Posts Tagged 'cmbs'

Notes from CREF – Commercial Real Estate Finance Confrence

This week commercial lenders and brokers got together in Las Vegas to discuss the state of the commercial real estate business and to convince each other to do business.   The meeting was well attended and optimism was in the air.  Everyone thought business would be good this year, well at least in comparison to last year.   But how could it have been worse given in 2009 lending was way down and real estate values collapsed.   While this meeting was focused on all types of commercial real estate, but a large part of the focus was on apartment lending. 

There were not many new announcements from Freddie or Fannie.  Both lenders stressed that they will continue to support the market and that they do not expect government action to change their structure  or focus during 2010. 

HUD was one of the big topics of the conference.  Over the last year this has been a main lender for many brokers/mortgage bankers.  For years HUD has been seen as a process oriented lender and one that does not really look at risk in the same way as the rest of the market.  It looks like that might change.    As mentioned in previous postings, HUD is planning on changing their underwriting criteria.   Based on comments made at the MBA it also seems that they will change their focus to a more market oriented approach.  Only time will tell.

Life Companies and  Conduits were abuzz about lending again.  Most Life companies were back in th market and a bunch of conduits were also back, at least for larger deals.   However, these lenders all indicated that they would not compete with Freddie and Fannie on apartment rates and therefore were focusing on other areas of commercial real estate.  It’s good that these lenders are back, but for now that won’t really effect the multifamily lending market.

There were no big announcements or sunrises at the meeting, but based on the tone and vibe at the event most professionals think commercial real estate lending may be ready to emerge from its cocoon.   I am not as optimistic and think we have another year or so before we start to see significant lending activity.    However, you have to walk before you run and I think we will be at least walking  (or crawling) this year.


CMBS is Back, Sort of.

Last year we saw some green shoots of CMBS issuance and lenders’ coming back into the market, but the New Year has seen real activity.  There are 5 major lenders who have reconstituted their programs, are hiring staff and marketing their programs.  This includes BOA, Citigroup, Goldman Sachs, JP Morgan/Chase and Bridger.

While this is exciting news, I don’t think it will have much effect on multifamily lending.   Given the economics of these deals they will not really compete with Freddie Mac and Fannie Mae and therefore will probably end up lending on other commercial real estate types.   Over time this might change.  We really don’t know what will happen with Freddie and Fannie as institutions or how their underwriting criteria might change.  For now they have a significant pricing advantage over CMBS and all other lenders, which makes them the lenders of choice.  However their underwriting does not fit every deal and as we find out what these CMBS lenders can really do they may be the right fit for some borrowers.

General Terms

Collateral:     Stabilized properties, all lenders will do multifamily and the three other main types of commercial real estate, but leverage will be adjusted depending on product.

Loan Amounts:   Most are looking for deals $10 million through $25 million, but one lender will look at smaller properties

Loan Term:     5, 7 or 10 year balloon loans

Maximum LTV:   60% – 75% depending on property type.  Multifamily is 70% – 75%

Minimum DSCR:    1.25 – 1.35 depending on property type, multifamily is 1.25x

Estimated Rate:     6.75% – 7.75%

Origination Fee:    1% to lender and probably another 1% to the broker/banker

Other Costs:     Typically $15,000 plus costs per loan

Prepayment:   Yield maintenance or defeasance, some lockout for the first couple of years.

In general the structures are similar to old CMBS deals, but the leverage is less and the underwriting scrutiny is higher.  For multifamily borrowers who fit into the Freddie or Fannie program that will be a better execution.  However, these programs might be a good fit for borrowers in secondary or tertiary markets where Freddie and Fannie are more conservative.  For now we will have to see what loans actually close with these lenders to see what they can really do and who they will really help.

TALF, CMBS and the future of CRE lending

First Developers Diversified, then Inland and now Flager.     These are the first few CMBS deals back in the market, some using TALF and others going naked on the sale of commercial real estate securities.  The real estate press is pushing these as the beginning of a new CMBS market.   Maybe that’s true, I’m not really sure.  But what I do know is this does nothing to help the typical borrower or owner of commercial real estate. 

It’s great that the big names with very strong balance sheets can tap into the market.  These deals were done at relatively low LTVs and with borrowers who have significant capital and Wall Street credibility.    It’s not surprising that with the current “euphoria” on an early end to the recession that these entities can borrower money from the public markets.  The question is when will these markets open up for deals with a mixed pool of properties and borrowers who don’t have a Wall Street “cache”.  I see no sign of this happening in the near future.

For now the markets still believe that commercial real estate values have further to drop.  I agree with this.  We are just starting to see foreclosed commercial properties hitting the lenders books and getting sold.  This distressed supply will continue to put downward pressure on values.  I am not even including the potential supply in loans that lenders are offering “kick the can down the road” workouts where they are extending the maturity hoping for a better value in the future.  If these properties see significant cash flow deterioration they will have to be sold or become bank REO putting addit5ional pressure on values.  From my perspective we will have to wait out most of 2010 before the markets are comfortable that there is a bottom in values.  Until that happens the capital markets can not even consider opening up.

For now I will continue to monitor these events since they do show some progress in the markets, but I won’t get too excited.   With the exception of multifamily debt, which the government is supporting through Freddie, Fannie and HUD, there is little hope for most borrowers to see an active lending market.  This means that unless you hare moderately leveraged you have to sit on the sidelines until the market recovers.  Even for Multifamily borrowers it’s mainly a waiting game.  If you have lower leveraged loans you can get a great rate today, but do not expect aggressive loan proceeds.    That was yesterday’s game and while it will occur again, we will have to wait until the capital markets really correct and lending is available.

The difference between 30/360 and actual/360 and why should you care?

Do you know how your lender calculates your monthly payment ad amortization schedule.   Its not as simple as you think.   In fact your lender may be calculating your payment differently than you expect or know.

A few years ago there was a lot of talk about payment methodology. People were talking about 30/360 payments, actual/360, actual/365 and all sorts of different methods to calculate your monthly payment.   From my perspective these various payment methods were just ways for lenders and brokers to hide the real deal and fool borrowers.  Today you don’t hear much about this issue, but its still an issue and one you need to understand in order to property evaluate your loan options.

For most of the 20th century, all lenders used a 30/360 calculation in determining your monthly payment.  They assumed every month had 30 days and each year had 360 days. This allowed for easy calculation of interest rates and amortization schedules. A 30/360 calculation is listed on standard loan constant charts and used by your calculator or computer in determining mortgage payments.

During the mid 1990’s the Wall Street lenders started using actual/360 or actual/365 payments in mortgages.  These are methodologies used in some other debt instruments sold on wall street.  These methodologies call for the borrower to pay interest for the actual number of days in a month. This effectively means that you are paying interest for 5 or 6 (on a leap year) additional days a year.  By doing this a lender can quote you a lower spread and rate on a transaction but actually collect the same or a greater amount of interest each year.    

The difference between actual/360 and actual/365 is the monthly payments not the overall yearly interest charge.  Both calculations charge you interest on the actual days in a month, but on the 30/365 loan your monthly payment is increased by the extra 5 (or 6) days of interest.  On an actual/360 loan the monthly payments are the same as on a 30/360 loan, but the amortization schedule is adjusted to account for the difference in interest.  Therefore, your balloon balance for an actual/360 loan would be slightly higher than for a 30/360 with the same payments. An actual/360 loan will have a balloon balance approximately 1% to 2% higher than a 30/360 loan with the same payment.

At current rates of about 6% the difference between an actual/360 or 365 loan and a 30/360 loan translates into about 8 Bps.  So in order to compare a 30/360 loan to actual/360 loan you should subtract 8 Bps or so from the 30/360 quote to put it in the same terms as an actual/360 or 365 quote. 

While the Wall Street conduit lenders started this trend, the Freddie Mac and Fannie Mae multifamily groups followed quickly behind.   Freddie and Fannie found they were losing deals to conduit lenders because of the quoted lower spread and its lower payment even thought he effective interest rate charge was the same or in some cases higher.  They started offering actual/360 loans in addition to 30/360 and today you can request a loan using either calculation.    Though the conduits are dead you still see most Freddie and Fannie quotes being offered as actual/360.    This is because it makes the rate sound better, lowers the monthly payment and makes it more likely the borrower will go ahead with the loan.   However this is not always te case so ask your lender what calculation method they are using.

While most Freddie and Fannie loans are being quoted as actual/360 this is not true of most other lenders.  FHA/HUD loans are quoted as 30/360 as are most life insurance company loans and almost all bank loans.   Therefore when comparing a Freddie or Fannie loan to a quote from another lender you must adjust for the payment methodology.

What’s the better methodology?  It really does not matter as long as you understand the difference.   Some people prefer actual/360 because it’s effectively a longer amortization schedule.  I personally prefer 30/360 because I can calculate the payment myself on my trusty HP 12c.  On an actual/360 loan I need an excel spreadsheet and still need to ask the lender for a printout of the actual payment and amortization schedule to make sure I am correct.   Whichever you prefer just remember to ask what payment methodology your lender is using so you can properly evaluate your loan quotes.

CMBS lending – Will it ever come back?

There as been a great deal of discussion about the future of CMBS and other types of securitized lending.  Will it ever come back? When will it come back? What will it look like when it does come back?   I have gotten a lot of questions about this since I wrote a blog posting on the Freddie Mac CME program.    Let’s get real, CMBS is not DEAD, but it is too early to know anything what the future will bring. 


Why am I so sure that CMBS is coming back?   Its simple, the capital markets are where the money is.    Lending has gotten too big to do it the old way with banks or insurance companies taking in money and then lending it out the back door.   And the ability for banks and insurance companies to get direct leverage from their own balance sheet is being limited not expanded.   Only through access to the capital markets will they be able to leverage their expertise and balance sheet to satisfy borrowing demand.   Once the general markets stabilize and there is confidence that the economy is strong, then CMBS will be back.  As long as the issuer can show they are really underwriting their loans and making “good” investment decisions the security investors will return.  They may require a higher interest rate, but they will return.


The most discussed issue relating to securitized lending is how to align the economic interests of the banks or originators and the security investors.  There have been many ideas discussed to accomplish this and its how CMBS was in the bad old days of the late 1990’s.  At that time the groups that originated the loans often bought the “B” or risky piece of the security so they made sure the loans were well underwritten and documented.  While its important to align the economic interests of the investors and originators (lenders) there are some legal issues that might be harder to overcome. 


You have probably heard the worries from lenders’ about the General Growth bankruptcy.  This is directly testing the issue of single asset entities.  In securitized lending each borrower is set up in a single asset entity so if it goes into default or bankruptcy the lender can cleanly foreclose on the property.   General Growth is a mall owner/operator which is the sole owner of a number of single asset entities.  These entities were set up for individual properties in order to accommodate the CMBS loans.   When General Growth went into bankruptcy it also took most of the individual single asset entities into bankruptcy.  They did this even though many of these properties were generating enough cash to pay their debt.  The concern of lenders is that the court might use cash flow and/or value from one entity to pay obligations of other entities.  In effect this would negate the benefit of single asset entities and make it harder for someone to lend on “just the real estate” and not the overall borrower.    How this will play out is still unclear, but this concern is buzzing around in the world of lenders.


Another, and from my perspective more worrisome, legal concern for securitization was recently highlighted in NY Times article Looking for the Lenders Little Helpers.   This showed how attorneys are claiming that the securities holders are really joint venture partners of the lender because the loans were created solely for the purpose of creating the securities.   This is an interesting approach and if it wins in court has the risk of putting the security holders and issuers in legal bed with the originator or lender.  This is effectively removing the holder in due course protection of a note holder and will mean the holder is liable for improper acts of the loan originator and could be responsible for statements, side agreements and promises of the loan originator.   This is a big deal.   From the article it sounds like courts are buying this argument for single family loans.  Whether this will fly on a commercial or multifamily deal is unknown, but its something we should keep watching.


If these legal issues do become the force of law it will drastically change the way securitized lending will occur.   It will also change how Freddie Mac, Fannie Mae and HUD financing occur since these lenders rely on the same legal standards.  However, these are issues that can be overcome.   Solving some of these issues may require new legislation or a different type of underwriting.  It may change how CMBS is originated or who does it and it will change what types of loans are available to the borrowing public.   However, I have herd it quoted that almost ½ of all lending in America was done on a securitized basis.  With the kind of money that generates we will find a way to save the baby and not throw it out with the bathwater.

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