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Advance made in campaign for commercial loan market.

An important step has been reached in the creation of a secondary market for commercial mortgages, according to a representative of the National Association of Realtors.

NAR President Dorcas T. Helfant announced in Washington, D.C., that a consortium of trade organizations, including NAR, and leading financial institutions is being formed to support the development of a national data base containing information on commercial loans. The collection of this information is a vital part of a large-scale plan to open up sources of funding for commercial real estate, Helfant explained.

For more than a year, NAR has been exploring the development of a secondary market for commercial mortgages. This market would be patterned after the secondary market for residential mortgages, through which loans are securitized and sold by lenders to investors. Various aspects of this project, including the standardization of commercial loans, will be discussed tomorrow by consortium members and other participants at the Eighth Annual Real Estate Finance Roundtable, sponsored by NAR. The initiative was triggered by the prolonged credit shortage that has "choked the life" out of the commercial real estate industry, Helfant said. "The credit crunch has forced us to become innovative," she said.

According to Helfant, the current credit contraction is due mainly to the Tax Reform Act of 1986, which took away incentives to invest in commercial real estate; and the Financial Institutions Recovery, Reform, and Enforcement Act (FIRREA) of 1989, which imposed much tighter capital requirements for commercial loans.

There are several barriers - both technical and legislative - that must be overcome to create a secondary mortgage market for commercial loans.

Like that for residential mortgages, a secondary market for commercial mortgages would be based primarily on the sale of mortgage securities. Through securitization, lenders pool mortgages and issue securities based on the collateral in the mortgage pool. Mortgage investors prefer purchasing securities rather than whole loans, because the risks are more manageable. However, a method has not yet been developed to design and price commercial mortgage securities. Helfant explained that this has not occurred because information on the performance of commercial real estate loans is sparse and inconsistent. A central network of information on these loans - a detailed, national data base - must be created to provide a basis for pricing the securities, Helfant said. In addition, the development of this data base will help foster standardization of commercial loan products.
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Title Annotation:consortium of trade organizations and financial institutions form to create national data base relating to commercial loans
Publication:Real Estate Weekly
Date:Sep 23, 1992
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