The commercial mortgage business enjoyed a quiet late summer for the first time in three years. At least that's what is indicated by the Barron's/John B. Levy & Co. National Mortgage Survey of more than 30 participants in the market for commercial mortgage-backed securities (CMBS) and traditional whole loans.

The market was racked in August 1998 by the Russian debacle and then, last year, by Y2K scares. But this summer ended with a fairly slow flow of new deals. With a large number of Wall Street types and CMBS buyers enjoying their summer vacations, late summer 2000 was reasonably quiet.

Nevertheless, despite the lack of new offerings, one large buyer noted that CMBS were "well-bid" on the secondary side. For triple-A paper, spreads versus interest-rate swaps were at the very low end of the trading range seen over the past several months. With 10-year triple-A CMBS trading at 39 to 40 basis points over the 10-year swap rate, both traders and buyers wondered whether the securities might break through to trade at tighter levels.

Activity will pick up after this autumn. New CMBS volume projections for the fall appear to be greater than most market analysts had estimated. Although there are some optimistic predictions of $15 billion coming to market this fall, most market viewers suspect that the true number will be around $10 to $12 billion.

If securitizations come in at that level, further spread tightening seems unlikely. On the other hand, securitization numbers are notoriously subject to slippage, leading to perhaps substantially less supply. According to PIMCO's Scott Mather, "Supply will be less than people think, perhaps on the order of $7 billion, which should lead to further spread tightening."

Pension funds will be able to invest in a broader range of commercial and residential mortgage-backed securities, under new amendments published at the end of August for ERISA, the federal law governing most pension plans.

To date, the funds have been restricted to only the most senior securities, generally those rated triple-A. The new regulations, expected to be enacted this month, will enable funds to buy securitizations rated as low as triple-B-minus.

The change is likely to draw a new, large group of buyers to CMBS rated double-A and single-A, on which spreads are expected to tighten modestly. Triple-B-rated CMBS, which have more real estate exposure, could tighten as much as 10 to 20 basis points, according to Salomon Smith Barney's Darrell Wheeler.

Buyers and traders greeted late August's decision by the Federal Reserve to hold short-term interest rates steady with a "so what" attitude. While the markets had anticipated that outcome, interest-rate swap spreads did tighten a tad - three to four basis points.

Less expected was the impact from Uncle Sam's routine quarterly refunding. The Treasury's newly auctioned $10 billion batch of 10-year notes became the benchmark issue, while the previous benchmark lost that status. The yield spread between the new and the old notes widened to a staggering 14 to 15 basis points.

The federal surplus has reduced the supply of new Treasury securities. Their resulting scarcity value - especially for hedgers of derivatives - lowers the yield of the new benchmark versus other comparable Treasuries.

The result in the commercial-mortgage market was sheer confusion. Lenders first attempted to raise their spreads by 14 to 15 basis points, which would keep the borrower's rate the same. A growing number of institutions, both on the CMBS and the whole-loan side, decided to use this Treasury benchmark change as a way to garner more business, raising their spreads only five to 10 basis points, giving the borrower a lower rate.

For those with a long memory, hotel loans suffered more during the early 1990s real estate recession than any other property type. But with today's full airplanes and jam-packed travel schedules, they are doing swimmingly.

To take advantage of this, a few CMBS lenders have opted to tighten their spreads on full-service hotel loans by some 25 basis points. Hotel spreads, which had been in the range of 275 to 300 basis points, are now more likely around 240 to 260 basis points.

Perhaps pushing them along is a more tolerant view from the rating agencies. Fitch, for example, has announced that its new ratings policy will allow for hotels to be underwritten based on the last 12 months' actual income. Its previous policy had capped income at the level achieved in 1998. Since both hotel occupancies and room rates have been escalating up strikingly in most markets, this change alone will allow for larger hotel loans, which in turn will surely attract more hotel borrowers.