A surge in delinquencies on the apartment loans backing a Resolution Trust Corp. bond issue is fueling doubts that banks can duplicate the agency's success in securitizing commercial mortgages.
No one is saying that investor in the RTC securities will be exposed to losses. They are protected by a huge cash reserve that rating agencies required before they would grant an investment grade to the $370 million of bonds backed by the mortgages.
But there is uncertainly about how much of the reserves will be tapped to cover losses. This underscores the limited potential that securitization of commercial mortgages has for banks at present.
Not Practical for Banks
"The RTC has done the community a wonderful service by providing liquidity in commercial real estate," said Luke Hayden, senior vice president of Chemical Banking Corp. "But the way they got these things done was by establishing massive reserves. That's not an option for commercial banks."
If had been hoped that securitization would offer banks a way to reduce their commercial real estate exposures and lower their capital. But few banks could afford the 30% to 40% hits on loans that RTC has taken to securitize some $7 billion in commercial mortgages.
The banks will have to find a way to sell the risk of first loss. And potential investors don't like uncertainty.
"The biggest impediment to securitization is the availability of information to judge the risks of a pool," said John F.C. Parsons, director of research at Ferguson Partners Ltd., a pension investment adviser in Chicago.
The RTC commercial securitization program was kicked off last August with the sale of a $373 million portfolio of mortgages on apartment buildings that had been originated by the defunct Gibraltar Savings and Loan Association. It was the first of $4.5 billion of RTC securities backed by multifamily properties.
Tougher to Analyze
Since then, the RTC has sold $2.3 billion of bonds backed by offices, warehouse, shopping centers, and other nonresidential real estate. These types of loans are considered even more difficult to analyze.
In the first deal, the reserve amounted to $130 million, or 35% of the pool.
Investors have gradually become comfortable with the real estate issues, and yield spreads have shrunk 20 to 30 basis points as a result, Wall Street traders said.
Sharon Stieber, section chief of securitization for the RTC, acknowledge that loans representing just over 20% of the collateral in the first RTC issue are delinquent. But she attributed it to a delay in payment of one or two of the larger loans in the pool.
Temporary increases in delinquent are not unusual after the right to service loans is sold in a securitization, she said.
Besides, she said, the reserve, as a percentage of the remaining balance on the loans in the pool, has increased slightly from 35% to 35.33%.
But some analysts say the pickup in delinquencies is worrisome.
"People who buy this put a lot of faith in the rating agencies," said Howard Gelbtuch, a securitization specialist with Coopers & Lybrand. "There's no question they apply a doomsday scenario stress test to the portfolios. They do a good job. But these things are just not performing the way they were expected to."
Mr. Gelbtuch noted a study issued in March by the REIS Reports, a New York data analyst, that estimated buildings backing as much as 70% of the loans cannot meet debt payments with rental receipts.
"I am firmly convinced that the reserves are being used up faster than expected," Mr. Gelbtuch said.
The study suggested that many of the loans could go into default and that the ultimate recovery on the reserve fund by the RTC would depend on how much can be recovered from foreclosure sales and workouts with the borrowers.
Lloyd Lynford, president of REIS, cautioned that the report was based on an incomplete sample of the loans in the pool but added that the very uncertainty illustrates the need for better information.
Because bank real estate is probably of better quality than the RTC's, Mr. Lynford said, it may be possible to sell the risk of first loss in the form of subordinated debt.
Question of Earning Power
But he said it is not enough to tell investors or the rating agencies that a loan is current.
"If you were to release the building today at today's leasing and occupancy rates, what kind of income would it generate?" he asked. What's needed is "a double check on the earning power of the assets being securitized."
Investors confirmed that better information is needed before they will buy the subordinate pieces of bank real estate portfolios.
"We have some investors actively considering that," said Mark Snyderman, vice president and portfolio manager at Aldrich Eastman & Waltch, in Boston. "The more junior our investment is - the closer to the first loss - the more information we need with respect to the loans."