Cynics of Mortgage-Bond Start Early
With speculations in the market for sudden shutdown of the encouragement plans provided by the Federal Reserve last spring, there was a rise in interest rates and also fear of decline in the roaring commercial mortgage market.
When rates actually rose, the market slowed temporary slowdown, however it also revived quickly. Wall Street is currently targeting investors for sale of commercial mortgage securities amounting to as high as $90 billion which is the largest since year 2007 and almost double the $48.4 billion in 2012. Though mortgage interest rates are at least a percentage higher compared to last spring, CMBS have been strong in their issuance
According to a publication by Commercial Mortgage Alert, most of CMBS issuance shows that old mortgages are being refinanced by new loans since July which clearly suggest that property owners are worried about further rise in interest rates and hence are interested for refinancing of their properties.
With the increase in mortgage sales there have been concerns regarding underwriter standards. According to Doug Mazer, real estate capital markets head of Wells Fargo & Co., the improvements in the borrowing market have been better than expected and it is also good news for owners of properties.
There is a major difference between the commercial mortgage securities market and the residential mortgage market. Inside Mortgage Finance are of the view that due to rise in rates, property owners stopped refinancing thus lowering residential mortgage sales to $460 billion in the second and third quarter which is a fall by 18.6%.
There is also difference how landlords and homeowners view refinancing. Landlords are in some cases compelled to refinance whether rates are attractive or not since they use mortgage backed securities for financing that take about 10 years to mature.
News from Federal Reserve has confirmed their curtailing program for progressive measures with the improvements in the economy which is very likely to lead to interest rate hike. These measures will also affect a residential mortgage program.
According to Larry Kravetz, CMBS head of finance, Barclays, people do not know when rates will be up again and are looking forward to utilize the window period before the curtail program of the Federal reserve is in action.
RD Olson Development’s founder Mr. Robert Olson who recently did a refinancing of $ 30 million from Royal Bank of Scotland Group PLC at 5% interest on a construction for a construction at Marriot Courtyard built by his company near Calif, Santa Barbara is of the view that it is not advisable to completely rely on the fact that rates will stay low. He also added that the next refinancing is due after two years and the current rate he got is considered good for hotel construction loans.
According to Edward Shugrue, the CEO of a commercial property investor company named Talmage LLC, investors have very high interest in bonds and those having appetite for high yield can go for CMBS with yields as high as 3.72% , which is at times higher by at least one percent compared to Treasury securities that have same maturity period.
As per results of rating firm Standard & Poor’s Ratings Services, the growing interest in bond investments have led to poor standards of lending like mortgages on low value properties and loans with interest only payments for long periods such as 10 years. These loans are found to constitute half of the deals made in 2013.
In Peter Eastham’s view, in charge of commercial mortgage ratings at Standard & Poor’s, the sudden increase in competition has surely led to fall in loan granting standards.
Example may be quoted of a recent $1 billion deal of commercial mortgage backed securities made by Goldman Sachs Group, where they had a loan of $ 60 million by a firm named Rialto Mortgage Finance that was mainly based on a lease for Banana Republic and on rents. About 6 million dollars were kept in the event of a signed lease. The loan comprised of $7.9 million in rents or 30% more of the revenues generated by the mall in the last year.
For the reason of an old investor-borrower CMBS dispute, a loan included in the deal was removed after selling bonds related to that loan to the investors. Now, the investors are looking to extract an extra 0.12 % from another CMBS deal made the same day.
In spite of all the positive and negative speculations doing the rounds, the year 2014 looks brighter with analysts predicting issuance of as high as $100 billion in the next year.