Activity increases and NAIC clears some hurdles

Commercial mortgage rates declined again over the last 30 days due to continuing improvement in the Treasury bond market. According to the Barron's/ John B. Levy & Company National Mortgage Survey, the Prime Mortgage Rate for a 10-year loan is now 8 3/8%.

Although the commercial mortgage market had its normal slow start in january and February, activity has picked up dramatically. Borrowers want to take advantage of today's seemingly attractive rates, while lenders are quite anxious to lock up business in order to meet their production goals. Because of the increase in the number of developers seeking financing for immediate funding, a number of survey members have cut back their appetite for deals which are to be funded in the future.

Surprisingly, several survey members reported that they are once again being asked to place mortgages on brand new projects. Though the conventional wisdom is still that there are no new projects being built, in fact, theseinstitutions are finding that there are a number of opportunities to provide financing on new apartments and so-called "big box" retail, where one single tenant takes a large amount of space.

In late April, the Invested Assets Working Group (IAWG) of The National Association of Insurance Commissioners (NAIC) again met to discuss commercial mortgage-backed securities and bonds issued by REITs. To the surprise of many observers, the meeting made substantial progress and cleared away a number of the hurdles which have existed since NAIC announced its "de facto" moratorium on rating new transactions earlier this year.

With respect to REITs, the IAWG agreed to let insurance companies carry rated REIT paper as Schedule "D" assets just as other corporate bonds are listed. These assets require only one-third to one-tenth as much capital as assets which are listed as commercial mortgages. Unrated REIT debt is still very much an open issue and subject to further discussion. On the commercial mortgage-backed securities side, the results were essentially the same. The IAWG agreed to allow rated CMBS transactions to be listed on Schedule "D," while leaving the question of unrated commercial mortgage-backed securities as an open issue. Industry observers have opined that unrated CMBS may not be allowed to be treated as bonds and may, in fact, be required to be listed under the commercial mortgage schedules.

In an additional move, the group agreed to include a number of transactions based on leases from credit tenants as Schedule "D" assets. Many of these deals had been previously described as "near misses." According to Larry Gorski, chairman of IAWG, the meeting lacked a quorum, but he expected to hold a conference call within two weeks which would formally rotify all of these changes. Needless-to-say, the rapidity with which these were handled surprised many observers and were viewed with special thanks by those on Wall Street who depend for a living upon the CMBS and REIT markets.

Although the CMBS market certainly greeted the NAIC's rulings with joy, 1995 has not been the best year for that segment of the business. Last 4% year, the CMBS market totaled about $20 billion. Some industry analysts are now projecting that the market will be lucky to produce $15 billion in new business this year, including a $3 billion securitization of assets from the liquidating Confederation Life Insurance Company. The insurance industry is continuing to be extraordinarily aggressive in offering pricing and terms which are in many cases not only competitive with the CMBS market, but even more attractive. Insurance companies can also fix the interest rate on a transaction long before the CMBS market. But, all this is subject to change as market forces continue to work on both sides of the transaction. It's best to keep in mind that it was less than two years ago that the CMBS market was the most efficient transaction available for many deals and the insurance company market was a poor second.

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