2008 CPN Goldbook - (Page 42) 2008 GOLDBOOK FINANCIAL SERVICES S P E C I A L S E C T I O N Proceed with Caution Conduits Back Off; Other Financiers Seek Solid Deals By Suzann D. Silverman T he financial sector’s love affair with commercial real estate cooled last summer, when warnings from Fitch Ratings and Moody’s Investors Service led banks to tighten their lending standards. Originations slowed considerably as a result; the Mortgage Bankers Association reported a 16 percent reduction in the fourth quarter of 2007 over the same quarter in 2006 and an 11 percent reduction in the second half of 2007 over the same period the previous year. Those numbers were all the more remarkable considering that the first half of 2007 was 38 percent ahead of the same period in 2006. While financiers generally claim to be more cautious about what companies they are providing with capital, activity has hardly been silenced across the board. Conduits, life insurance companies and commercial banks all decreased their originations during the fourth quarter, but the government-sponsored enterprises increased their volume by 41 percent. And a number of life companies and commercial banks are still financing the deals that are taking place, though far more selectively. The CMBS market has seen the greatest change, with conduit lenders pulling back or restricting warehouse lines, according to Expectations & Market Realities in Real Estate: 2008, a late-2007 report by Principal Real Estate Investors, Real Estate Research Corp. and Torto Wheaton Research, a CB Richard Ellis Inc. company. Such a shift has a significant impact on the overall commercial real estate finance market because the CMBS market now encompasses such a large portion of it, according to Mortgage Bankers Association senior director of commercial/multi-family research Jamie Woodwell. In 2006, for instance, CMBS made up 46 percent of commercial and multi-family originations. Predictions generally have the CMBS market returning sometime around the middle of 2008, which would have pools trading around the beginning of 2009. CMBS delinquencies remain low, though they rose 56 percent from the first quarter of 2007 to year-end, according to Standard & Poor’s. It predicted in February that delinquencies could double sometime in 2008 or 2009, bringing them to their December 2003 peak of just under $4 billion. And Fitch Ratings noted in a January report that they could even triple by the end of 2008 owing to “additional economic stress to property cash flows, declining defeasance volume, balloon defaults and the decrease in new origination volume.” While either way the number is still low, the public markets face some challenges, including earlier delinquencies in the 2005 to 2007 vintage years, delinquencies that are now being created faster than loans are being resolved, an increase in retail and multi-family delinquencies and a significant number of loans maturing in 2008, according to Standard & Poor’s. The market for collateralized debt obligations has essentially come to a halt, but Woodwell and Mortgage Bankers Association senior vice president & chief economist for research and business development Douglas Duncan predicted in February that CDOs will return, albeit with some restructuring. 42 Commercial Property News 2008 Goldbook
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