Wednesday, May 13, 2009

You Make the Call

Dovetailing on last friday's post regarding the collapse of the CMBS market, and who, if anybody is going to pick up the slack, I thought it would be prudent to examine the current thoughts about what the fallout might be if there is no securitization market revival. At the same conference I denoted in Friday's post, a different question was posed:

Will there be a securitization market revival, or is the foreseeable future going to revert back towards balance sheet lending?

The overwhelming response, was that their will be some type of revival, but it will never get back to the level it was at 18-24 months ago, and it certainly will not happen any time soon. The TALF program is still undergoing some changes, but the program should certainly help with single asset deals and will provide shorter terms. Because of the glut of debt maturation ($400 B by 2013), the market has not stabilized, and toxic assets must get taken care off before we will see any revival of the securitization market.

Part of the problem that is often NOT discussed, is the lack of confidence not in the real estate sector, but in the ratings put out by ratings agencies on collateralized debt. Let us not forget that many of the failed CDO's were insured and rated AAA. There will continue to be no, or little investment if the benchmarks being used to value and rate assets are not trusted.

All of this being said, nobody at the conference doubted the intellect and ingenuity of Wall Street. At some point, Wall Street will figure out another creative way to push securities on the open market. Until then, many people thought that mezzanine providers would pick up the slack of first mortgage originations that are only being levered to 60-70% to get to the more traditional, and buyer preferred 75% LTV. The reason this may work is that while mezzanine financing is typically viewed as unnecessarily expensive, because first mortgage interest rates are historically low, the blended rates wouldn't be that bad, somewhere in the 7.5% range. As we battle inflation and interest rates begin to rise over the next few years, pushing rates back to their historically norms of the same range, investors may be okay with this approach.

Another suggested solution to the CMBS mess, is that in the future, originators may have to take some type of first loss position in the loans, as well as actually having to service the loans. Additionally, instead of slicing up pieces of many different mortgages and pooling them together, it has been suggested that they simply pool whole loans together so that owners can go to one lender to service their loan. This way, everybody's interest are more closely aligned with one another.

What do you think about all of this? Are there any other suggestions out there that make sense? We'd love to hear your thoughts!

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