Finance CMBS
Nov 16, 2007
By: Paul Rosta, Senior Associate Editor
After a week that brought more bad news for the capital markets, analysts said that the CMBS market faces a slow recovery.
Next year CMBS issuance will probably wind up at roughly $110 billion, half of the $220 billion total for this year, noted Tad Philipp, managing director for Moody’s Investors Service. “Right now the origination machines are running at a fraction of their capacity,” he said. As a result, CMBS issuance will be especially slow in early 2008, Philipp predicted. CMBS sponsors and investors will likely backload much of their activity into the second half of the year, he predicted. CMBS delinquencies could rise from their current 0.5 percent rate to 1 percent or more during the next year, Moody’s observed in a report issued last week.
Philipp made comments on a day that a senior economist suggested that the capital markets could take a $400 billion hit from the subprime mortgage meltdown. According to widely published reports, Jan Hatzius of The Goldman Sachs Group Inc. estimates that capital sources might have to pull back lending volume by as much as $2 trillion, further raising the likelihood of a recession. So far banks have reported some $50 billion in sub-prime-related losses.
One of the results of the slower CMBS market is decreasing diversity in loan pools. This trend stems from the shrinking size of pools. Before the credit crunch hit, CMBS issues of $4 billion to $5 billion were not uncommon. Now, typical pools tend to run in the $2 billion range.
Fewer loans in the pool undercuts the power of securitization to spread risk. For example, a $100 million loan represents a much bigger percentage of a $2 billion pool than it does of a $4 billion pool. “If two or three big loans (default), it can make your delinquency go up,” Philipp noted. Moody’s analyzed CMBS pool diversity using the Herfindahl score, named after the mathematician who developed a measurement of market share concentration.
Philipp reported that one CMBS sponsor recently took Moody’s off a deal after the ratings agency raised concern about the loan pools’ diversity. He declined to name the originator or any identifying details of the pool, but explained that the composition of the pool changed during because some loans failed to close on deadline and B-piece buyers kicked other loans out of the pool. Moody’s requested that the originator include more junior debt in the pool to cushion the senior bonds. Instead, the sponsor brought the pool to another ratings agency.
The dramatic shift in the credit markets will by no means shut off the access to capital, however, said Anthony Downs, a senior fellow at the Brookings Institution and author of the newly published Niagara of Capital: How Global Capital has Transformed Housing and Real Estate Markets. During a press briefing this morning at the Urban Land Institute’s headquarters in Washington, Downs commented, “People who have all this money don’t want to sit on it. Gradually, the pressure will be greater and greater to make a deal.” Banks and insurance companies that hold loans on their books are in a position to start lending immediately, he said.
By: Paul Rosta, Senior Associate Editor
After a week that brought more bad news for the capital markets, analysts said that the CMBS market faces a slow recovery.
Next year CMBS issuance will probably wind up at roughly $110 billion, half of the $220 billion total for this year, noted Tad Philipp, managing director for Moody’s Investors Service. “Right now the origination machines are running at a fraction of their capacity,” he said. As a result, CMBS issuance will be especially slow in early 2008, Philipp predicted. CMBS sponsors and investors will likely backload much of their activity into the second half of the year, he predicted. CMBS delinquencies could rise from their current 0.5 percent rate to 1 percent or more during the next year, Moody’s observed in a report issued last week.
Philipp made comments on a day that a senior economist suggested that the capital markets could take a $400 billion hit from the subprime mortgage meltdown. According to widely published reports, Jan Hatzius of The Goldman Sachs Group Inc. estimates that capital sources might have to pull back lending volume by as much as $2 trillion, further raising the likelihood of a recession. So far banks have reported some $50 billion in sub-prime-related losses.
One of the results of the slower CMBS market is decreasing diversity in loan pools. This trend stems from the shrinking size of pools. Before the credit crunch hit, CMBS issues of $4 billion to $5 billion were not uncommon. Now, typical pools tend to run in the $2 billion range.
Fewer loans in the pool undercuts the power of securitization to spread risk. For example, a $100 million loan represents a much bigger percentage of a $2 billion pool than it does of a $4 billion pool. “If two or three big loans (default), it can make your delinquency go up,” Philipp noted. Moody’s analyzed CMBS pool diversity using the Herfindahl score, named after the mathematician who developed a measurement of market share concentration.
Philipp reported that one CMBS sponsor recently took Moody’s off a deal after the ratings agency raised concern about the loan pools’ diversity. He declined to name the originator or any identifying details of the pool, but explained that the composition of the pool changed during because some loans failed to close on deadline and B-piece buyers kicked other loans out of the pool. Moody’s requested that the originator include more junior debt in the pool to cushion the senior bonds. Instead, the sponsor brought the pool to another ratings agency.
The dramatic shift in the credit markets will by no means shut off the access to capital, however, said Anthony Downs, a senior fellow at the Brookings Institution and author of the newly published Niagara of Capital: How Global Capital has Transformed Housing and Real Estate Markets. During a press briefing this morning at the Urban Land Institute’s headquarters in Washington, Downs commented, “People who have all this money don’t want to sit on it. Gradually, the pressure will be greater and greater to make a deal.” Banks and insurance companies that hold loans on their books are in a position to start lending immediately, he said.
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