Three trade associations have formally joined in a consortium to push for growth of a secondary market for commercial real estate. The National Realtors Association. the Mortgage Bankers Association and the National Realty Committee have been working together informally for several months trying to pull together the consortium of commercial. mortgage and investment banks, attorneys and ratings agencies.
The consortlure met last Wednesday and Friday in Boston. On Thursday. commercial securitization was the topic of a NAR Roundtable on Credit and Finance.
"With this Joint effort. (we) hope to address many of the obstacles to and the feasibility of an expanded secondarymarket, particularly standardization issues and the lack of commercial mortgage performance data.' said Steven A. Wechsler. president of the NRC. "At the same time. we will continue to address the legal and regulatory barriers that impede an expanded secondary market.'
The embryonic market for securities backed by commercial real estate loans has largely been the domain of the Resolution Trust Corporation. which. by the end of this year will have successfully securitized nearly $10 billion of such securities. which amounts to about onequarter of the commercial MBS market. Consequently. the private sector has largely depended on RTC securitization programs to stimulate development of a secondary market for commercial real estate securities.
But liquidity remains below the level necessary to foster more issues from other companies and spark more commercial lending. As a result. real estate trade groups will attempt to foster securitization efforts through the real estate industry and the asset-backed market.
Absentlegislation to aid the securitization of commercial real estate loans. the real estate industry has taken the first step outside the RTC's activities. The agency's programs have served as a virtual blueprint for the consortium.
One of the group's first projects. which was discussed at the Boston meeting. is the creation of a pricing model to evaluate the risk of commercial mortgage securities based on existing commercial mortgage performance data.
Once the model is created. the trade groups hope to develop an industry consensus on underwriting requirements. documentation and terminology.
Work on the model will be led by Kerry Vandell. chairman of real estate and urban land economics at the University of Wisconsin at Madison.
The lack of standardization is often cited as the major impediment to increased securitization of commercial real estate loans.
Among proponents of commercial real estate securitization, it was hoped that legislation would facilitate the growth of this market. as the Secondary Mortgage Market Enhancementact did for the residential mortgage market in 1984.
But even after a hearing last May before a Senate Banking Committee subcommittee on commercial real estate securitization. there still are no plans for legislative action. despite a consensus that the RTC's efforts in this area have been quite successful.
The NAR has said it is prepared to offer 'a substantial financial contribution' to fund the consortium's efforts. and it is attempting to raise initial funding for the consortium. The three real estate trade groups wffl provide support staff for the consortium.
The NAR. MBA and NRC have already actively sought changes that would aid the securitization of commercial real estate mortgages. They have asked the Internal Revenue Service to issue regulations that would clarify that prepayment penalties. contingent interest and other forms of interest typical in commercial mortgages may be passed on to holders of the security. They also have asked the Treasury Department to convene a task force from the appropriate federal agencies to devise incentives for reaching conformity of commercial mortgage loan documents.
There are skeptics about commercial securitization. The efficiency of financial intermediation may be impaired by such securitization. Financial consultant Bert Ely said last spring in an interview with The Mortgage Marketplace.
"It looks more efficient but that's strictly an appearance." he added. "The whole idea is to get commercial real estate loans off the books of banks. but I question whether the securities market is really that much more efficient in securitization than banks being able to hold (the loans) profitably in the portfolio.