8A — February 10 - 23, 2012 — Financial Digest — Mid Atlantic Real Estate Journal
www.marejournal.com
F INANCIAL D IGEST
By Bruce Coin, Bruce Coin Consulting, Inc. The Current Commercial Mortgage Market
T
he Commercial Real Estate arm of the Mort- gage Bankers Associa-
nies have acknowledged that they want to fund more volume and some, like Principal, are rolling out new products. They are venturing into the mezza- nine debt market to capitalize on the now relatively stabilized commercial real estate market (with exceptions) to fund the “delta” between what is avail- able as a standard first lien mortgage and what a borrower needs to refinance or make an acquisition. One could equate a program like that to pseudo “joint venturing” depending upon the structure. I see abun- dant opportunities that will
allow them to pick and choose excellent assets and borrowers while enjoying the premium yields available in the “mezz debt” arena. On the economic front many, but not all, of the carefully watched barometers are con- firming a continued but modest growth. At their January meet- ing the “Fed” left interest rates unchanged and commented that “the expectation is that they (the fed funds rate) will remain exceptionally low (now) until late 2014”. For borrowers that is good news. They also estimated a growth rate of be-
tween 2.2 and 2.7 percent and reiterated that they will con- tinue to reinvest their principal payments received from their mortgage backed securities back into “agency sponsored” MBS. As the largest current MBS buyer their purchases have been an important sup- port of the mortgage market. Consistent with that was Fannie Mae’s announcement that its total multifamily is- suance for 2011 was approxi- mately $23.8 billion reflecting a 45 % increase over 2010’s $16.4 billion. Kimberly John- son, Vice President of Fannie’s
multifamily capital markets said “right now it looks like new issue DUS will probably be in the same range as 2011”. Life companies and banks will need to be aggressive to compete for multifamily business. CMBS volume should con- tinue to increase slowly with a number of $1 billion pools being brought to market. Look for rating agency newcomers, Morningstar and Kroll to win an increased portion of that rating business. Standard and Poor’s has become “persona non gratta”. Congress continues to ago- nize over the Dodd Frank Act’s Volker risk retention rule and its QRM provision. The latest is that they want to impose a Pre- mium Cash Capture Reserve Account or PCCRA. The pre- miums earned on the retained portion of a sold loan (or pool) would be escrowed into a cash reserve at the institution hold- ing the retention to be available in the event of default. Propo- nents, including the Mortgage Bankers Association, argue that such a requirement could severely curtail issuance of non-agency RMBS and CMBS and that it was not specifically addressed by Dodd Frank. A final thought concerns the way Discounted Cash Flow analysis continue to be per- formed. Many commercial ap- praisers continue to project that rents and expenses of multi-tenant properties will still escalate on a straight line basis over a 10 year holding period using annual factors of 2.5 to 3 percent. They are obvi- ously ignoring the lessons of the past 4 years and the post WWII history of recessions. Since WWII, recessions have occurred in a range of two to ten years with two and ten year hiatus being atypical. Most occur every four to eight years and close to national elec- tions. If one is projecting for ten years, and how good is anyone’s “crystal ball” after three or four years anyway, wouldn’t it be prudent to assume that a re- cession is going to occur within that time frame? When reces- sions occur, property vacancy rates increase, rents go flat or actually decline while most operating expenses continue to increase. Defenders say “that’s the way all investors make their forecasts”. I submit that is inaccurate and that prudent investors and analysts all vary
tion had its annual con- vention this year at Super Bow l t ime in Atlanta. While much of the focus this year will be on the na-
Bruce J. Coin
tional election, it is clear that cautious optimism abounds as mortgage bankers and lenders are anticipating more lending. The major insurance compa-
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