Commercial mortgage interest rates were lacking direction during September according to the Barron's/John B. Levy & Co. National Mortgage Survey of major institutional lenders nationwide. The benchmark 10-year prime mortgage rate declined 1/8% to 7 3/4%, which is viewed as a bargain by most large borrowers.

Normally, Barron's/Levy Survey conversations focus on deals and current trends in the public and private commercial mortgage industry. Interestingly, this month the survey resembled more of a "job fair" than a lending forum. American business in general and the insurance industry in specific are presently going through dramatic changes, which often result in either "downsizing" or "rightsizing." The current rash of mergers, including the acquisition of Connecticut Mutual by Massachusetts Mutual Life Insurance Co. and the acquisition of New England Life by Metropolitan Life Insurance Co. to name just two of the larger transactions, has many people justifiably worried about their futures. Additionally, a number of lenders, including Provident Life & Accident, State Mutual, Aetna Life & Casualty and Confederation Life are either selling huge chunks of their own portfolios or reducing their commercial mortgage exposure, which is forcing many of their experienced hands to explore "networking" as a source of potential new job opportunities.

On the CMBS front, most eyes were focused on securitization by Provident Life & Accident of Chattanooga. They have recently securitized virtually all of their commercial mortgage loan portfolio. The transaction is expected to total about $960 million and consists of some 368 loans. Investment bankers, led by Merrill Lynch & Co. and Morgan Stanley & Co., have structured the transaction into some 10 tranches. The bulk of these are investment-grade rated and run the gamut from AAA to BBB; these will be placed in the public bond market. The below-investment-grade pieces, including those rated BB, B and an unrated tranche, are being pushed to the private market. Buyer interest appears high in this securitization, which consists solely of performing loans.

Institutional lenders are always looking for a niche that will allow them to achieve superior returns without taking excessive risks. A handful of survey members are now chasing the tax-exempt mortgage business and are finding the results to be more than satisfactory. A large number of real estate projects built in the 1980s were financed using tax-exempt bonds. Now, many of these loans have matured and borrowers are looking for lenders to buy these bonds and pay off the existing lender. Obviously, all of these properties have long track records, so there is not much guesswork to do when estimating how they will perform. Additionally, there is not a large group of buyers looking for these transactions. As a result, spreads and underwriting are quite desirable. Because pension funds cannot use tax-exempt income, they are not interested in these loans.

As noted in previous surveys, a fair number of lenders are on the sidelines presently, having done their entire allocation for 1995. Naturally, another group of institutions has seized the opportunity to increase its originations, sensing that spreads have widened and underwriting has become more conservative while these players are "out of the market." But, 1996 is right around the corner, and this window would seem to be open for only another 30 to 45 days at the most. Then, most analysts expect it to be back to competitive business as usual.

When it comes to "hot" property types, multitenant industrial facilities are superheated. Lenders have no real love for warehouses that are a combination of office and warehouse. But, bring them a straight, industrial warehouse with trucking rail access, and they will salivate, especially if the loan is part of a larger package. Most survey members are "underweighted" in the industrial sector, which further stimulates their interest.

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