The secondary market for real estate loans is active despite a dearth of new origination for both the commercial and residential markets.
David Tobin, a principal at Mission Capital Advisors, said that as the real estate market recovers, there is an increasing amount of secondary trading of performing loans.
“As the recovery takes hold, there’s secondary trading on sub-performing loans where credit quality is perceived as stable or recovering,” he said. “Currently, the loan-to-value ratio on these loans may be upside down but the rate is so low that the borrower is able to come out of pocket. Eventually, as the leasing and/or rents recover, the property cash flows and a performing loan that trades today at 80% of par trades at par in three years. That loan may trade multiple times between credit companies, banks and hedge funds during that period."
He added that the secondary market for mortgages has been active since the 1980’s for various reasons, including the GSEs, bank’s need for asset growth and an ever expanding credit culture.
Even prior to the most recent financial meltdown, there were three distinct high growth periods of lending in the last 20 years: the period following the first S&L crisis, the period following the Russia crisis / Asian Flu and the period following the dot-com bubble. In each instance, the credit event was followed by flurry of new origination when the economy recovered.
In terms of the recovery in commercial real estate, Tobin said that it has been largely driven by the reduction in interest rates and the return of liquidity into the marketplace, a jobless recovery so far.
"On the macro level, there seems to be no emerging industry force, like technology or the building boom, that’s leading us back into increased employment such as there was in the late 90's and mid 2000’s," he said. "Although there might not be a major industry that will lead to job growth, but I expect a combination of smaller factors instead to happen."
In CMBS, he said that low interest rates and new origination platforms will help to conquer some of the impending refinancing wave that is set to occur in the next few years. "The spectre of refinancings and low rates bode well for the market, which has driven some banks and mid-tier firms to get back into the business," Tobin said.
As an example, Credit Suisse recently hired Jeff Fastov, formerly a managing director at Goldman Sachs, to be a senior staff at the bank's new CMBS operations. The firm also appointed James Dvrostep, who was a secondary consumer ABS trader at the firm, as a trader in the secondary CMBS desk. Dvrostep reports to Chris Callahan, head of CMBS secondary trading at the firm.
And just last Friday, StructuredFinanceNews.com reported that Cohen & Co. and FundCore Finance Group announced that they have partnered to create a CRE conduit where the loans will be targeted for securitization including all major property types.
Although the CMBS secondary market experienced a bad period, "it’s been on fire since mid 2009," Tobin said. "CMBS relative to MBS has always had a much greater subordination — 20% to 30%. It does not approach single-family levels in terms of risk and is a more stable asset class. The market has come back quicker."
"There’s been a lot made of the delinquency figures, but the recent trend has been flat to declining," Tobin said. "All other things being equal, delinquencies figures are affected by factors such as new originations, modified loans moving into performing status, nonperforming loans being sold off and other resolutions. Low rates and the aid this provides to borrowers trying to refinance, have helped keep the delinquency rate lower than was expected.”
In a recent report from Fitch Ratings, analysts said that U.S. CMBS delinquencies closed out last year at 8.23%, although these have moderated in recent months. The numbers were from the rating agency's latest Loan Delinquency Index.
According to the report, CMBS delinquencies have dropped from the high of 8.66% that the market saw in September 2010.
The rating agency estimated late-pays to peak at or near 10% within the next year. This is a notable dip from the rating firm's initial 12% projection by 2012. Numerous factors should work to keep the index close to 10% despite the highly leveraged loan defaults, said Fitch Managing Director Mary MacNeill.
"Property market fundamentals are stabilizing and liquidity is returning to the market, allowing special servicers to resolve an increasing number of loans,’ she said.
A rise in new CMBS issuance for 2011 will also help to offset amortization and repayments. This will keep the universe size comparatively stable, the agency stated in the report.
