Finance: Where Will Needed Debt Capital Come From? Can CMBS Make a Comeback?


Over the next several years, hundreds of billions of debt capital will be needed to refinance maturing loans, and when market fundamentals rebound, additional debt will be needed for new acquisition and development projects.

The future role of the agencies, which provided a lion’s share of debt capital for the multifamily market, is somewhat uncertain as the present conservatorship expires at the end of 2009. Smaller regional and community banks have begun to provide some debt but larger banks remain paralyzed. The number of insurance companies providing debt has diminished and the ones quoting are very conservative. But even if non CMBS sources start to approach “normal” volumes, that still falls short of the expected demand.

The securitization of commercial and multifamily mortgages is critical to providing needed liquidity and, after the market for existing CMBS paper strengthens and market fundamentals stabilize, I expect CMBS new origination to occur, hopefully by 2011. But, in my opinion, prior to a CMBS comeback certain underwriting and regulatory changes will be required for the return of bond buyers’ confidence. These changes include:

* Underwriting needs to adjust from the past to reflect the risk of commercial loans. This will require originators to have to “skin in the game” and not be rewarded simply on volume of securities packaged and sold.

* Rating agency models need to be more conservative with more attention made to the underwriting of individual loans rather than the past reliance on diversified pools and subordination levels.

* REMIC laws need to be revised to allow for greater special servicer flexibility on such matters as extensions, restructurings, assumptions, and the post closing collateral adjustments.

* Some exceptions from market-to-market accounting should be considered for investors electing to limit their ability to sell bonds for some time period.

So, what do you think? Will CMBS come back? What changes do you anticipate? Let us know your thoughts.