by Todd McNeill

CMBS-marketsThe CMBS markets have been moving along rather methodically ever since the gradual resurgence in 2011. The summer of 2012 has started off like a repeat of the summer of 2011 when the United States credit rating was under intense scrutiny from S&P and the stock market continued to seesaw.  This summer’s volatility is centered on the European Sovereign debt crisis and the possible “contagion risk” that is frequently discussed.

If you are in the market for a CMBS mortgage this summer, expect choppy waters as we navigate towards the fall elections.  Below are the top 5 issues that will cause constant swings in the securitization market in the upcoming months:

5.  Growth in the U.S. GDP is too slow to adequately affect the jobless rate.  This constant discussion of the jobless rate will be a solid reminder for all bond and B piece buyers to continue to underwrite real estate with an eye for conservatism.  The most recent growth rate report from the Fed was unchanged at a rate of 1.9% from January through March, which translates to roughly 90,000 jobs a month…not nearly enough to lower theU.S.jobless rate of 8.2%.

4. Banks’ credit ratings.  Goldman Sachs, Morgan Stanley, JPMorgan Chase, Bank of America, and Citigroup all suffered credit ratings cuts. The rating agency Moody’s Investors Service said that even though these banks had moved to strengthen their operations, their core trading businesses contained structural weaknesses. In other words, the downgrades reflect the new sober era for Wall Street. “It will make life more difficult for the banks over the long run,” said Andrew Ang, a professor of business at Columbia Business School. “The effect of ratings is pervasive.”  These lenders will need to make up their higher cost of borrowing by charging more for their services.  This will trickle down to the borrowers.

cmbs-markets-s-and-p3. General stock market volatility.  Expect the stock market to react to almost every one of the issues mentioned herein.  There will be plenty of financial uncertainty, political turmoil, and debt crises looming in Europe and theU.S.  The U.S.presidential election in November will only add to this buffet of uncertainty, and  the stock market typically hates uncertainty.

2. No depth in the “B” piece market.  As of June 2012, almost 2 years into the CMBS 2.0 life cycle, there are still only seven (7) active “B” piece buyers in the market.  So, it is these limited “B” piece buyers who are driving the credit quality of the underwriting.  News travels fast among the securitizations shops as to what deals get “kicked out” of the pools and for what reasons.  As each CMBS lender pushes the envelope on any aspect of underwriting, the punishments handed down by the “B” buyer reverberate quickly around the market.  Until more buyers come into this space, expect constant spread movement up or down depending on the news from the street when a CMBS shop is in the market with a securitization.

1.  The European “tinder box.” Europe is going to be working through issues for quite some time.  Many predict that Greece will be leaving the Euro and that the EU is simply buying time to figure out how to unwind Greece from the Euro without creating shockwaves through the credit markets.  The recession in Europe will push down theU.S.economy as well.  The U.S. Treasury is clearly the safest place to be, as the market has signaled since the beginning of summer.  The U.S. Treasury rate is at historic lows, and commodities have also been dropping steadily.  In addition to Greece, Spain’s and Italy’s borrowing costs have soared up to 7%, which has both teetering on the brink of insolvency.  An argument could be made that a massive wave of defaults through Europe could seize credit markets for a period of time (brief or extended).  The news, good and bad, coming from Europe will have the markets reacting negatively and positively all summer.

The purpose of the blog is not to suggest that you should not borrow money using CMBS.  It is simply to say that if you plan on borrowing from CMBS lenders, there are several things you should know about how to handle the process.

  • First, you should move as quickly as possible through the process.  Get the 3rd party vendors everything they need in a timely fashion and be available to answer questions so that the reports do not get delayed.
  •  In the same fashion, make sure that the lender is receiving all of its checklist items as quickly as you can.
  • Depending on the need for speed, it might be worth the risk to engage legal counsel early so that when approval is obtained, you can close quickly.
  •  Look at the calendar when working through the process, and minimize the probability of your closing to land around an announcement from either the E.U. or the Fed.

In summary, get through the application process with urgency to minimize your exposure to external events.  Using a brokerage firm like Metropolitan Capital Advisors that has its own in-house processing and closing department to assist the borrower in getting through the lender checklists, 3rd parties, and Estoppel & SNDAs could ultimately provide huge savings to the borrower and might even be the difference between making the deal and having the deal come up short.