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CRE Finance World Autumn 2014 20 we are making, but we can imagine a time going forward based on current trends when credit metrics move beyond what we think are prudent levels. Sam Chandan: Brian, are we underpricing the risk of higher interest rates at exit for today’s new originations? Brian Olasov: I would deem that to be a bigger potential problem than credit risk since we’re likely to be at the tail end of a thirtyyear bull run in interest rates. And again, I think that the sector most at risk may be in the banks that are holding these long-term fixed-rate assets without being match-funded. Having said that, the cost of funds in banks right now is at a level, around 25 basis points, that capital markets or even life companies can’t compete. So when you see those pricing aberrations coming from aggressive bank lenders, you do have to keep in mind that they have a built in funding advantage, which is a unique advantage. Nobody else but the government can compete with a bank’s cost of funds. Sam Chandan: What about some of the smaller bank lenders in the market that have their share of the multi-family pie but lack the analytical sophistication of a Freddie Mac? When we are talking to some of the community and regional banks, small regionals in particular, there is sometimes a vastly different approach to thinking about the riskiness of the loans they are making, Are you satisfied that the market is thinking carefully enough about some of those exit risks? David Brickman: No, not entirely. We scratch our heads at times, again focusing on the local and regional banks. We obviously do not have insight into their internal models nor do we have insight into their own asset liability management practices. But it strikes us that they may have issues if you do have a significant rise in interest rates. Unfortunately again, I cannot know exactly how they look at it, but the aggressiveness we see does surprise us at times from that sector. Brian Olasov: I think some banks may have entered into a devil’s bargain where they are willing to trade off tomorrow’s interest rate risk for current earnings. If you’re putting on 10 year, fixed rate paper, even at a low leverage point, at 3.5 percent, which is where some of the loans that are being closed are that I’ve seen, even if you’re being funded at a very low cost, you still have significant overhead to take care of. And it’s not clear to me that that’s a prudent pricing position, even if the loan doesn’t constitute a more immediate default risk. I’m old enough to remember that interest rate risk, writ large, sunk the thrift industry, because of shrinking and then negative net interest margins. We won’t see that again, but it could be painful for some unhedged institutions. Sam Chandan: A closing question for Kim about a very current issue in the market. I hear that some issuers are actively shopping for ratings. Is that once again a feature of the market? Kim Diamond: Absolutely. I would say that the issuers are doing exactly what they get paid to do, which is to maximize their execution and unfortunately rating shopping is one piece of that. It may benefit them in the short run but in the long term it could be deadly for the market. There is nothing in the way that this business is done that has fundamentally changed post-crisis. Sam Chandan: A sobering reminder that we still have some work to do. That’s all the time I’m allowed for today. Thank you all once again for your time and insights. CRE Finance Roundtable: The Risk Cycle “I would say that the issuers are doing exactly what they get paid to do, which is to maximize their execution and unfortunately rating shopping is one piece of that.”


CREFW-Fall2014 10.15.14
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