Three years after a slump in the market for securities backed by commercial mortgages, advocates argue that stricter underwriting and prepayment protection have removed much of the risk.

Since 1998, when a worldwide credit crisis shook many investments, the market for these securities has gone through a consolidation period, according to Jonathan L. McKetney, director of the capital markets division at the Mortgage Bankers Association.

The portfolios of many real estate investors were not capitalized well enough to weather the 1998 crisis, Mr. McKetney said. But the industry learned from its mistakes and implemented much stricter underwriting procedures, such as more thorough researching of loans' underlying collateral, he said. "It is a better-quality market, because the underwriting standards have increased tremendously."

And lenders' own improved habits have added to the quality of the securities, several sources said. After losing their shirts in the early 1990s, commercial lenders have been more selective and cautious, curtailing overzealous developers and, by extension, bad loans, these sources said.

"Originators and issuers have improved underwriting, documentation, and marketing, which has helped to improve the average loan quality," said Yougou Liang, managing director of Prudential Real Estate Investors.

As a result, low-grade mortgage bonds represent a great opportunity for institutional investors looking to expand their portfolio coverage, Mr. Liang said.

In fact, Mr. Liang argues in a report released this month, the market for such bonds has few players and presents "opportunity for participation by investors of all kinds." They must understand that the securities are a risky investment, he said in an interview, but they are "one that is richly rewarded." He noted that the market for such high-yield bonds is influenced by the real estate market, which is currently very healthy. (The market for low-yield mortgage debt is more directly influenced by fixed-income market forces.)

Jeff Williams, vice president of the public debt advisory group of Lend Lease Real Estate Investments of Atlanta, agreed that market is healthy. Property supply and demand are at equilibrium, vacancy rates are at historic lows, and recovery rates on commercial mortgages are at historic highs, he said. As a result, he said, commercial-mortgage-backed securities should be able to weather an economic downturn.

The current construction of many commercial-mortgage-backed bonds, especially in the higher investment grades, should also provide good protection to investors, Mr. Williams added. Many high-grade commercial loans have lockouts that prevent borrowers from prepaying on their loans in most cases, he said - and in cases where prepayment is allowed, the borrower must replace the real estate collateral with Treasury debt.

But Peter Kozel, director of commercial real estate research at Standard & Poor's, was less enthusiastic about lower-rated mortgage-backed bonds. Predictions of weaker economic growth this year raise the risk of such securities, he said. Investors should conduct proper due diligence and use common sense, he said.

"It is not saying that they are going to default, but clearly the amount of risk involved in holding these properties is higher than it was a year ago," Mr. Kozel said. "If we have a dramatic slowdown, all bets are off" on many commercial-mortgage-backed instruments.

Old-fashioned hard work, Mr. Kozel said, is the key to these securities. Investors need to watch the economic figures and drill into the details of the individual properties and their surrounding regions, he said. "You should be cautious about the real estate market; that is well understood."

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