Legislation likely to pass Congress within several weeks will serve to accelerate securitization of commercial real estate mortgages, industry officials say, adding that it couldn't have come at a more fortuitous time for insurers and bankers.
That is because a number of so-called bullet or balloon mortgages entered into by insurance companies and large commercial banks in the halcyon days of the mid- and late-1980s are coming due, and by facilitating securitization of commercial mortgages, the law should ease the shock to the market from the anticipated glut of refinancings.
Bullet or balloon mortgages have a relatively short life, usually with a maturity of up to seven years. One concern had been that the properties financed through these short-term mortgages had been appraised at higher values than can be realized for the properties today.
The new law should facilitate refinancings of these high-value properties because underwriters will realize they can now sell the loan into the secondary market without the underwriter of the security having to make separate offerings in each state in which it is sold as is now required.
Sheridan Schechner, a vice president at Goldman Sachs & Co. in New York, says Wall Street estimates that $120 billion to $140 billion in bullet or balloon commercial mortgages will be maturing in each of the next two years. Most of these loans are on the books of insurance companies or large banks.
Ironically, the same week the conference panel approved the bill containing the securitization provisions, Goldman Sachs announced it has teamed up with Bank of Boston to introduce a commercial mortgage conduit for the securitization and resale of mortgages originated by high quality institution partners.
Under the plan, Bank of Boston will originate, pool and service the loans; Goldman Sachs will structure, distribute and trade the securities. Initial volume estimates by Goldman Sachs for the growth of its conduit business are approximately $500 million in mortgage loan securitizations over the next year. But Schechner said the timing between the announcement on its partnership with Bank of Boston and passage of the new law is strictly coincidental.
Specifically, the banking law approved by a House/Senate conference selected to deal with differing banking bills agreed to a bill July 25 that includes a provision exempting securities backed by commercial real estate loans from complying with state blue sky laws. These laws mandate that all securities offerings comply with each states differing laws. Securities backed by single-family and multifamily homes were exempt from the state provisions under the Secondary Mortgage Market Enhancement Act of 1984.
Congress balked at providing the same exemption for commercial real estate loans when it passed the law, and the opposition has been successful since then in barring commercial real estate loans from exemption under SMMEA. That opposition, led by Rep. John D. Dingell Jr., D- Mich., chairman of the House Energy and Commerce Committee, collapsed this year.
A congressional staffer familiar with Dingell's views said his opposition remains, but he didn't have the votes this year. However, the staffer said, Dingell intends to watch this market closely. In other words, if fraud and abuse surface in these big- money products, such as through exaggerated appraisals or unrealistic projections of revenues that result in default, Dingell will be prepared to quickly move to impose restrictions such as severe regulation of the market, probably at the hands of the Securities and Exchange Commission. In any event, Congress is likely to pass the bill at least by the time it adjourns for a summer recess in mid-August.
It was incorrectly stated in Mortgage Marketplace July 25 that the conference panel had not approved exempting commercial ABS from state securities law requirements as other ABS products are provided under SMMEA. That is because the provision dealing with commercial ABS was part of regulatory relief provisions in Title III of one of the two bills combined in the legislation approved by the conference panel July 25. It was not part of the securitization provisions contained in Title II of the same bill.
The congressional action is only part of the reason the commercial real estate MBS market is growing. This market is gaining a terrific amount of investor acceptance, Schechner said. Its becoming a mainstreet investment alternative. And it couldn't have come too soon. With all of these bullet loans maturing there is a need for someone to step in and refinance those markets.
The commercial MBS market in 1993 is estimated at $18 billion; estimates for this years volume ranges from $15 billion to $25 billion. The higher levels were predicated on lower interest rate levels, Schechner said. He added he estimates over the next five years, $75 billion as a minimum for this market.
The legislation approved by the conference panel, renamed the Riegle/Neal Community Development Financial Institutions Modernization Act of 1994 also includes provisions facilitating securitization of small business loans. Because the omnibus bill, a typical election-year product, incorporates so much special interest legislation, it is not surprising that the securitization provisions dealing with commercial mortgages are somewhat different than those dealing with small business. For example, commercial real estate loans are eligible for securitization through Remics through the 1986 tax act; the bill pending before Congress does not extend that treatment to small business loans.
However, despite heavy lobbying by supporters of both instruments, the conferees declined to specifically include language in the bill that will allow pension funds to purchase the instruments. But congressional staffers say the report language on the bill will include language supporting an exemption for the two instruments from Erisa requirements if the Labor Department desires to do so. And Labor Secretary Robert Reich has said in a letter to several members of the Senate Banking Committee he looks favorably to expanding the types of products pension funds can invest in.