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CRE Finance World, Summer 2012

Securitization is a Good Thing……Really! Second, obviously some of the things that Fannie and Freddie Banks and thrifts are the biggest percentage of the Commercial did were right as far as the performance of their multifamily loans Real Estate Market (approximately 50%) and they either have shows and you could argue that their multifamily lending was the to step up or have the aforementioned private funds and public shining star of an otherwise unfortunate record. Commercial Mortgage REITS increase their participation to make up the difference. The regulators need to come up with revised So if the life companies continue to lend and maybe use more capital standards for commercial real estate loans that have been securitization to enhance and protect their performance and securitized so that they are encouraged to use securitization regulators provide some incentives, we have solved one part of the for the disciplines involved and maintain stable and acceptable puzzle. It is a small part however because of the total commercial delinquency standards. A major issue here will be that the big mortgage loan universe of $2.6 trillion, they only represent 10-15% banks all participated in securitization and basically sold off all the of the outstandings. risk. These new standards would encourage the banks to hold an adequate percentage of the risk on their books. The medium to The CMBS piece which is another approximately 25%, is trickier small size banks will all need help and likely have to pool resources because you have to find a way to make loans on lesser quality to utilize any level of securitization. properties than life companies but still have the originator/risk owner have enough investment to maintain the quality and perfor- Securitization’s beneficial attributes can be an integral part of mance at an acceptable level. What is that level? In my mind it is the continued development and enhancement of a more stable 10-15%. That presents a problem because the amount of capital and investor friendly commercial real estate lending sector. Think involved would be substantial so you would have to have large about all the progress that has been made and the future possibili- private funds or sovereign wealth funds that could create platforms ties. What if more documents and representations and warranties where the loss adjusted yields would be acceptable. The other way were standardized, what if borrowers were incentivized to utilize to fund vehicles would be to create more public Commercial Mort- on-line standardized reporting that would facilitate the monitoring gage REITS. Now there have been a whole host of problems with processes. What if Rockport or a similar underwriting package Commercial Mortgage REITS over the years including inadequate became the standard and all information on a property throughout capital, mismatching assets and liabilities, and insufficient size to its history was accessible with all of its performance, mortgage, create the type of diversification required. Still a properly managed appraisal, environmental, structural, tenant data, and many other Commercial Mortgage REIT with adequate capital access and pieces of information. The pieces are there, now we just need diligent use of the securitization market could provide a stable and some bold initiative from the investment community and some acceptable yield to investors on a risk-adjusted basis. In both of those help from the regulators. structures, the use of in-house servicers would greatly enhance the borrower experience, particularly on the special servicer side. CRE Finance World Summer 2012 22


CRE Finance World, Summer 2012
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