New year starts on positive note, returns to normalcy

The commercial mortgage market started the new year on a reasonably positive note as life insurers were restocked with new funds and some sense of normalcy returned to the commercial mortgage-backed securities (CMBS) market. On the whole-loan side, interest rates showed very little change with borrowers battling to see whether they could command a fixed rate of less than 7% for a 10-year term. Although the CMBS market has by no means completely recovered from the fall collapse, new securitizations are being sold, and there was a distinctly more positive tone in early January than in late December.

In early January, Goldman Sachs was pricing an $890 million securitization comprised of collateral contributed by Goldman, Amresco Capital and Daiwa Securities. The marketing of this transaction actually began before the holiday break, and in fact, the entire two triple-A tranches totaling some $612 million were said to be pre-sold to Freddie Mac and one of the regional Federal Home Loan Banks. The spread was reported to be 1.35% over the 10-year Treasury, which, though slightly higher than the market at the time, was dramatically tighter than the market in late December when the spread was fixed. The transaction attracted agency interest because almost one-third of the collateral was comprised of loans secured by apartments. Goldman Sachs and Freddie Mac declined to comment on the transaction.

New issuance in the CMBS market reached a record in 1998 - $79 billion compared to $44 billion the previous year. But savvy market analysts say that there is virtually no chance for a replay of that level this year. Many originators have still not returned to full production and some, such as Nomura Securities' affiliate Capital America, have announced that they will not be returning to the business. Noting the lighter projected issuance volume, Jim Higgins of Bear Stearns suggested "technicals in the CMBS market bode well for spread tightening in the first half of 1999."

We've asked a representative group of CMBS buyers and Wall Street participants to share their forecasts for the CMBS market as of the coming June 30th. The panel is predicting the average triple-A spread to be 111 basis points, while issuance is predicted to total $28 billion. These compare to actual CMBS issuance for the first six months of 1998 of $44 billion and June 30th triple-A spreads of 85 basis points. We'll check back in July to see how well our panelists performed.

The first real 1999 test of the CMBS market will come in late January or early February when separate securitizations headed by First Union and Wells Fargo come to market. These banks are highly regarded underwriters, and, as a result, some analysts are projecting that spreads will tighten markedly for these transactions.

January is always a slow month for the whole-loan business, and this year appears to be no different. Institutional lenders are flush with capital for new investments. Nevertheless, most life insurers have noted that their supply of funds for 1999 won't show any dramatic increase. One of the results of the new supply of funds is that artificial floors on loan rates appear to be vanishing. In the fall, lenders would often offer to price a mortgage based on a spread over Treasuries, but not to be less than a floor rate of say 7%. As competition heats up, survey members noted that they are dropping the floor and offering to price their mortgages at a spread over Treasuries.

Most whole-loan lenders greatly benefited from the late summer and early fall collapse of the CMBS market since one of their major competitors was on the sidelines. Now that interest in the CMBS business is picking up, institutional lenders are having to become a bit more competitive. As an example, several issuers have joined with commercial banks in order to offer a combination construction and permanent loan program.

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