Heavy competition leads to lending innovations Commercial mortgage whole-loan rates showed little change during November, according to the Barron's/John B. Levy & Co. National Mortgage Survey of major whole-loan and commercial mortgage-backed securities () buyers. On the whole-loan side, institutional lenders gently nudged their spreads 0.10% to 0.15% wider, knowing that CMBS spreads had widened even further. Demand in the whole-loan business was somewhat modest as most institutional lenders and their borrowing clientele were more focused on year-end closings than they were on generating new business.
There's quite a bit of talk among the institutional lending community about how they can be competitive in a market which is becoming increasingly dominated by the major CMBS players. Most are looking for niche lending opportunities where they can offer both expertise and speed. Several survey members noted that they had an increased interest in student housing while others were seeking opportunities in the mini-warehouse and storage business, and loans to investment-grade credits.
In early December, activity in the CMBS arena was still running at a frantic pace. Merrill Lynch, CS First Boston and Deutsche Morgan/Goldman Sachs were each putting the finishing touches on securitizations which will be in the $1 billion range.
Through the middle of November, the CMBS market had a rather dour feeling to it. Buyers and dealers were all complaining about the large year-end issuance schedule, and most players felt that the market would have a good case of indigestion while absorbing all of the new transactions. But in late November, a $2.2 billion securitization led by Lehman Brothers and First Union went to market and was surprisingly well-received, even though spreads had to be widened to absorb the huge amount of product. 'AAA' spreads, which hit a low of 0.62% in the summer, widened to 0.83% on the, while 'BBB' bonds were priced at 1.45% over the Treasury curve, some 0.50% above the low point. Once the Lehman/First Union transaction cleared, the mood in the market seemed to change almost immediately.
One positive factor cited by several CMBS analysts was the emergence of Freddie Mac last month as a major CMBS buyer. In an $870 million securitization offered by NationsBank and Citicorp, Freddie Mac offered to buy some $350 million to $400 million of the 'AAA'- and 'AA'-rated classes. According to one money manager, the presence of such a huge new buyer could have "tremendous spread implications," meaning that spreads could tighten significantly in the near future.
In mid-December, CS First Boston was planning to come to market with a $1.47 billion securitization that stood to be well-received. According to a major money manager, spread talk on the $540 million 'AAA'-rated A1-C tranche was cautiously estimated to be in the 0.80% to 0.85% range. Such a wide spread range seems to indicate that, despite the renewed positive spirit in the market, underwriters aren't firmly convinced that spreads have reached their peak and are starting to turn around.
Wall Street has never lacked for innovation, and the buzz today is about a new financial structure called a FASIT, or Financial Asset Securitization Investment Trust. This new vehicle will allow increased flexibility when dealing with commercial mortgages in that it allows collateral to be swapped into and out of the trust -- something current structures do not offer. More than a few Wall Street names, including Nomura and CS First Boston, are currently exploring ways to utilize FASITs so that commercial mortgages can perhaps be offered in the future without prepayment penalties. To be sure, this won't be smooth sailing as all of the tax regulations surrounding FASITs have yet to be issued. Nevertheless, a commercial mortgage industry without prepayment penalties would fundamentally change the commercial mortgage business.
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John B. Levy is president of John B. Levy & Co. Inc. in Richmond, Va.