The Commercial Mortgage Securities Association (CMSA) held a Webinar yesterday discussing the state of the commercial mortgage industry. Participants also offered opinions on current government finance programs.
The most notable were the opinions offered on the legacy CMBS Term ABS Loan Facility (TALF) program and the issue of re-REMICs.
“The CMSA’s goal in this process has been, first of all, to applaud the administration’s effort to unlock the capital markets through programs such as Public-Private Investment Program (PPIP) and TALF,” said CMSA President Patrick Sargent. “But we’re out there now cautioning against measures that might be counterproductive to the benefits and the positive impacts that they’ve had.”
One of the main concerns of the CMSA is the role of the collateral monitor in the legacy CMBS program. They recommended that the Federal Reserve Bank of New York take into account the bond price and the adjusted haircut when considering the eligibility of a bond, leaving room for possible sellers and buyers who might ‘vet’ bonds before the subscription date.
The overall sizes of legacy CMBS TALF programs, as well as new-issue CMBS, and their monthly allowances have not yet been established for the market. CMSA’s biggest anticipated concern is that the programs would not reach their target levels of participation, a fact that CMSA stated should be very transparent.
The expected problem with the legacy program is about the pricing mechanism, the CMSA stated. Currently, there is a very small window in which the CMBS can be purchased and qualify for the program, which would force current CMBS portfolio holders to sell and rebuy their CMBS in the market, which could potentially set off a mark-to-market chain reaction with negative effects on the investor.
“The legacy loan program will be a little bit more democratic, where for each auction, anyone can go and apply to be one of the managers, and then the assets will be sold by the [ Federal Deposit Insurance Corp. (FDIC)], either directly from the FDIC or the FDIC will facilitate their member institutions selling assets into the program.” said Chris Hoeffel, managing director of Investcorp Internatinal. “These transactions might take the form of outright sales of assets, or they might look like securitizations where the FDIC will actually help institutions, or the FDIC itself will manage securitizations of existing loans.”
The CMSA recommended that CMBS trading desks be able to mark bonds for the Fed, as they do for investors, rather than actually having to sell and repurchase the bonds. In this way, there would me a means of creating an average price, just as in the CMBX process. Additionally, market transparency would be necessary on assumptions being used when the Fed is projecting any changes, such as extensions, losses, and prepayments.
“In June, the legacy loan program was postponed by the FDIC; that didn’t have much of an effect on spreads, and so we started around July at a round swaps base of 700 basis points, tighter because I think to some extent we had a re-REMIC bid that had started to exert tightening pressure on what would be non-eligible CMBS,” said Lisa Pendergast, managing director of Jefferies and Co.
In the case of re-REMICs, the CMSA recommended that these be considered for eligibility in the program due to the Standard and Poor’s announcement of possible ‘AAA’-bond downgrades. This would allow for the resulting influx of re-REMICs, and create the space for approval on a limited basis.