Securitization is a Good Thing...Really!

CRE Finance World, Summer 2012

Securitization is a Good Thing……Really! John M. Scheurer Consultant S in the 1990s and 2000s, I was able to observe how the 1. 1997 and less than .2% since 2002.Life company 60 + delinquency rates peaked sometime around1992 at approximately 7.5% after the hangover of the 80s andhave trended down ever since with it being under 1% sinceecuritization takes a lot of flak these days for the role itplayed in the capital markets crisis by its association withsubprime home loans and generally as part of the causeof the financial crisis. But as a participant in its development CMBS market was instrumental in enhancing the lending markets 2. Banks and thrifts 60+ delinquency rates peaked sometime in a myriad of ways. CMBS produced new systems and lending around 1991 at approximately 6.5% and trended down to 1% processes, increased information flow, transparency, documentation, or less from 1999 to 2008, then trended up beginning in 2008 investor participation, standardization and far greater focus on to almost 4.5% in 2010 and are now around 3.5%. performance metrics than imaginable in the 1980s, all things that most everyone would agree make lending more efficient and 3. Fannie and Freddie 60 + delinquency rates for multifamily loans commercial real estate a more investor friendly asset class. are similar to the life companies in that they peaked around 1992/1993 and trended down since then with rates for both Looking ahead, what lessons can we take from the market’s early staying below 1% throughout the recent crisis. Q4 2011 delin- success? How can we use those lessons to create a long-term quency rates for Fannie were .59% and Freddie .22%. stable lending market going forward? I would say that there are three key items: 4. CMBS, which started in the early ’90s but had no real significant volume until 1995 had delinquencies that trended up to about A. First and foremost, everyone needs to adopt the advances 1.72% in 2003, then fell below 1% until they started to climb in promulgated by CMBS in information collection, availability, 2008 and accelerated dramatically to 8.56% where they were standardization and in utilization of the key systems and at Q4 2011. processes. The CMBS market set the standards for the development of more rational and efficient commercial lending. Chart 1 Commercial/Multifamily Mortgage Delinquency B. Banks, thrifts, life companies and other portfolio lenders should Rates Among Major Investor Groups securitize more of their assets as a way to add discipline and Selected delinquency rates at the end of the period adopt the benefits and efficiencies from the CMBS model. C. Sovereign Wealth Funds and other large investors should fund or create some private commercial real estate finance vehicles that utilize securitization but retain a significant portion of the subordinate bonds and more Commercial Mortgage REITS need to be raised which will utilize securitization but retain a significant portion of the subordinate bonds. Commercial Mortgage lending has had a somewhat rocky perfor- mance record from a historical perspective. We have had banks, thrifts, life companies and CMBS as ways to underwrite, close, monitor and invest in this asset class. CMBS was created because all the other types of commercial real estate lending historically failed on some level. I recently was reading the MBA’s Fourth Quarter Commercial and Multifamily Mortgage Delinquency Rates (I know John, you need a life!) and a number of things occurred to me. A publication of Summer issue 2012 sponsored by CRE Finance World Summer 2012 19


CRE Finance World, Summer 2012
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