Whole-loan, CMBS volumes continue on upward rampage Commercial mortgage rates continue to be at or below 7% for prime properties, according to the Barron's/John B. Levy & Co. National Mortgage Survey of lenders and investors in the whole-loan and commercial mortgage-backed securities (CMBS) market. With rates this low, borrowers are generally opting to fix rates for as long a period of time as possible while lenders, for the most part, want shorter-term paper.

The market for whole loans continues to be quite strong, according to survey participants. In April, a number of survey members recorded new commitments two to three times greater than would normally be expected. Life insurance companies appear to be learning how to compete against the Wall Street-based conduits, and the result is a startling increase in commitment levels in some cases. One survey participant noted that "we hit 'em where they ain't," meaning in his case that they have a supply of 15- to 20-year fixed-rate money which is priced lower than Wall Street charges for the same product.

Institutional lenders are continuing to pour money into the whole-loan market in no small part because of the market's stellar performance. For the 12 months ended March 31, 1998, the Giliberto-Levy Commercial Mortgage Performance Index(sm) showed a total return of 13.22%, strongly outperforming Lehman Brothers' Baa duration-adjusted bond index, which showed a total return of 11.44% for the same time frame. The office sector led the charge with a total return of almost 15%. Credit losses are almost at the negligible level in some sectors. For example, apartments showed a total credit loss of only .09% for the last 12 months and only .01% during the first quarter of 1998.

The CMBS sector is surely enjoying the good times as well. Volume here is on a rampage that is startling even some of the most seasoned investors and analysts. Although 1997 saw record new issuance of $44 billion, it is entirely possible that that could be eclipsed in just the first six months of this year!

Three big deals recently came to market, including a $1.4 billion offering from Deutsche Morgan Grenfell and GMAC Commercial Mortgage, a $1.3 billion offering sponsored by Goldman Sachs, Citicorp and AMRESCO, and an $818 million conduit transaction sponsored by Chase Securities. At the senior bond level the transactions were priced similarly with the 10-year triple-A tranche of each priced at a spread of .77%. But at the triple-B level, there was quite a difference with the Goldman, Citicorp and Deutsche Morgan transactions both priced at a spread of 1.45% over the 10-year Treasury, while the Chase transaction priced at a very skinny 1.33%. CMBS buyers noted that junior tranche buyers are becoming more aware of who originated the mortgages, and that, in effect, this price differentiation is the beginning of a true "brand awareness." CMBS buyers seem to show great respect for bank underwriting and, as a result, offerings that are priced by banks have been well received by the market in the past.

In addition to the brand origination theme, one buyer noted that the Chase transaction collateral was originated solely by them, whereas the other two were an accumulation of collateral from various originators. Last year, originators came together to pool their collateral under the "bigger is better" theme, but this year the market seems to be willing to pay a premium for those originators who both have a recognizable brand name and keep their collateral in a single pool. Others are sure to follow this lead of single originators, including Bear Stearns, which is coming to market shortly with a $700 million securitization.

On the CMBS buying side, the more senior tranches continue to be dominated by the money funds and the insurance companies. Meanwhile, the lower tranches are becoming of extreme interest to the publicly traded mortgage REITs who are seeking higher yields.