New commitments almost reached for year

Commercial mortgage rates have remained remarkably stable over the last 30 days according to the Barron's/John B. Levy & Co. National Mortgage Survey. This is despite a jittery Treasury market which moved nervously with each new economic statistic. Borrowers continued to flood the market with new offerings, locking up long-term fixed-rate money at rates only seen once before in the past 20 years.

As a result of this strong borrower interest, commitments issued by survey members skyrocketed. In some cases, survey members reported that they were issuing new commitments at two to three times the level to which they have become accustomed. To be sure, most survey members weren't quite that busy, but on average, survey members found their loan commitments up more than 1 1/2 times the normal level. Several survey members said they were as busy now as they were in 1986, when rates fell and borrowers surged into the market.

Because of this strong increase in loan commitments, a number of institutions have almost reached their total commitment program for the entire year. At least one "mega lender" has decided to sit on the sidelines for a while and is only entertaining selected transactions.

For most of this year, commercial mortgage spreads have been under pressure. But the flood of new business has clearly caused them to stabilize. To be sure, for loans which are for less than 60% of the property's value, the competition is still quite fierce. Shopping malls are a prime example. A recent four-mall securitization by Equitable found buyers for the AA tranche at 85 basis points over Treasuries. But as lender appetites are filled, institutions appear to be under less pressure to reduce spreads, to capture new business.

The Commercial Mortgage-Backed Securities (CMBS) market has suddenly sprung to life after a reasonably slow first half. Late in June, the Resolution Trust Corp. (RTC) brought its "C1" transaction to the market where it was extraordinarily well received. The $853 million transaction was oversubscribed in many classes which showed that the CMBS market was starved for product. This securitization was no doubt helped by the National Association of Insurance Commissioners' (NAIC) recent decision to let rated CMBS be treated as bonds for purposes of risk-based capital. Now that insurers had gotten the "all clear," they eagerly snapped up the issue.

Coming fast on the RTC's heels are at least four conduit securitizations which will total well over $1 billion, including two being underwritten by First Boston, one by Merrill Lynch and another by J.P. Morgan Securities. Today's extraordinarily low rates have also made this a fortuitous time for these investment banks to be in the market.

Pension funds are continuing to analyze and follow the commercial mortgage market for both securitized debt and whole loans. However, they are still behind the life insurance industry in their impact on the pricing and structuring of these transactions. Additionally, many major public funds are out of the market because the November elections led to changes in political leadership. These funds include the New York Common Fund, California Public Employees Retirement System and the Connecticut Trust Funds.

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