Commercial First has been forced to stop originating loans as a result of funding difficulties.

The commercial mortgage lender has fully utilized its warehouse facilities and has thus far not found additional liquidity. Its current warehouse facilities expire in December 2008 and January 2009.

Commercial First has been reliant on securitization to fund its small-sized lending business, which is likely to remain difficult beyond the maturity of its warehouse facilities set for year-end. The lender said that it had fallen victim to Bear Stearns'near collapse.

"We have a business that made a profit of GBP13 million ($25.62 million) last year and will make in excess of GBP20 million this year, with a balance sheet of GBP1.6 billion in performing mortgage assets at an average LTV of 68% and a 4% margin - yet are still unable to obtain financing," said Stephen Johnson, sales and marketing director at the firm. "It is abundantly clear the credit market has failed."

Commercial First usually works with Barclays and Deutsche Bank on its securitizations. Last November, the lender priced its Business Mortgage Finance transaction, BMF-7, at genuine market levels. Despite the deal's success, the company said existing facilities have been fully utilized and planned new arrangements have not materialized.

"The business had received positive indications that warehouse lines and working capital funding would be made available," Johnson said. "Also, an initial offer for the business was received during the last few weeks. However, events in the market, including the recent collapse of Bear Stearns, have meant the offer for the business and additional funding have been withdrawn." He added that, consequently, Commercial First has no alternative but to suspend originations. The company is currently in dialogue with its funding partners to work through possible solutions for future business.

According to Johnson, Commercial First continues to explore every opportunity to obtain new funding and has entered into a consultation period, exploring all available avenues to enable a quick return to the market. Market reports have said that an option for the company might include a stakeholder buyout.

Although some restructuring is expected to take place, it is not expected to impact the firm's servicing unit. Commercial First said it would be increasing staffing to cover the arrears management, which is expected to happen in the next three months.

Moody's Investors Service said it is closely monitoring the firm's Business Mortgage transactions because the rating agency found signs of weakness with rising arrears and reduced excess spread over the last few quarters. Commercial First is currently responsible for the special servicing and cash bond administration functions for all BMF deals. The special servicer is responsible for arrear management over three months and for overseeing enforcement proceedings.

According to Deutsche Bank analysts, the junior tranches of these transactions might be at risk given the sharp decline in commercial properties, which is likely to be most prevalent for small, low-quality units as found in the BMF transactions.

If the performance of the special servicer were to deteriorate, this could have an impact on collection and recovery rates for the transaction. The day-to-day mortgage and back-up cash/bond administration is outsourced on all transactions to Homeloan Management.

"Servicer performance maybe cannot be really measured due to the fact that past performance of most of the CMBS portfolios was quite good and foreclosing activities have been very, very rare," a CMBS investor said. "This might change in the future if due to actual market circumstances more loans will breach covenants."

The investor added that the outcome will also depend on how servicers cope with that workload to satisfy investor interest. "We are sure that, with more experience, deals will then price in differentials between each other and will be based on the existence of different servicers and their track record," the investor said, adding that the ability of servicers to cope with the workload still has to be proved.

Fitch Ratings last week upgraded tranches of the Business Mortgage Finance program's first two issues. The affected notes of BMF-1 were the Class M tranche (upgraded to AAA' from AA+' with the outlook revised to stable from positive) and the Class B notes (upgraded to AA-' from A' with a positive outlook). Meanwhile, the affected notes of BMF-2 were the Class M notes (upgraded to AA' from AA-' with a positive outlook).

All the other tranches of these transactions, as well as all tranches of later BMF issues, were affirmed by the agency. These actions followed a review of all BMF deals. The upgrades were a result of the seasoning, the significant level of prepayments, the sequential amortization and the higher-than-expected excess spread levels, according to Fitch.

However, Deutsche Bank analysts said they see significant risk in the deals because the increased property value in these transactions was driven by mortgage availability.

(c) 2008 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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