As published in Scotsman Guide's Commercial Edition, May 2011.
For commercial mortgage brokers, the gloom of the financial crisis is starting to lift. Not only are macroeconomic indicators turning positive for the first time since 2007, but bank liquidity — one of the key indicators of future mortgage lending — is starting to improve. Although this recovery is still in the early stages, 2011 may be the best year brokers have seen in a while.
The commercial mortgage-backed securities (CMBS) market is improving.
Commercial loan prices have stabilized.
More banks are selling loans.
As of late March, CMBS deals this year totaled more than $8 billion, according to Bloomberg. In comparison, $11.5 billion in CMBS was issued in all of 2010. New CMBS issuance is important because it complements the liquidity from whole-loan sales and allows institutions to make more capital available for originations. The market is coming back because CMBS is now offering attractive, yield-adjusted returns.
In addition, commercial real estate loan prices have been improving since the middle of 2010. This stabilization bodes well for the industry. In some markets, loan prices are actually starting to increase. Improving prices mean more buyers and sellers of loans, as well as more buyers and sellers of the underlying real estate.
Most important, however, is that commercial loans are being sold again. More banks are selling their loans because the liquid secondary market is helping maximize the sale price. Competitive bidding among a growing pool of loan buyers worldwide is creating a deep market.
The effectiveness of loan sales in creating liquidity is resulting in a long-term shift in the attitudes of loan-portfolio managers. A growing number of institutions are realizing that selling loans is one of the most-effective ways to diversify, reduce risk and make more capital available for lending.
Financial institutions also are motivated to sell loans to dispose of distressed debt and move beyond the balance-sheet problems that have depressed stock prices and limited strategic options.
Troubled assets are being purchased by hedge funds, opportunity funds, banks and insurance companies. Investor demand for loans is high because there is a wide variety of products, and it is easier to access this asset class through the secondary market. In addition, loans for as little as $1 million can now be bought and sold. Smaller loans attract more market participants, which promotes more liquidity.
There’s one other reason financial institutions are selling distressed loans: The stronger the institution’s balance sheet, the more likely that institution will emerge as a winner in the coming wave of consolidation in the financial-services industry.
In the meantime, brokers have good reason to believe that better days are ahead.
Kingsley Greenland is CEO of DebtX, the largest marketplace for loans. He has more than 25 years of experience in financial services and has played a pivotal role in creating a liquid secondary market
for whole loans. Greenland was previously president of Boston Capital Mortgage Co. and chief operating officer of Fleet Real Estate Capital. He has a bachelor’s degree in business administration and a juris doctor. Reach him at (617) 531-3400 or firstname.lastname@example.org.