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Going-out-of-business sale liquidates CMBS supply

The commercial mortgage-backed securities (CMBS) market was the scene of a "going out of business" sale as Nomura Securities began to liquidate the huge supply of mortgages originated by its once high-flying affiliate, Capital America.

Nomura's fixed-rate securitization, known as Commercial Mortgage Asset Trust C1, consisted of 230 loans for a total of $2.375 billion and was led to market by a joint team of Lehman Brothers and Goldman Sachs. Gauging the appropriate spread levels proved to be extraordinarily difficult. For example, price talk for the $800 million A-3 class rated triple-A originally was in the 1.3% to 1.33% range, but skyrocketed to 1.45% when the dust finally settled. Interestingly, almost immediately after closing, spreads on that class tightened .08% - .10%, leading some market analysts to question whether Nomura had in fact found the best deal.

But, although the backseat drivers were clearly in abundance, it was a complicated transaction to price, given the fact that Nomura is no longer an active participant in the market.

Approximately 40% of the collateral pool consisted of premium, or "buy-up" loans, where the borrower agrees to pay a higher than market rate in return for somewhat greater proceeds. Adding credence to the pricing complexities, late last week some of the bonds, including those from the Class-D rated triple-B, had still not been sold, even though the spread was an extraordinarily wide 3.65% over comparable term Treasuries.

Rising Treasury rates have done nothing to encourage borrowers, and in fact, a number of life insurance companies indicated that their pending list of new deals was beginning to significantly erode.

Interestingly, in spite of rising rates, there seem to be more than a few extraordinarily large deals shopping for long-term fixed-rate financing. Perhaps the one grabbing the most attention is a package of approximately 22 regional shopping centers owned by General Growth Properties, the Chicago-based retail REIT (NYSE: GGP). General Growth is soliciting financings which will total approximately $1 billion to $1.2 billion and is willing to break up the malls into smaller pools if that would lead to lower pricing. Officials at General Growth indicated that some of the malls were being financed by insurers while other pools were attracting Wall Street attention.

Notwithstanding higher Treasuries, the CMBS market was on a tear in the first quarter. In fact, the securitizations totaled slightly more than $18 billion, which was 20% greater than the previous record set in last year's first quarter. But that number is a bit misleading as second quarter volume this year will be 30% less than the first quarter's torrid pace. Most analysts are expecting a second quarter total in the $11 billion to $12 billion range. As a result, many are already suggesting that the slower pace of securitizations will mean that CMBS spreads will tighten again.

From a loan delinquency point of view, there is every reason to believe that spreads should continue to tighten. In fact, delinquencies, as tracked by the American Council of Life Insurance, are now at their lowest level in 30 years. Apartments garnered the lowest delinquency rates, while office and hotels brought up the rear. But delinquencies are a trailing market indicator, and it is hard to predict what effects an economic slowdown will have.

There is currently almost a feeding frenzy going on in the market for apartment mortgages. Wall Street investment banks are eager to make multifamily mortgages because CMBS buyers like to see apartments make up a large percentage of securitization pools. But two government-sponsored enterprises, Fannie Mae and Freddie Mac, are on a rampage and seem to be gobbling up every multifamily mortgage they can find at prices that Wall Street simply cannot duplicate. Meanwhile, apartment owners are taking advantage of all the attention and are able to gather extremely attractive mortgages for their existing properties.

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