The new-issue private label CMBS market has been taking a breather, and how long it will last depends on what happens as far as international financial concerns and other events that have roiled U.S. and world markets.

If the European plan aimed at quelling Greece's financial concerns underway at press time were to have a lasting effect and reduce the global market volatility that has caused CMBS spreads to widen, issuance could make a comeback.

But whether there is a comeback sooner or later, the slowdown that has given at least one investment banking concern and couple of smaller players reason to pull back from the space is an opportunity to rethink it.

"It's a good time to stop and take stock of what's going on," Tad Philipp, director of commercial real estate research at Moody's Investors Service, told this publication.

As noted recently in article in ASR sister publication National Mortgage News' Web site, Philipp found in a recent study that there were some signs of slightly looser underwriting during the third quarter, a trend that could be a problem over time if it continued.

"There were a lot of people competing for only a handful of loans and that has led to some credit erosion," Philipp said.

He noted that the trend is "constrained for now but the direction is not good. There was slippage in a couple of the key metrics, but nevertheless it's still consistent with 2004 which was one of the last good vintages before the spike."

He said in the three deals rated in the third quarter average loan-to-value ratios, for example, rose a little bit.

Also the distribution of LTVs going into that average "flattened" so that more were either better or worse, rather than middle-of-the-road.

"The average is staying the same, but the dispersion is getting worse," Philipp said.
He characterized it as a situation where, "we kind of have gone to the edge of precipice but we haven't gone over. You wouldn't want to see this trend keep going for another year or so, then you would be in not in a good place," Philipp said.

With wider spreads from international financial concerns recently making it difficult for CMBS conduits to compete with balance sheet lenders like banks and life companies, CMBS have effectively taken a break.

"It's a chance for the market to cool off," he said.

The CMBS market will be back again when spreads become more favorable, something Philipp said "we all hope is sooner rather than later. There's a lot of real estate out there that needs to be refinanced well beyond the capacity of the balance sheet lenders to do so."

While Philipp believes there is a long-term need for CMBS, he notes that unfortunately CMBS can be somewhat volatile in terms of issuance because issuance depends on market conditions and spreads.

"It's kind of like CMBS is the hare to the tortoise played by life companies," he said. "They're either shut or going at full speed. There's very little in the middle."

In the mean time, at least for now, the agencies are there to fill the gap.

"I definitely think the agency CMBS (issuance volumes) have benefited from some uncertainty in the private label space," Kimberly Johnson, vice president of multifamily capital markets at Fannie Mae, told this publication in an interview last week.

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