The CMBS market is expected to continue evolving in 2011 while fixed-rate loans remain the sole product offering for top properties in the retail, office and hotel sectors.
At this moment, it’s anyone’s guess as to what financing will eventually be available for floating-rate debt on “story loans” made in 2005, 2006 and 2007, according to speakers at a media roundtable in New York.
Banks are more comfortable lending in the CMBS market now. But the renewed interest is only “in a small box,” said Charles Roberts, a finance partner in the London office of the law firm Paul Hastings. “Most of the others in the midrange can’t get financing. But margins are getting lower if it’s a good property.”
The local economy, demand for space, and intense competition differ greatly by regions across the country. And similar to the residential mark, banks are finding it difficult to value commercial assets. “Every property has its own wall to deal with it,” Roberts said.
With $1.4 trillion in commercial loans looming over the industry, questions arise as to how banks will work to clear them out. When will the day of reckoning come?
For now, the speakers said there is no incentive to foreclose on CMBS assets and to “put in more capital for the marketing and liquidation of these properties.” Banks are holding land as “long as necessary.”
It is a “harder decision” for the special servicer to foreclose if there is a way the property can be refinanced, if there can be an appraisal reduction, or if there is the incentive to lease it out.
More “walkaways” are occurring with underwater mortgages in the CMBS market as well. Before, borrowers went the “extra mile” because of the stigma associated with the scenario. “But that fear has subsided,” the speakers said, “and people will lend to them again three or four years from now.”
The securitization industry has yet to absorb whatever risk retention agreement could be determined under the Dodd-Frank reform. More documentation is likely going to be required, particularly for special servicers, added Ronald Lanning, of counsel, corporate department for the law firm’s New York office.
“Under the Dodd-Frank Act and Reg AB proposals, there are plenty of people in the industry who already think they disclose enough. There is lack of information from special servicers on the forms explaining what their plans are for the property.”
