Commercial Mortgage-Backed Securities Carving Permanent Role in Capital Markets; Record Amount Issued in Fourth Quarter; Annual Survey by E&Y Kenneth Leventhal Real Estate Shows Broadening Use by Opportunity Funds, Conduits, Traditional Lenders.SAN DIEGO--(BUSINESS WIRE)--Feb. 12, 1996--Despite the strong reemergence of traditional mortgage lenders last year, the commercial mortgage-backed securities (CMBS CMBS See: Commercial Mortgage Backed Securities ) market volume was down modestly from the record $20 billion in new issues in 1994 -- to $18.3 billion in 1995. According to an annual survey by E&Y Kenneth Leventhal Real Estate Group released today at the Mortgage Bankers Association conference in San Diego, the continuing vitality of the CMBS market -- some $8 billion was issued in the fourth quarter of 1995 --a record for any quarter -- was due to the maturing use of the mortgage-backed securities Mortgage-backed securities (MSBs) Securities backed by a pool of mortgage loans. as a popular real estate investment vehicle by Wall Street and institutional investors. The three key sources for 1995 issues were conduits, opportunity funds and traditional lenders -- which included some large banks and insurers once seen as competing with CMBS. "The CMBS market has now developed well beyond the role of `exotic alternative' and assumed a permanent place in real estate capital formation," said Joseph B. Rubin, national director-capital markets for E&Y Kenneth Leventhal Real Estate (EYKL) in New York New York, state, United States New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of . "Although some saw it as a short-term answer for capital formation during the credit crunch Credit Crunch An economic condition whereby investment capital is difficult to obtain. Banks and investors become weary of lending funds to corporations thereby driving up the price of debt products for borrowers. , it has become institutionalized in·sti·tu·tion·al·ize tr.v. in·sti·tu·tion·al·ized, in·sti·tu·tion·al·iz·ing, in·sti·tu·tion·al·iz·es 1. a. To make into, treat as, or give the character of an institution to. b. now that traditional lenders are in the market." CMBS structures have diversified to provide flexibility that meets needs of both issuers and investors, according to Rubin. "Creative structures are lowering the cost of funds Cost of Funds The interest rate paid on an outstanding loan. Notes: Money isn't free! Cost of funds is the cost of borrowing money. See also: Interest Rate Cost of funds Interest rate associated with borrowing money. for the issuers while targeting specific investor needs," said Rubin. He said that CMBS originally came to prominence as a tool of the Resolution Trust Corporation in the early 90s, and then became a popular alternative financing vehicle in response to the credit crunch. CMBS are securities collateralized by commercial real estate loans. Other developments revealed by the survey included: Better rates for borrowers, budding secondary market The news for commercial real estate borrowers is that spreads are diminishing on CMBS issues, providing better lending rates. According to Phoebe Moreo, national director-securitization for EYKL, "The credit curve on investment grade CMBS has tightened dramatically. In 1995, triple B CMBS dropped to 200 basis points above the Treasury rate and we expect the tightening to continue down the curve to double B in 1996." Moreo believes that the next step for CMBS will be a growing secondary market wherein CMBS holdings are traded regularly among investors. Liquidity Means Longevity "Increased liquidity for commercial mortgage-backed securities is actually ensuring its longevity," added Rubin. "More capital is flowing into CMBS because financial institutions are placing greater emphasis on real estate in their portfolios and because of general improvement in the real estate markets. The attractiveness of CMBS is further fueled by the increasing standardization of commercial real estate information and the use of technology to gather and analyze the data." Conduits: Arrived in '95, Grow in '96 In the conduit sector, 1995 was the long awaited year when loan production occurred at levels sufficient to fuel significant activity, according to the report. Conduits were the leading source of new CMBS, accounting for 25 percent ($4.5 billion) of the year's total. However, "superconduit" consolidation is a trend likely to continue. Mortgage bank and commercial bank conduits are expected to grow in 1996, particularly as the larger commercial banks utilize CMBS to re-enter re·en·ter also re-en·ter v. re·en·tered, re·en·ter·ing, re·en·ters v.tr. 1. To enter or come in to again. 2. To record again on a list or ledger. v.intr. the real estate lending business without tapping into capital. Lower Risk, Says NAIC NAIC See National Association of Investors Corporation (NAIC). : Insurers Return to CMBS Insurance companies were back in the market in 1995 ($2.4 billion in issues) to reclassify Verb 1. reclassify - classify anew, change the previous classification; "The zoologists had to reclassify the mollusks after they found new species" class, classify, sort out, assort, sort, separate - arrange or order by classes or categories; "How would you portfolios from loans to securities, improve liquidity, realize built-in tax losses or exit the mortgage business entirely. The favorable decision by the National Association of Insurance Commissioners The National Association of Insurance Commissioners (NAIC) is an Internal Revenue Code Section 501(c)(3) non-profit organization which seeks to organize the regulatory and supervisory efforts of the various state insurance commissioners from around the United States. to treat CMBS as bonds rather than whole loans confirmed the lower risk-based capital requirements Risk-Based Capital Requirement A stated requirement of liquid reserves placed upon banks and institutions that deal in risky ventures. Notes: These requirements exist for the protection of investors who hold an interest in these types of businesses. for CMBS that will foster more insurance company utilization. The 1996 CMBS study was conducted by the E&Y Kenneth Leventhal Real Estate Group, the preeminent provider of real estate advisory services advisory services advisory services provided to the public, in their capacity as owners and managers of animals, are an important part of veterinary science. They may be provided by government bureaux, by commercial companies who deal in pharmaceuticals or animals or animal , with more than 2,100 real estate industry specialists located in 75 markets. CONTACT: EYKL Joseph Rubin, 212/403-5200 Phoebe Moreo, 212/403-5200 or 602/957-2000 or Gallen Associates Ron Heckmann, 510/268-9848 |
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