The Mortgage Banker Association's (MBA) Commercial Real Estate Finance (CREF) and Multifamily Housing Convention & Expo 2008 held last week began with opening remarks from MBA President and CEO Jonathan Kempner. Kempner's comments drew a parallel between the past year in CREF markets and the recent Super Bowl game in terms of the "Wow factor." Kempner also cited the MBA's involvement in the Terrorism Renewal Insurance Act (TRIA) extension and Federal Housing Administration loan limit increases, which he considered as overall positives for the CREF sector.
In his remarks, MBA Chairman Kieran Quinn referred to the end of the Golden Era that alluded to the mortgage industry's good fortune over the past 15 years. This stint, according to Quinn, lasted longer than most as most up real estate cycles that usually only go on for seven years on average. He noted how capital was flowing into the real estate markets and the fact that interest rates and cap rates remained low until mid-August last year, which was when spreads broke loose in CMBS. He also raised his concern that CMBS would suffer the contagion effect that prime residential mortgage markets have had to endure. Commercial delinquencies, although expected to double in 2008, would still fall in the 1.2% range - quite stellar for most bond markets, Quinn said.
In a separate interview, Quinn expressed his surprise that the markets have reacted based on emotion and less on fundamentals which is evidenced by the fact that the super senior collateralized cash flows have 30% credit enhancements gapping out to historic wides in the mid-170s over swaps. Quinn said that the news involving firms like Goldman Sachs gaining by shorting ABS has prompted some to short CMBS via synthetic and macro-vantage points as well.
Has the Music Stopped?
In a broad-based panel discussion on the upcoming year about commercial lending and investing, participants were more optimistic on the prospects of the commercial market overall.
This panel included Fannie Mae Senior Vice President Phil Weberand and Freddie Mac Senior Vice President Michael May.
The panel focused on assessing the GSEs' chances of handling increased supply as more multifamily units are developed to meet increased housing needs in more costly areas such as California. Panelists also dealt with where the previous buyers of CMBS have gone, including the departure of opportunistic and fast money investors such as hedge fund and other levered buyers that have gone into hiding during this period of credit volatility.
A factor that was not widely discussed at the panel is that backstop buyers of CMBS might be full up on product with life insurance companies having constraints built in from their own dwindling balance sheets. This is caused by declining sales and more conservative risk allocations.
Various panelists who held large "buy and hold" portfolios expressed their displeasure at the Financial Accounting Standards Board's (FASB) insistence on using the mark to market type of accounting. The participants felt that current market valuations only feed into any prevailing market sentiment. They believe that the dollar price should reflect the underlying cash flows, a fact that the market price often discounts.
The panel discussion then turned toward the gapping CMBS spreads and what may lie ahead for 2008 and 2009. Most felt that turnaround was far off as investor confidence was needed first, and many expressed their concerns that this has not happened yet.
In a separate conversation, Quinn indicated that since the TRIA extension initiative has been successfully extended to 2014, lobby efforts on the treatment and accounting of CMBS will likely take a more intense focus from the MBA as marking and valuations of positions not intended for sale in the short-term are a concern for longer-term portfolios, end buyers, and even government sponsored entities like Fannie Mae and Freddie Mac.
Quinn proposed the possibility that a consortium of dealers was needed to band together and jointly structure an issue. This would be a notable combined effort on the market's part that would make investors more supportive feeling to the issue and make it less about dealer competition. He also said that a full "flushing out" of CDO paper was necessary, an event that has not fully happened yet.
At the second general session, MBA Chief Economist Douglas Duncan and Senior Director for Commercial/ Multifamily Research Jamie Woodwell focused on the Association's forecast for domestic growth. Estimates for the first half of 2008 is less than 1%, with 2H08 growth pegged between 2% to 2.5%, depending on whether the Federal Reserve takes further action and what the stimulus package from the White House would look like in its final version.
In stressing the importance of housing as both a boost for former economic growth and its drag on the current picture, Duncan stated that current supply will have to be worked off before market stabilization can ensue.
On the subject of foreclosure rates, Duncan said that one fourth of all foreclosures in the U.S. are on investor properties and not on primary dwellings, which has been the contention of many ABS investment professionals.
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