In a market best described as jittery, commercial mortgage spreads widened in March, while interest rates stayed enticingly low, according to the Barron's/John B. Levy & Co. National Mortgage Survey. The market's nervousness couldn't be ascribed to any one factor, but rather to a general concern about the economy's lack of strength and a perception that this could have a significant impact on the real estate and mortgage business. March was an extremely active month, whether for commercial mortgage-backed securities (CMBS) or for whole loans.
Mortgage delinquencies do, in fact, appear to be on the rise. According to a recently published study by Salomon Smith Barney, overall CMBS delinquencies are up from 0.76% at year-end 2000 to 0.98% at the end of first-quarter 2001. The cause of the first quarter rise was attributed to increases in hotel and retail delinquencies, neither of which surprised savvy market observers. Hotels, which were 1.39% delinquent at the end of the year, rocketed to 2.31% at the first quarter's end, while retail, which ended the year at 0.58%, moved sharply higher to 0.84% at the end of the first quarter. Office delinquencies declined, while multifamily and industrial delinquencies were up. The report's author, Darrell Wheeler, noted that the increased delinquencies were mostly caused by 1997 and 1998 securitizations, which experience increasing delinquencies as they age.
The market's edginess once again sent swap-adjusted spreads higher. According to J.P. Morgan Vice President Pat Corcoran, triple-A swap-adjusted spreads are at their highest levels since the long-term capital debacle in the fall of 1998. The stock market's recent roller coaster ride may in fact be the commercial mortgage market's savior. Many money managers are sitting on the sidelines with cash gained from exiting the stock market and are waiting for spreads to peak before they pounce. To be sure, predicting spread peaks is a dangerous job, but survey members last week seemed to be of a mind that buyers would flood the market when 10-year, triple-A rated CMBS was available at interest rate swaps plus 0.60%. Despite the high spreads, Pacific Investment Management Co.'s Scott Mather said: “We see better spreads on the horizon, so we're keeping our powder dry.”
The April CMBS calendar was robust, but a new accounting rule change by the Financial Accounting Standards Board, known as FASB 140, could be a fly in the ointment. The rule, which went into effect on April 1, required most securitizations as currently structured to be treated as “financings” rather than as “sales,” which are preferable. Until the new rule is clarified or modified, many originators were expected to postpone their April offerings.
| Selected CMBS Spreads (in basis points, or hundredths of a percentage point) | Whole Loans (Interest rates) | |||||
|---|---|---|---|---|---|---|
| To 10-year U.S. Treasuries | Prime Mtge. Range 04/02/01 | Prime Mtge. Rate | Prime Mtge. Range 03/05/01 | |||
| Rating | 04/02/01 | 03/05/01 | Term of Loan | |||
| AAA | 150 - 152 | 135 - 137 | 5 years | 6.85 - 6.95 | 6.85 | 6.78 - 6.83 |
| AA | 169 - 171 | 151 - 153 | 7 years | 7.19 - 7.29 | 7.19 | 7.05 - 7.15 |
| A | 185 - 188 | 167 - 169 | 10 years | 7.29 - 7.39 | 7.29 | 7.15 - 7.25 |
| BBB | 240 - 245 | 213 - 218 | 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. | |||
| BB | 525 - 550 | 525 - 540 | ||||
The CMBS calendar was chock-a-block with activity as four major deals priced in late March. The last of which was an $864 million offering of 101 loans from GMACCommercial Mortgage, with underwriters led by Goldman Sachs and Deutsche Bank. The A-2 class, rated triple-A, priced at interest-rate swaps plus 0.54%, right in the middle of dealer expectations. Multifamily loans accounted for 30% of the securitization, which enticed Freddie Mac to buy some $400 million of the $546 million A-2 class. The A-2 spread was viewed as surprisingly tight since just three days earlier a similar-sized securitization from PNC Bank and ABN/AMRO had priced at interest swaps plus 0.59%. Traders attributed the pricing difference to Freddie Mac's involvement in the GMAC offering. The class F, rated triple-B, wasn't as well-received. Initial expectations were interest-rate swaps plus 1.40%, but swaps plus 1.50% were needed to clear the market. Freddie Mac bought $450 million of the First Union/Bank of America securitization, which priced a week-and-a-half before GMAC.
Loan originations this year were supposed to be weak, but the interest-rate decline has seemingly brought borrowers out of the woodwork. Institutional lenders noted that many of their clients are electing to finance properties rather than sell them due to the cheap level of rates and a decline in activity in the sales market. Despite retail delinquency news, institutional lenders are still chasing grocery-anchored shopping centers. They argue that these centers tend to keep their value regardless of general economic conditions.
John B. Levy is president of John B. Levy & Co. Inc. ( www.jblevyco.com ) in Richmond, Va. © Dow Jones & Co. Inc., 2001.