about branding - where buyers of CMBS securities were more likely to buy securitizations from originators that they trust. But the slowdown in loan production has made it very difficult for any firm to aggregate enough mortgages, so firms are banding together to do joint transactions. Recent examples include a securitization led by Prudential Securities, which included originations from National Realty Funding, Greenwich Capital and Bridger Commercial Realty Finance, while a Morgan Stanley-led transaction included collateral from CIBC, PNC Capital Markets, Residential Funding Securities and Deutsche Banc Alex. Brown. One buyer at a major money manager says these deals are "losing personality - they all look alike."

Until recently, new CMBS originations traded with thinner spreads than those available in the secondary market. But all that has changed now as buyers seem to be more interested in additional securities in deals that they already know. Secondary market transactions are now trading at spreads 0.05% to 0.10% less than comparable transactions in the new origination market.