[Update 1: Corrects headline to reflect billions not millions.] The widening of spreads on commercial mortgage-backed securities reduced the competitiveness of conduit loan origination in the third quarter, according to Moody’s Investors Service, which expects issuance to slow over the next few quarters. Analysts said CMBS deals will revert back to $50 billion to $75 billion annually “when the spread widening driven by eurozone debt issues reverses to the levels we experienced earlier this year,” despite the “feast or famine aspect” to loan origination. CMBS issuance averaged $66 billion a year from 1998 to 2004, according to the ratings agency, which expects about $30 billion in total issuance for 2011, excluding unwrapped Freddie Mac bonds. “However, CMBS issuance has the potential to go to zero in a crisis or to $200 billion-plus as we saw in the 2006-2007 acquisition boom and may see again in the 2016-2017 refinance echo,” Moody’s analysts said. “For CMBS, the current turmoil means a delay of game, not game over.” Tad Philipp, Moody’s director of commercial real estate research, said 2012 CMBS issuance should mirror this year by starting slow and ending quick, whereas 2011 started quick and ended slow. Analysts said multiborrower, floating-rates CMBS transactions returned to the market for the first time in four years during the third quarter. And Moody’s expects CMBS backed by pools of nonperforming loans to “return as investors seek financing for purchases of distressed debt.” Still, Moody’s analysts see problems with CMBS although third-quarter metrics tracked comparably to those of the pre-crisis 2004 vintage. “The signs of erosion in underwriting are worrisome,” the analysts said. The gap between Moody’s loan-to-value metric, which measures balloon refinance risk, and underwritten LTV ratios is 33%, which is the widest yet in CMBS 2.0. (Click on chart to expand.) Write to Jason Philyaw. Follow him on Twitter: @jrphilyaw.
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