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CMBS volume in 2001 sets record

The calendar for commercial mortgage-backed securities was chock-a-block with new offerings in November as borrowers scrambled to lock in low interest rates.

According to a survey of 30 commercial mortgage professionals in the Barron's/John B. Levy & Co. National Mortgage Survey, catching low rates is no easy job. After hitting a low of 4.22% in early November, rates on 10-year Treasury issues skyrocketed to 5% just two weeks later.

CMBS volume may break the previous 1998 record of $78 billion. To date, some $72 billion has been brought to market, and that total will top $80 billion — a performance all the more amazing because the industry effectively shut down for six weeks after the terrorist attacks of Sept. 11. (Editor's note: As of press time, statistics provided by Commercial Mortgage Alert (CMA) indicate the record will be shattered. CMA is projecting $35 billion in CMBS issuances in the fourth quarter alone, which would push the 2001 total to nearly $95 billion.)

Simple security

The market clearly likes simple, fixed-rate CMBS, and Wall Street is ready to accommodate. A $1.21 billion issue from Lehman Brothers and UBS was due to close the first week of December, followed closely by a $1.04 billion issue from J.P. Morgan Chase. Floating-rate loans, on the other hand, are often made on transitional projects, and investors are wary of their additional leasing and development risk — a wariness that could offer buying opportunities.

Normally, the triple-A tranche in floating-rate transactions would be priced at the London Interbank Offered Rate (LIBOR) plus 28 to 32 basis points (100 basis points equals 1%), or approximately 18 to 20 basis points over credit-card securitizations. One well-regarded analyst called an $847 million floating-rate deal from Morgan Stanley, priced at 55 basis points over LIBOR, a “screaming buy.”

The three credit-rating agencies — Moody's, Standard & Poor's and Fitch — are battling for market share centering on an arcane type of security. CMBS investors have been buying the triple-B and double-B tranches from various securitizations and packaging them with the debt of REITs and residential mortgages into new securitizations called collateralized bond obligations (CBOs).

Another notch on the belt

Moody's clout in this relatively small section of the business may significantly impact the primary business of rating new securitizations. In essence, the agencies “notch” each other's transactions when rating a CBO. That means an agency lowers the ratings one or two grades for each piece of collateral it did not originally rate. Since Moody's is the dominant CBO rating agency, the failure to have Moody's rate a new securitization means that some CBO buyers will refuse to buy the non-Moody's-rated collateral or, if they do buy, it will be at significantly lower prices.

In a recent offering, GE Capital's triple-B issue was priced to yield some 10 to 15 basis points more than a Moody's issue. According to one major investor, “notching is just a money grab” by Moody's to edge out Fitch from the CMBS business, which Moody's denies. John Strain,a managing director at Morgan Stanley, noted that “the notching methodology isn't derived from a statistical analysis of the competitor's deal performance.”

Rating agencies counter by saying that notching is necessary because of philosophical differences among agencies and the agencies' lack of understanding of their competitors' methodologies. But privately, they're willing to admit that notching is intended to preserve a larger market share of the CMBS market.

John B. Levy is president of John B. Levy & Co. Inc. (, Richmond, Va., © Dow Jones & Co. Inc. © Dow Jones & Co. Inc.

Barron's/John B. Levy & Co. National Mortgage Survey

Selected CMBS Spreads (in basis points, or hundredths of a percentage point)
To 10-year U.S. Treasuries
Rating 12/03/01 11/05/01
AAA 136 - 138 125 - 126
AA 154 - 156 142 - 144
A 179 - 182 167 - 170
BBB 232 - 237 214 - 219
BB 550 - 565 560 - 575

Whole Loans (Interest rates)
Term of Loan Prime Mtge.
Range 12/03/01
Mtge. Rate
Prime Mtge.
Range 11/05/01
5 years 6.38 - 6.48% 6.43% 6.25 - 6.75%
7 years 7.00 - 7.10 7.05 6.62 - 6.87
10 years 7.08 - 7.18 7.13 6.75 - 7.00
For loans of $5 million and up, on amortization schedules of 25-30 years, that can be funded in 60-120 days, with 0-1 point.

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