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Prospects positive for liquidity in capital markets.

What are the prospects for greater liquidity in the real estate capital markets in 1993? To address this issue we must review the status of the key sources of capital for the real estate industry.

In 1992, life companies foreclosed on over $5 billion in commercial real estate properties and mortgage delinquencies increased to over 7 percent of mortgage assets - more than double the level reached in the two previous real estate downturns in the mid-70's and early 80's. With insurance regulators setting capital standards for life companies and rating agencies lowering financial strength ratings on major insurers, such as Prudential and MetLife, life companies will tread cautiously in 1993. For those life companies that remain active lenders, borrowers should anticipate more conservative underwriting and increasing spreads over Treasury issues as these lenders seek higher yields.

What about the much hyped market for securitization? The greatest activity by far has been with the RTC which has sold over $10 billion in mortgage securities backed by income producing properties. But these are somewhat unique transactions involving large mortgage pools that do little to help the individual borrower seeking a "cash window" for the refinancing of a specific property. To help satisfy the financing requirements of the traditional real estate borrower, the second half of 1992 saw the development of a number of mortgage conduits, one of which was the Washington Mortgage 'Common Sense' loan program. 1993 will undoubtedly see the continued evolution and expansion of this market; however, one should not expect securitization to be the panacea for the real estate industry.

With respect to the agencies, Fannie Mac remained the single largest source of capital for the multifamily industry providing $4 billion to the market in 1992. Real estate borrowers can expect Fannie Mae to remain a reliable source of capital in 1993 with approximately $4.5 billion in fundings. As one of the few active Fannie Mac DUS lenders in the country, Washington Mortgage will serve as a primary capital source for borrowers seeking Fannie Mac fundings.

Another potential bright spot on the horizon in 1993 is Freddie Mac. Having devoted much of its efforts in the past two years to restructuring its existing loan portfolio, Freddie Mac has spent the last few months "staffing up' with production personnel. One should expect to see Freddie open a 'cash window" for new originations in 1993.

Last, but certainly not least, what about equity? This word did not exist in the vocabulary of many real estate developers in the 80's; however, significant equity is now required by lenders as an integral part of the real estate capital structure. But where will the equity come from? For many investors, the 'cash-on-cash" returns available in real estate do not provide adequate incentives for the perceived risk. Hence, a lack of demand for real estate investments which has contributed to the downward spiral in property values.

One way to stabilize values would be a rational modification to the tax code to allow the use of passive losses by investors and to be used in conjunction with existing properties only. With Senator Moynihan serving as Chairman of the Senate Finance Committee and Congressman Shumer on the House Banking and Finance Committee, New Yorkers have several powerful allies in Washington. All real estate professionals should make sure that these and other representatives hear the real estate industry's message on the issue of passive losses.

In summary, the traditional real estate lenders, such as life companies, will be marginally more active than in 1992. Expect securitizations to bring some new capital to the market, but not enough to fill the liquidity gap. Equity will become an increasingly important component of the real estate capital structure, but investors will seek higher returns on their equity. Fannie Mae will continue as a major capital source for the multifamily borrower and Freddie Mac will become a much welcomed new entrant to the market. At Washington Mortgage, we will remain on the "cutting edge" of the mortgage banking industry in our effort to bring greater liquidity to the real estate capital markets.
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Title Annotation:Review & Forecast, Section II; review of key sources of capital for real estate industry
Author:Kikalari, Gary Q.
Publication:Real Estate Weekly
Date:Jan 27, 1993
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