Commercial mortgage rates declined slightly over the last 30 days, according to the Barron's/John B. Levy & Co. National Mortgage Survey. The Barron's/Levy 10-year prime rate as October began was 8%.

Activity normally heats up after Labor Day, and this fall was no exception. However, last year many institutional lenders had already filled their production goals for the year and as such were in a "yield mode," only looking for transactions at higher than normal rates. But this year is quite different. To be sure, there are a number of lenders flashing the "yield mode" sign, but they seem to be in the minority. Lenders are still interested in doing more business for 1996, and more than a few are already lining up their first quarter 1997 pipelines.

Although loan demand seems adequate for most survey participants, whole loan spreads continued to be under pressure, especially for deals that are viewed as low leverage. Several survey members indicated that they were willing to offer spreads below 1% for loans-to-value, which were no greater than 40%. An additional group of lenders was offering spreads which ranged from 1% to 1.25% for loans which were less than 50% of the property's value.

As we indicated last month, a number of large life insurance companies are in the market to sell a portion of their existing commercial mortgage portfolio. Last week, Teachers Insurance and Annuity Association (TIAA), the giant New York-based insurer, announced that it had sold more than 40 loans, worth approximately $850 million, to Morgan Stanley. The investment bank intends to securitize the portfolio at some later date. Approximately one-third of the loans were on major shopping malls, while a significant number of the transactions consisted of loans which were now performing but had been previously restructured. TIAA is not alone in its attempts to show that its whole loan portfolio can be quickly and efficiently sold. This "merging" of the whole loan market and the commercial mortgage-backed securities (CMBS) market is sure to accelerate in the coming year. A number of large institutions have already determined that they can originate more loans than their own portfolios need, so more large-scale sales such as TIAA's are sure to follow.

Activity was not only heavy in the whole loan market but also in the CMBS market as well. Nomura Securities International, which has been responsible for some of the largest CMBS transactions, is back in the market with a new $807 million transaction dubbed "D3." The securitization consists of 145 properties, which they directly originated. The word on the street is that the three AAA tranches could attract pricing in the .50% to .75% range depending on the maturity of each tranche. Spreads for this nine tranche securitization range are upward to 6.25% to 6.50% for the below investment grade-rated "B" tranche. The market seems to be fairly excited about this transaction because virtually all the loans are locked to prepayment for the life of the mortgages making the predictability of cash-flows more certain.

The other hot deal on the CMBS side is the Lehman Brothers' securitization of the noninvestment grade tranches from Confederation Life. Lehman, in a sale dubbed a "whopping success" by market analysts, offered the $1.6 billion investment grade tranches in February of this year. The noninvestment grade mortgages consist of five classes which start at BB and go through nonrated. This $330 million securitization is perhaps the largest noninvestment grade CMBS transaction offered to date and, as a result, is expected to draw a great deal of attention.

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