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Conduit Shops Open, But GSEs Still Dominate - 02/01/10
By Jerry Ascierto

While the CMBS market continues to struggle with record-breaking delinquency rates, several conduit lenders are cautiously re-opening their shops.

Word on the street is that JPMorgan Chase, Deutsche Bank, Goldman Sachs, and Bridger Commercial Funding are still originating CMBS loans, while Citibank expects to start looking at loan submissions soon.

But the rates and terms offered by these lenders just can’t compete with Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA). As a result, the product is seeing more success with retail, office, and industrial assets, than with multifamily properties.

Unable to Compete
Most of the shops looking for securitizable loans are talking a maximum 70 percent loan-to-value (LTV) and a minimum 1.30x debt service coverage ratio (DSCR), with 25-year amortizations. And these active CMBS players are generally quoting 10-year loans in the high-7 percent to mid-8 percent range. In contrast, all-in rates from the government-sponsored enterprises (GSEs) and FHA are still mostly under 6 percent, plus the leverage levels and DSCRs are more favorable.

Warehousing risk is one of the main concerns holding many lenders back. CMBS loans are “warehoused” or held on a balance sheet before they are securitized, and given the CMBS industry’s cloudy outlook, lenders are balking.

“It’s very difficult to price, structure, and underwrite loans without good clarity on the back-end execution,” says Clay Sublett, national production manager and CMBS director for Cleveland-based KeyBank Real Estate Capital. “There are really two big risks: One is that there’s no disposition, and the second risk is, there is a disposition, but it’s not profitable.”

KeyBank was once one of the industry’s more active CMBS players, having originated about $2.5 billion in securitized loans in 2007. But like many banks, the company is spending more time thinking about older originations than newer ones. As it tries to reduce its real estate exposure, the bank may restructure some of its balance-sheet construction loans by extending them and fixing the rate.

“We are not currently considering new loans for securitization, but we’re looking at some of our existing loans with the idea that we might structure them into more securitizable type loans,” Sublett says.

Delinquency Rates Climb
Clearly, the hesitation for lenders is the climbing delinquency rates of CMBS product. January saw another wave of such delinquencies, according to two recent reports. The percentage of multifamily CMBS loans that are delinquent by 30 days or more reached 9.71 percent, according to market-research firm Trepp. If factoring in Stuyvesant Town/Peter Cooper Village, that rate would reach all the way up to 13 percent.

But the percentage of multifamily CMBS loans that are delinquent by 60 or more days is around 8.3 percent, according to Fitch. In January alone, 248 commercial real estate loans totaling $4.7 billion were transferred to special servicing.

There are a couple of reasons why the multifamily industry has the highest CMBS delinquency rate amongst real estate sectors, and they both concern the GSEs, according to Sublett. First, CMBS originators wanted to get a certain percentage of multifamily loans into each CMBS pool, so that Fannie Mae or Freddie Mac would view it as a qualified investment and buy the bonds.

But getting that percentage of multifamily loans was difficult because conduit lenders had a hard time competing with the GSEs, not only in proceeds and rates but also because the GSEs offered supplemental loans. “So the loans the CMBS originators got in the multifamily space were generally lower-quality borrowers and properties, and they had to stretch to get the product,” Sublett says.

Where did it all go wrong? CMBS loan originations became a pure volume game as lenders threw prudent underwriting practices out the window. And the creation of the Collateralized Debt Obligation market, where B-piece buyers could further sell off risk, was the beginning of the end.

“When the B-piece buyers found a way to further sell off the risk, they were much more willing to take riskier loans,” Sublett says. “Some of it was just the natural Wall Street extension of [the idea that] if a little bit is good, a whole lot is better. The thought was that any loan you could get through the securitization meat grinder was a good loan, because you made money on it.”
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