Life firms take advantage of 'amazing turn of events' The whole-loan market and the commercial mortgage-backed securities (CMBS) market traveled two entirely different roads during October, according to the Barron's/John B. Levy & Co. National Mortgage Survey. The whole-loan side witnessed a feeding frenzy as insurers rushed to lock in record high spreads and conservative underwriting terms. On Wall Street, CMBS spreads also reached record highs, and new originations ground to a trickle, though by the end of the month a glimmer of light was beginning to shine.

On the whole-loan side, insurance company managers were a gleeful bunch as they were able to glean through an incredibly large number of new loan offerings. Some of the offerings came from borrowers who were accustomed to dealing on Wall Street and now found the normal conduit sources to be on the sidelines. Whole loan lenders were continuing to offer mortgages at extraordinarily wide spread levels, while at the same time setting a floor rate. Floor rates seemed to vary from 6% to 7%, depending on loan term and the appetite of each institutional lender.

Virtually the only negative in October on the whole-loan side is that more than a few insurers are short of long-term seven- to 10-year mortgage money. As a result, they are encouraging their borrowers to take shorter term three- to five-year transactions.

In what many life insurance company executives see as an amazing turn of events, a number of conduit lenders are now asking life insurers to buy their previously closed whole-loan inventory. Capital America, for example, is reportedly showing a $6 billion portfolio of existing whole loans to life insurance companies and offering them a chance to "cherry pick" any individual loans which they wish to buy. Officials at Capital America declined to comment.

Due to spectacular spread increases in the third quarter, whole loans dramatically underperformed duration-adjusted Baa bonds, according to the Giliberto-Levy Commercial Mortgage Performance IndexSM. Mortgages showed a total return for the quarter of a scant 0.97%, while bonds registered a healthy 3.11%. For the last 12 months though, the numbers are somewhat different as commercial mortgages registered a 9.41% total return as compared to a bond return of 9.10%.

The CMBS market spent most of October in the tank as spreads rocketed to record levels. By midmonth, AAA spreads were in excess of 200 basis points, while BBBs weighed in at 325 basis points. At month's end, AAAs had shown a strong rally as concerns about hedge fund positions and macro-economic events had subsided somewhat. To be sure, though the AAA market had tightened some 40 basis points, it was based on limited demand. Lower rated classes were still best described as weak.

Perhaps partially contributing to the improved tone of the market was a reported sale of Long Term Capital Management's entire CMBS portfolio to PIMCO. Reports that the $4.2 billion portfolio had been placed seemed to calm the market. Officials at PIMCO declined to confirm or deny the sale. Officials at Long Term Capital also declined to comment.

A miniboom of new conduit offerings is scheduled to hit the market within the first couple of weeks of November, testing the appetite of buyers for new originations. The first deal to be priced may be a $1.6 billion offering from NationsBank/BankAmerica to be followed by offerings from Morgan Stanley/Heller, Chase Securities, and Donaldson, Lufkin & Jenrette. Some analysts feel that spreads will tighten somewhat from their current levels because the new crop of securitizations are being offered at spread levels which are dramatically above levels that prevailed this summer.

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