As published in Scotsman Guide's Commercial Edition, October 2008.
Commercial brokers are starting to wonder how to stay in business while the market works through its liquidity, credit and property deleveraging process. The name of the game is loan investors -- particularly, B-piece buyers from Wall Street.
These investors are holding the trump cards for resurrecting everything from small-balance commercial loans -- aka, those of $5 million or less -- to the large-loan commercial-mortgage-backed-securities (CMBS) deals. They also hold the key to stabilizing the residential and collateralized-debt-obligation (CDO) space. And they are not ready to move until they either see a turnaround or receive a high-enough return to take on the risk.
The current market dislocation is not because of the absence of available investment capital. It is a crisis of confidence in the quality and value of loans and the securities they back. And brokers should closely watch the movement of market spreads between fixed- and adjustable-rate loans, as well as the spreads between high-quality and high-yield debt and securities. On any given day, the movement of these spreads determines if the market equilibrium for buying loans is closer to the buyers' bids or sellers' asking prices.
Brokers who wish to remain relevant until originations come back would be wise to become friendly with the fund investors -- and to keep a close watch on the residential and commercial markets to see which way the funds are flowing.
Antsy residential investors
Although many commercial brokers do not handle loans in the residential market, they're quite aware that trends in that sector greatly affect the flow of funds in commercial.
The residential market doesn't need to see home prices stop declining for the mortgage market to stabilize. Although that flies in the face of prevailing wisdom, consider that when home prices stop falling, a lot of the upside investment potential for value-adds and distressed buyers will evaporate quickly.
Sellers will almost immediately gain the upper hand. Private equity and hedge funds will begin throwing large blocks of capital at these businesses, and the result may be chaos and a lot of bad loan purchases.
In addition, fund managers will be on a buying binge when the rest of the world says that residential properties are on the upswing. Due-diligence shops will be overwhelmed, which could lead to more mistakes and mispricing.
This side of the industry seeks investors willing to buy paper on the street at something that resembles a reasonable bid -- based on achieving a reasonable risk-adjusted return and a plan to "work" the real estate asset. These could be investors who hire real estate agents to rent properties behind loans until a market uptick, when those properties can be sold, for example. Until then, residential banks and lenders will continue writing down assets, even though they have no intention of selling at those prices.
A number of buyers in the default-loan acquisition and servicing space are starting to kick the tires of loan portfolios, however. Their investors are getting antsy about not buying into what they see as good value in real estate and mortgage portfolios and even some securities.
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