Speakers assess financial market at YMBA Meet the Lenders luncheon.

Wild fluctuations in the capital markets and widening market spreads are having a direct and powerful impact on real estate lending, including a realignment of the power balance between lenders and borrowers.

These were some of the ideas shared by Richard Katzenstein, vice president at Mutual of New York (MONY) Real Estate Investment Management, when he spoke at the October "Meet the Lenders" Luncheon sponsored by the Young Mortgage Bankers Association.

Katzenstein joined Sam Giarrusso, administrative vice president of M&T Bank, and Ernest Rosato, senior vice president and managing director of DLJ, as guest speaker at the event. The luncheon provided a forum for these lending industry leaders to share their thoughts on the status of the real estate finance markets, as well as particulars about how their institutions are handling loans in the current environment.

According to Katzenstein, a sea-change is effecting the real estate finance markets. "For the first time in history, the real estate finance markets are directly tied to activities in the financial and capital market worlds," he said. "This new relationship has already altered the way real estate finance markets react to financial market turmoil. We all know the capital markets are exceptionally unstable at this time. As a result, real estate finance players have immediately taken a much more cautious and diligent approach to lending."

The speed with which real estate finance players are responding to changes in the larger capital markets world is reassuring to Katzenstein, who noted that the old time lag between economic downturn and real estate downturn often left lenders with greater losses on their books. However, the capital market turmoil is creating some havoc for lenders who sprang to prominence in the last two years.

"Rumors are flying as to which companies will or will not survive in the coming months," he said. "The more recognized players see the silver lining in this corrective cycle, since it will narrow the field of players. Once the correction ends and stabilization returns, the remaining CMBS issues should return to profitability."

As for MONY Real Estate's position in the market, Katzenstein noted that life companies continue to remain active in the lending arena. He said the dominant lenders of the 1980's have changed, and new lenders have emerged. And while there is no single dominant life company lender, there are a scattered number of life companies that remain active with various programs. Further, as the market turmoil shakes out some of the competition, life companies are seeing their new deal pipelines fill with opportunities.

"Market spreads have really widened, including spreads from the life companies," he said. "Turmoil in the capital markets and declining interest rates have prompted lenders to turn their focus to loan ratios rather than spreads. For example, we have a present rate floor of 7 percent."

According to Katzenstein, MONY Real Estate is in a very solid position to ride out this challenging market. "Because of the market uncertainty, I believe that lenders have gotten back the upper hand in loan negotiations," he said. He also pointed out other benefits that prudent lenders will experience in this market, adding "The quality of loans should improve as lenders refrain from overly aggressive transactions. Accordingly, lenders don't have to increase leverage or reduce the reserves set aside for the leasing and management of a property in order to make a loan."

Finally, Katzenstein noted an overall benefit from the topsy-turvy capital market situation. "Billions of dollars of new construction will be put on hold, which will keep today's markets more stable. Lenders' quick reaction to capital market turmoil may well have protected us from the dangerous cycle of over-building that traditionally signals the end of a market boom."