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October 3, 2008 - Marcus & Millichap

Ending one of the most volatile weeks in U.S. financial history, fixed-interest rates for multi-family and commercial loans fell across the board as agency lenders came down about one-quarter percent and commercial banks pricing off of swaps lowered rates by a similar margin. Many banks that are exercising extreme caution in the face of liquidity concerns held back on taking new applications or looked to combine their loans. In spite of the approval by the House of the rescue package today, economic worries dominated the market as stocks fell and demand for short-term securities rose, pushing down yields. The good news is that there is money available for well-situated and first-rate properties in healthy markets. A s swaps have fallen, we have been able to deliver rates for three-year loans at below 5.5 percent.

Fannie, Freddie Still Lending; Tighten Spreads

Sep 19, 2008 - CRE News

Federal Housing Finance Agency earlier this week said that Fannie Mae and Freddie Mac, which are now under its control, will continue to operate its multifamily business "as usual."

The agency said it "recognizes the importance of all aspects of the enterprises' multifamily businesses ... for a healthy secondary market and for housing affordability." It specifically cited their low-income housing tax credit operations, and added, "In particular, support for multifamily housing finance is central to the enterprises' public purpose."

Fannie and Freddie's conservatorship, it said, doesn't impact their "authority ... to enter new contracts," which would include mortgages on multifamily loans.

Indeed, lenders are still actively quoting loans for the two agencies. And spreads on the loans have actually tightened in the last week, by roughly 10 basis points for Fannie loans and 11 bp for Freddie loans, which have since widened a bit. That was in the face of a broad market-wide meltdown that saw CMBS spreads balloon by roughly 90 basis points and effectively shut down all sorts of lending.

Today, Fannie 10-year loans were being quoted in a range of 250-255 bp over Treasurys, while loans with shorter terms were slightly wider. Loans with seven-year terms are being quoted at a spread of 290 bp and five-year loans are at 310 bp.

Loans from Freddie carry similar spreads.

The two agencies, along with Housing and Urban Development loan programs, are among the only providers of credit for commercial real estate at the moment. "The best deal out there now is HUD," said one mortgage intermediary. He said the agency can provide financing for a multifamily project at an all-in cost in the low-7% range.

CMBS lenders are basically out of the market because the wild swings in the prices for bonds have made it impossible to profitably price a loan. And few life companies are willing to lend on anything but the most stable properties. Because of the volatility in all markets, it has become impossible for them to quote loans.

That leaves commercial banks and the agencies. And commercial banks are becoming ever-more cautious in lending, in light of tightened regulatory scrutiny.

The National Multi-Housing Council noted that as a result of the federal takeover of Fannie and Freddie, the two agencies' retained portfolio would be allowed to grow to $850 billion through next year, which "should benefit the apartment sector." It added that it was working with the agencies' conservator, Federal Housing Finance Agency, "to ensure that the long-term plans for the (government-sponsored enterprises) do not negatively affect their ability to serve as the key source of mortgage capital for the apartment industry." That would include their investments in CMBS, which are generally backed solely by apartment collateral.

Freddie and Fannie have been very active players in the CMBS market. Fannie, which started buying CMBS just two years ago, held $25.6 billion of AAA bonds as of last March. And Freddie's portfolio totaled $64.8 billion. Combined, that amounts to 12.2% of the entire CMBS universe. If there were doubts about their ability to continue holding those bonds, it could further pound CMBS values.

The Council said it has stressed to the agencies' conservator that allowing them to continue writing apartment loans and keep those loans on their balance sheets "will not adversely affect their soundness, since multifamily loans represent a small portion - less than 12%" of their portfolios. Delinquencies for apartment loans held by the two agencies have remained tiny, with Fannie's at 0.11% and Freddie's at 0.03%.

"We will continue to work with regulators and lawmakers as the situation evolves and will continue to make the case that one key reason the apartment sector is out-performing nearly every other real estate sector is because of the capital provided by Fannie Mae and Freddie Mac in the midst of the current fiscal crisis," the Council said.

Copyright © 2008 Commercial Real Estate Direct, a service of FM Financial Publishing LLC. All rights reserved.

 

 

 Over 16% of Loans Securitized on Watchlist

Jul 14, 2008 - CRE News

A total of $30.3 billion, or 16.2% of all commercial mortgages that were securitized last year are on master servicer's watchlists, according to analysis by Credit Suisse.

In contrast, $64.2 billion, or 12.3% of the $521.2 billion of mortgages that were securitized between 1996 and 2006 are on watchlists.

The increasing propensity for 2007 loans to move onto watchlists is a clear indication of the liberal loan underwriting practices that were prevalent last year. Often, loans were provided based on projected, or pro-forma property cash flows, as opposed to existing cash flows. Trepp, LLC found that 1,096 pro-forma loans, with a balance of $28.9 billion, back the CMBS transactions that make up the five CMBX indices. A total of 13.6% of the loans, by balance, that comprise the CMBX.4 index were underwritten based on projected operating results, as opposed to actual results. That percentage inched down to 10.7% for CMBX.5. The CMBX indices are supposed to be fair samples of the market in general.

Trepp found that only 104 of the 853 pro-forma loans included in the first four CMBX indices so far had met their projected performance parameters.

Credit Suisse's analysis found that 80.3% of the 2007 loans on watchlists had debt-service coverage levels of less than 1.1x, or had other cash-flow related issues. Those might include delinquency of mortgage payments or property taxes. A total of 70% of the watchlisted loans were tagged because of low DSC levels. In contrast, only 46.2% of the $361.6 billion of loans securitized between 1996 and 2005 and are now on watchlists have low debt-service coverage levels.

Another 7.7% of the 2007 watchlisted loans had occupancy or tenant-related issues at their collateral properties.

Loans are placed on watchlists by CMBS deals' master servicers for a variety of reasons, including low debt-service coverage ratios, borrower bankruptcy, lease defaults or pending maturity. While placement on a watchlist doesn't necessarily indicate imminent default, it is usually a sign of stress and a fairly good predictor of future problems.

A major reason for the low debt-service coverage levels, at least for recently securitized loans, is that operating expenses often are greater than anticipated, while revenue has fallen short. Among the largest recent-vintage loans on watchlist is a $550 million mortgage on Wells Fargo Tower, a 1.4 million sf office building in Los Angeles that was securitized through GS Mortgage Securities Corp. II, 2007-GG10. The property generated $31.6 million of net cash flow last year, just under its $32.3 million annual debt-service obligation. But it was underwritten under the assumption that it would generate $37.6 million of net cash flow. Leases governing about 41% of the property come due within the next four years. And those leases pay rents of less than $22/sf - far lower than the market's $32/sf average. So it's highly likely that the property's cash flow will indeed climb in the coming years, as existing leases roll over with higher rents.

Another large loan plagued by a low debt-service coverage level is the $325 million mortgage on Presidential Towers, a Chicago apartment complex with 2,346 units. The loan was securitized through Banc of America Commercial Mortgage Trust, 2007-3, and generated $18.3 million of net cash flow last year, which is just about equal to its annual debt-service requirement. Unlike most other mortgages that were underwritten with hefty projected increases in revenue, the loan on Presidential Towers was underwritten with a debt-service coverage level, based on net cash flow, of 1.03x. So even at origination, it would have made it onto a watchlist.

The property is owned by a venture of Waterton Associates and the California State Teachers' Retirement System, so it is viewed as a low default risk. It is 90% leased, which is low relative to the market's 95.5% occupancy average.

Copyright © 2008 Commercial Real Estate Direct, a service of FM Financial Publishing LLC. All rights reserved.