A trio of trade groups has stepped up efforts to spur securitization of commercial real estate loans.
The National Association of Realtors, the National Realty Committee, and the Mortgage Bankers Association of America said at the NAR's annual real estate finance roundtable last week that they have pitched in more than $500,000 to start a consortium. Its mission:
* Improve data.
* Standardize loan documents to simplify the pooling of loans.
* Fight for relief from capital and accounting rules that block securitization by banks and insurance companies.
A New Urgency
An active secondary market has long been on the commercial real estate industry's wish list because loan sales would free up capital for new lending and refinancings. But faced with the worst conditions since the Depression, securitization has moved to the top of the agenda.
A liquidity crisis and recessions was enough to get residential loan securitization off the ground two decades ago, recalled Robert J. Eisenberg, a former regional director of the Federal Home Loan Mortgage Corp..
"This will be a replay of 1969," Mr. Eisenberg predicted.
In liquidating the assets of bad thrifts, the Resolution Trust Corp. has found buyers for more than $8 billion of investment-grade securities backed by commercial real estate loans.
Now the challenge is to find a cheaper way for private issuers to package loans to investors once the RTC supply dries up, said John B. Levy, senior vice president of NationsBank's NationsBanc Mortgage Corp.
What is now a small market could ultimately grow to $450 billion, if 40% of commercial realty loans and 50% of multifamily loans can be resold, said Kerry Vandell, chairman of real estate and urban land economics at the University of Wisconsin.
Model Being Developed
To fuel that growth, the new consortium is financing an attempt by the University of Wisconsin to create a risk-rating and pricing model for the securities and to create a national data base on real estate market conditions.
Credit rating agencies require issuers of securities backed by property loans to set aside reserves or sell subordinate securities -- probably much larger than necessary.
"If you can get more information, it will reduce the subordination," Mr. Levy said.
Developers, reluctant to provide operating data on their businesses, have hindered past efforts to compile useful market statistics. But they may be more cooperative if convinced it will help restore credit to their industry, roundtable participants said.
Loan documents are less uniform for commercial property than for residential mortgages.
But standardizing them to accommodate rating agencies and investors is not an insurmountable obstacle, law professor Patrick Randolph of the University of Missouri told the group.
"We already have a great deal of standardization," he said. Mr. Randolph noted that documents vary from state to state but always address the same issues, such as down payment, interest rate, and maturity.
The industry only needs to come up with forms that have the same information in the same place, he said.
Particularly vexing to bankers, who have contemplated using securitization to move loans off the balance sheet, is the requirement to hold capital against the entire balance of a loan if they retain even a small part of the loan.
There is little hope this rule will be overturned. To do so would fly in the face of international banking regulation, Michael O'Hanlon, managing director of mortgage finance of Lehman Brothers Inc., said in a recent interview.
But in the current economic climate, real estate lobbyists believe they can gain some flexibility on the rule, said Stephen Wechsler, president of the National Realty Committee.The PotentialFor SecuritizationProperty % of loans securitizedtype Currently Potentially 40% 60% - 70%Residential $1.19 $1.79 - trillion $2.09 trillion 15% 40% - 50%Multifamily $47 $125 - billion $155 billion 2% 30% - 40%Commercial $15 $225 - billion $300 billionSource: University of Wisconsin