The real estate industry is beginning to find creative solutions around funding shortfalls as it faces the current liquidity crisis.
As lending becomes more scarce and increasingly expensive, some segments of the mortgage market are turning to securitization for liquidity. For example, servicing advance facilities are becoming increasingly popular as a type of financing within the US residential mortgage-backed security (RMBS) sector, according to analysis by Toronto-based credit-rating agency DBRS
Servicers may be obligated to advance missed payments to RMBS trusts monthly, but DBRS noted full reimbursement of the advances may take months or years. And servicers need liquidity sooner rather than later.
Servicing advance facilities enables servicers to securitize their rights to advance reimbursements at high investment-grade rating levels and receive funds up front, DBRS said in the report
"Most servicers need to advance in RMBS structured finance transactions, however this can become expensive for servicers that are weak financially because typically they need to borrow from third parties at high rates in order to fund the advances," Kathleen Tillwitz, senior vice president of US structured finance at DBRS, tells HousingWire
"With delinquencies continuing to grow," Tillwitz adds, "servicers need to advance more often and for longer periods of time before they get reimbursed. As a result, servicing advance transactions are replacing expensive lending facilities and keeping servicers liquid because they get paid up front in the deal."
Elsewhere in the commercial real estate market, Barclays Capital
is seeing signs of hope in non-securitized debt markets. In particular, Barclays recently noted the Teachers Insurance and Annuity Association - College Retirement Equities Fund -- or TIAA-CREF
-- lent $145m against the 1.3m square-foot Graybar office building in Manhattan. The property's owner, a real estate investment trust (REIT), plans to use the proceeds to pay off a $108m loan set to mature late next year.
"In addition, we have seen a continued thaw in the unsecured debt markets, as noted by several REIT debt raises this week including Mack-Cali, Duke Realty Corp., and Simon Property Group," Barclays said in a report.
But the commercial real estate development industry continues to struggle with credit issues, particularly this week with Maguire Properties
, which Moody's Investors Service
notes continues to experience ongoing levels of high effective leverage and declining performance. It's also struggling to cover dividends out of its operating cash flow, indicating a possible need for short-term funding.
As a result of the credit uncertainties at Maguire, Moody's on Tuesday put on review for possible downgrade a number of commercial mortgage-backed securities (CMBS) with exposure to Maguire's properties.
The affected CMBS -- with trusts out of Bear Stearns, Banc of America, Credit Suisse, Greenwich Capital, Wachovia Bank, JP Morgan Chase and Morgan Stanley -- bear vintages from 2004 to 2007. Maguire's properties accounted for anywhere from 6% to 18% of the outstanding deal balance involved in the reviews. The total volume of structured securities affected in the reviews is worth $6.7bn.
Write to Diana Golobay
For full insight into how the private market is solving its own financing issue, please see the upcoming September issue of HousingWire
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