The US CMBS industry is at a “crossroads” amid regulatory efforts to tighten rules regarding new securitisation deals, according to Lewis Ranieri, founder of Ranieri Real Estate Partners and the father of the mortgage-backed securities market.
Under the Dodd-Frank financial reform act, passed in July, ratings agencies became liable – for the first time – for the ratings attached to CMBS. It was a move that prompted the nation’s three dominant agencies, Standard & Poor’s, Moody’s Investors Service and Fitch Ratings, to ban the use of their ratings in documentation for new bond sales: an action that, in turn, saw the Securities and Exchange Commission promise to take no action against offenders until at least January 2011.
Ratings were crucial to the proper functioning of the CMBS market, and CMBS was crucial to the proper functioning of US real estate capital markets, he explained.
“We can’t turn back the clock to when most assets, including real estate, were funded on balance sheet.” The “diminution in value” that would occur from just balance sheet lending would not, he predicted, “be a very comfortable thing to contemplate”. As a result, securitisation was “at a crossroads”.
New CMBS issuance reached a peak of $250 billion in 2007, with senior real estate executives telling the Urban Land Institute and PricewaterhouseCoopers Emerging Trends 2011 report new issuance could to climb to between $75 billion and $100 billion “within a few years”.
Retail assets dominate the new deals that have come to market to date, with a recent JPMorgan pool of 30 loans comprising 67 percent retail compared to 16.5 percent office, 10.3 percent industrial, 5.3 percent for mixed-used assets and 0.8 percent in self storage. H2 Capital Partners acquired the pool’s B piece, while the debt service coverage ratio and loan-to-value was 1.66 percent and 60 percent, respectively.
It is the spreads above Treasuries and swaps, though, that is giving the CMBS market a competitive edge, sources told PERE. Pricing for the JPMorgan deal saw spreads of around 150 basis points for AAA tranches. Historically, those spreads would have been nearer 30bp.
“There is a lot of room for improvement on spreads,” one executive explained.