Last year at the MBA Commercial Real Estate Finance Convention (CREF) “cautious optimism” prevailed regarding CMBS conduit originations, tempered by disappointment in the size of the minimum loan balances sought by CMBS conduit originators ($20mm and up), required debt yield (13%-14%) and conservative underwriting.
This year, “cautious” is gone; the word is “optimism.” With the lack of significant new issue supply and the Federal Reserve continuing to push interest rates lower, bond buyers are starving for well-structured product like CMBS, which can provide decent yield. As a result, spreads and interest rates continue to decline and origination shops are desperate for loans to fill their CMBS pools. Loans down to $5 million are now routine, debt yields in the 11% area are prevalent, and leverage is creeping up.
“All of our investment banking relationships were hitting me up for loan product,” commented Michael D. Sneden, Executive Vice President of ValueXpress. “A $5-million loan size? No problem. Tertiary market? No problem. Hospitality? No problem. It was all music to my ears,” said Sneden.
The question is: Will the enthusiasm and CMBS market have legs? I think a comment by Michael Cohen, Executive Director of UBS Securities LLC, is particularly on point. He said, “I am confident that the market will be great for the next 30 days.” Market gyrations make it impossible to predict the future.
“So in the short run we will make hay,” notes Jim Brett, a senior loan underwriter at ValueXpress, “and push as many CMBS conduit loans through the system as fast as we can.”
Ann Hambly, founder and co-CEO of 1st Service Solutions, an advisor to commercial loan borrowers, recently outlined the resolution of defaulted CMBS loans since 2007 in an interesting article for Northeast Business Journal. Ann notes from 2007 through mid-2011, a total of $82 billion of CMBS loans were resolved. Some takeaways:
President Obama announced that he is elevating the head of the Small Business Administration (SBA) to a Cabinet-level position, as he urged Congress to also grant him permission to consolidate that and other federal agencies in an attempt to make government more efficient.
The decision to bring SBA Administrator Karen Mills into Obama's Cabinet does not need congressional approval. However, Obama's much broader proposal to merge overlapping agencies does. Obama appealed to Congress on Friday to help make that happen.
"This is the same sort of authority that every business owner has to be sure that his or her company keeps pace with the times," Obama said. "Let me be clear, I will only use this authority for reforms that result in more efficiency, better service and leaner government."
“Having Karen Mills among the President’s key decision makers is great news for lenders committed to the SBA lending programs,” commented David Glanville, a regional loan originator for ValueXpress. “There is concern about where the SBA is going to find itself under the President’s proposal to merge six major trade and commerce agencies to create efficiency. The appointment of Mills to the Cabinet implies the SBA will have a major role in the merger of the agencies.”
On Wednesday, the Federal Reserve, citing ongoing concerns for a global economic slowdown and a stubbornly weak U.S. labor market, said it expects to keep record-low interest rates in place at least until late 2014. Fed Chairman Bernanke said the Central Bank stands ready to take additional action to kick start the weak U.S. economy, but he stopped short of saying the Fed was planning any future bond purchase programs.
“We are prepared to take further steps in that direction if we see that the recovery is faltering or if inflation is not moving toward target. It’s an option that’s certainly on the table,” Bernanke said. He also addressed the Central Bank’s new inflation target of 2%, saying that goal could be overlooked if it meant bringing down unemployment.
Also on Wednesday, the Fed released the forecasts of its policymakers for the first time. The release revealed a wide disparity among members of the FOMC on when the U.S. recovery might start gaining traction. When taken as a whole, Bernanke explained, the forecasts led to the decision to push back any discussion to raise interest rates until late 2014.
“This is positive news for CMBS conduit and most other commercial loan borrowers,” commented Michael D. Sneden, Executive Vice President of ValueXpress. “CMBS bonds tightened in response and CMBS loans rates are solidly in the mid-5% area now, down from 5.75% a week ago.”
The CMBS deal calendar for early 2012 is taking shape. All told, 14 transactions totaling $10.8 billion are scheduled to hit the market by April, according to a preliminary tally by Commercial Mortgage Alert. The activity comprises nine multi-borrower deals totaling $9.3 billion, three single-borrower transactions totaling $1.1 billion and two distressed-loan securitizations totaling $400 million.
Of those, 11 deals totaling $8 billion are scheduled for the first quarter. In addition to those in the pipeline, one transaction has already priced: a $1.2-billion multi-borrower issue by Goldman Sachs, Citigroup and Archetype Mortgage Capital.
The projected $9.2 billion of first-quarter issuance would put the U.S. market on pace for $37 billion of annual volume -- right in line with the prediction of a panel of CMBS pros surveyed recently by Commercial Mortgage Alert. The deal pipeline, while hardly robust compared with pre-2008 levels, does reflect improvement in the market since last year’s second-half swoon. Only $5.8 billion of U.S. offerings priced in the fourth quarter. But bond spreads have tightened somewhat, improving the competitive position of CMBS lenders, who are feeling more upbeat these days.
Ron Goldstein, director of Lender Relations for the N.Y. district office of the SBA, recently reminded New York SBA lenders that time is running out on the 504 Certified Development Company Loan Program for debt refinancing authorized by the Small Business Jobs Act of 2010. The program is set to expire on September 27, 2012.
According to Jimmy Hughes, Director of SBA 504 Program for the Regional Business Assistance Center, a New Jersey CDC, the 504 project must have received an Authorization (basically the SBA’s form of Commitment), but does not have to close by September 27, 2012. This provides a little extra time to close loans through the fall.
“But there may be a crush of applications right before the expiration that could overwhelm the SBA approval staff in Sacramento,” warned Jim Brett, a senior loan underwriter at ValueXpress. “This happened when the fee waiver and 90% guarantee amount expired for the SBA 7(a) loan program in December 2010, and although the surge may not be as great, borrowers who wait too long to apply for an SBA 504 refinance loan may get shut out.”
The SBA 504 refinance program enables a small business to refinance existing debt and, more important, use excess equity to obtain working capital that can be used for financing eligible business expenses. Borrowers will be able to refinance up to 90% of the current appraised property value.
According to “Commercial Mortgage Alert,” commercial mortgage-backed securities (CMBS) prices rose again this week, continuing a month-long rally. Spreads on legacy CMBS paper tightened Wednesday, January 11 as industry professionals returned from the Commercial Real Estate Finance Council’s annual winter conference in Miami Beach, FL. Some of those gains were surrendered Thursday when opportunistic sellers met the surge in demand by offering large bid lists. Still, CMBS values overall wound up higher than a week ago.
Evidence of the rally has been largely restricted to legacy CMBS issued prior to 2008 since bonds from post-crash deals still don’t trade that often. But the higher prices bode well for the first multi-borrower issue of the year -- a $1-billion offering by Goldman Sachs, Citigroup and Archetype Mortgage Capital that is slated to hit the market next week.
“The next deal to come out of the pipeline is going to reset the spread benchmarks,” said one CMBS trader. “And given the momentum we’re seeing now, they’re going to be tighter than what we’ve seen for a long time.”
Early guesses are that the AAA-rated long-term bonds from the super-senior portion of the offering could be shopped in the range of 105-120 basis points (bp) over swaps. That would be down from final pricing of 130 bp on equivalent bonds from the last multi-borrower transaction, a $673.9-million issue by UBS and Natixis that priced on December 9, 2011.
“We have been aggressively trying to buy CBMS for Country Bank, but we keep being outbid on the legacy CMBS from 2005 and 2006 transactions that have passed our underwriting analytics,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “The rally is great for CMBS borrowers, no so much for CMBS investors.”
According to Secondary Market Access (SMA), a leading SBA 504 First Mortgage Line Pool (FMLP) settlement firm, December 2011 saw record activity for FMLP settlement with a total of 24 loans settled into 10 separate pools.
SMA’s Bob Judge said FMLP volume is growing significantly as lenders realize this secondary market option is available to them. “The FMLP program is an incredibly valuable tool for those lenders who are looking to maximize income while diversifying risk.”
The gross loan amount of all loans was almost $60 million. Judge coordinated the settlement on 8 of 10 pools in December 2011 and he anticipates more pool originators entering the market as the FMLP program becomes more widely recognized by 504 lenders. The program allows for the pooling and sale of a portion of first mortgage loans that were closed in conjunction with SBA 504 second mortgage loans.
“Country Bank and ValueXpress are actively assembling a first FMLP for settlement in the spring or summer of 2012,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “We anticipate 4-5 first mortgage loans that will be closed in conjunction with SBA 504 second mortgage loans; an approximate balance of $20 million will be pooled and partially sold under the FMLP program.” Country Bank has set a goal of $50 million of SBA 504 first mortgage loans for 2012 and it is actively providing loans to qualified borrowers.
Delinquencies of 30-days-plus in commercial real estate loans in CMBS fell 26 basis points (bp) to 9.51%, according to Trepp, New York, yesterday. Only August 2011's 36-bp drop was larger.
But Trepp warned that higher delinquency rates could be on the horizon. Trepp expects the delinquency rate to increase as 2007-vintage loans -- originated under the weakest underwriting standards -- start reaching their five-year balloon maturities. This will add to the stress being put on the delinquency rate by the slowdown in CMBS issuance.
“It’s quite possible that this will represent the best reading for a while,” said Trepp Senior Managing Director Manus Clancy. "Even if the 2007 vintage is only ‘as bad’ as the 2006 vintage has been, the (delinquency) rate could easily go up 75 bp. So, for now, further improvements in the delinquency rate could be elusive."
Nearly $15.5 billion of 2007-vintage loans will come due in 2012, with the majority reaching their balloon dates within the next six months. For perspective, one year ago the CMBS market was looking at $13.7 billion in 2006-vintage five-year balloon loans reaching maturity. Of that, $9.9 billion remains, meaning only 29% was retired in some form. Of the $9.9 billion, nearly 60% is already with the special servicer.
Deutsche Bank and J.P. Morgan will be the top issuers of CMBS when the final “league tables” are tallied for 2011. Deutsche and J.P. Morgan were in a dead heat for the top position as the year closed. Headed into year-end 2011, Deutsche has $6.8 billion of global CMBS credit, followed by J.P. Morgan at $6.6 billion. Deutsche’s $6.3 billion of U.S. bookrunner volume is narrowly ahead of J.P. Morgan’s $6.2 billion. Rounding out the Top 5 in both rankings: Wells Fargo ($4.3 billion), Bank of America ($2.9 billion) and UBS ($2.8 billion); of these three firms, none has had non-U.S. activity, so their global and U.S. totals are the same.
CMBS issuance in the United States nearly tripled in 2011 to $32.7 billion. While that is a significant improvement from $11.6 billion in 2010, it is below the year-earlier expectations of almost $40 billion. It also pales in comparison to the go-go years of 2005-2007, when annual volume ranged as high as $229 billion. Non-U.S. issuance is up only slightly, to $3.3 billion, putting global issuance at $36 billion.
“Although no one is asking, my prediction for 2012 is $50 billion of CMBS issuance,” said Michael D. Sneden, Executive Vice President at ValueXpress. “Spreads are trending down and investor appetite is good; as long as Europe can contain its debt problems, I think we can hit this number.”
News from Sears Holdings Corp. threatened to jolt CMBS investors on Tuesday morning: Sears announced that it would be closing up to 120 stores -- a mix of both K-Mart stores and Sears stores. The news sent Sears stock plunging 18%. According to a report by Bloomberg on Tuesday morning, this was the biggest decline in Sears stock in over eight years. On Wednesday, Sears Holdings Corp. identified 79 of the anticipated 100-120 stores it said it would close; the list is split almost evenly between the Sears and Kmart chains.
On Tuesday, the struggling retailer reported weak holiday sales and forecast earnings for the current quarter would fall by more than half from year-earlier results. It also said it tapped its credit line during the fourth quarter for inventory.
“There are quite a few Sears and Kmart locations within CMBS loans, with Sears or Kmart usually one of the top three tenants,” said Michael D. Sneden, Executive Vice President at ValueXpress. “I took a look at the full-sized Sears stores on the list and sure enough, the second one slated for closure, 150 South 69th Street in Upper Darby, PA, is secured by a $65-million CMBS conduit loan in which Sears represents 23% of the net rentable square footage. There are surely more locations with CMBS exposure.”
The Upper Darby shopping center is already struggling, with a reported occupancy of approximately 75% and a net cash flow debt-service coverage as of June 2011 of 1.03x. The Sears lease expired in August 2008 and likely has been renewed for short-term periods; once Sears ceases to pay rent, a potential default or loan restructuring is a distinct possibility.
“The problem with the large multi-story Sears buildings is that no one wants to lease those buildings in today’s market,” observed Sneden.
Mezzanine financing remains readily available to help bridge declining property values in situations where the refinancing of existing debt with a new first mortgage alone cannot pay off maturing debt. A typical 65% loan-to-value first mortgage can be increased to 75% using a mezzanine structure. For example, Chicago-based Pearlmark Real Estate recently wrote a $12-million mezzanine loan on the 841,000-square-foot office building at 1700 Market Street in Philadelphia, PA. The coupon is 11.25%. The $111-million senior mortgage on the property was written by UBS.
“We have used mezzanine financing on a few of our CMBS transactions,” commented Michael D. Sneden, Executive Vice President of ValueXpress. “The rate on the loan often is more than borrowers are willing to pay, but if you look at a blended rate on the combined first and mezzanine loan, the rate does not look that bad, penciling out in the 6.5% area right now. Plus, it sure beats injecting cash equity into the transaction to make up the difference between the first mortgage loan and the payoff.”
A challenge is that mezzanine loans are legally complex to structure. As a result, most mezzanine lenders want to make loans $10 million and up, impying first mortgage loans in the $100-million area. “These first mortgage levels are higher than we typically originate,“ said Jim Brett, senior underwriter at ValueXpress. “However, we have developed a few mezzanine relationships that will provide mezzanine loans in the $2 million-and-up category, implying smaller first mortgage loans in the $20-$30 million range, consistent with our origination levels.”
“The amount of CMBS conduit loans should increase for ValueXpress and the industry for 2012, but not by leaps and bounds,” estimates Michael D. Sneden, Executive Vice President at ValueXpress. “I think the market as a whole, which generated about $30 billion in CMBS loans in 2011, will grow to about $50 billion in 2012.”
Sneden expects SBA lending to be active in 2012, particularly SBA 504. “I see a rush of SBA 504 refinances prior to the program’s scheduled end in September 2012. But I also wonder if the program will be extended or made permanent, a move that would make sense to me. On the other hand, the U.S. government does not seem capable of passing any legislation that makes sense, so I am not holding my breath,” said Sneden.
Sneden believes SBA 7(a) volume will be challenged in 2012. “The SBA 504 program is so much more competitive than SBA 7(a) that I see borrowers pressing lenders for 504 loans and walking away from SBA 7(a) proposals. “When refinancing was not allowed in 504, the SBA 7(a) program had a monopoly on SBA refinances,” notes Sneden. “In 2012, SBA 504 refinances will rule until September, in my opinion.”
Government-sponsored (GSE) multifamily programs (Fannie Mae, Freddie Mac and HUD) will continue to dominate the multifamily sector. CMBS conduit loans will capture multifamily loans that are ineligible for GSE execution, providing excellent debt capital flows to the multifamily sector overall.
To recap, in 2011, the commercial lending market for existing income-producing and owner-occupied real estate continued to improve, albeit very slowly. “In 2011, we completed our first CMBS conduit loan since the end of 2007,” commented Sneden. “We are now processing and closing about one CMBS conduit loan a month, a far cry from the 35-50 a year we originated in 2005-2007.”
UBS and Citigroup priced a $674-million CMBS transaction on December 9 that found strong demand. The AAA-rated super-senior bonds priced mostly in line with initial pricing guidance and at tighter spreads in most cases than comparable paper in the previous multi-borrower transaction -- a $774-million offering by Cantor Fitzgerald that priced December 6. But spreads on the lowest-rated bonds widened from price guidance. The deal’s collateral was contributed by UBS (81.6%) and Natixis (18.1%).
The UBS-Citigroup offering is backed by 32 mortgages on 38 properties, with office properties representing 26.4% of the collateral pool, followed by retail at 22.5%. Hospitality properties were 15.4% of the collateral pool.
Three of the four super-senior classes priced in line with guidance. A $154.4-million tranche of 4.7-year bonds and $235.9 million of 9.7-year bonds both priced at 130 basis points (bp) over swaps. Meanwhile, $37 million of 2.6-year bonds sold at 80 bp. The other super-senior tranche -- Class A-AB, with $44.4 million of 7.2-year bonds -- exceeded guidance by 10-15 bp, pricing at 120 bp.
Among the subordinate bonds, the junior triple-A rated bonds, double-A rated bonds and single-A rated bonds also priced in line with guidance. But lackluster demand forced UBS and Citigroup to sell bonds rated Baa1/BBB (high) by Moody’s and DBRS at 725 bp, up about 50 bp from price guidance. And the paper rated Baa3/BBB (low) went for 950 bp, up about 150 bp from price guidance.
“The results of this offering are great news for CMBS borrowers and originators,” commented Michael D. Sneden, Executive Vice President of ValueXpress. “We are seeing an immediate decline in spreads to borrowers to the swaps-plus-350 area for a 10-year term, resulting in interest rates of about 5.6%, down from 6.00%-6.25% as recently as 30 days ago."
Country Bank has been ranked 22nd by dollar value of SBA loans approved in 2011, according to "Crain’s New York Business" in its New York Area’s Top SBA Lenders list. Country Bank approved $8.575 million of SBA 7(a) loans in 2011. In 2010, Country Bank was not ranked.
The rankings included SBA 504 loans provided by the Empire State Business Development Corporation and the New York Business Development Corporation. Excluding SBA 504 loans provided by these non-bank certified development corporations, County Bank’s ranking improves to 20.
“We are very pleased to break into the top 25 SBA lenders in New York for 2011,” commented Tim Moffett, Vice President and head of Government Guaranteed Lending at Country Bank. “In 2012, we expect to close upward of a combined $50 million of SBA first lien mortgages in conjunction with the SBA 504 program and SBA 7(a) loans. Unfortunately the 504 first lien mortgages are not counted in the rankings; otherwise, we would easily rank in the top 10 for 2012.”
“Part of our ability to close this volume is due to the assistance from our affiliate, ValueXpress,” noted Moffett. “We lean on their underwriting and technical skills to process SBA loans; we provide quick and efficient service for our clients in an effort to dispel the belief that SBA loans are cumbersome for borrowers."
Leon Elliott, a 40-year veteran in commercial and residential real estate lending, has joined ValueXpress effective December 1. Elliott will be based in the Boston, MA metropolitan area and will be primarily responsible for commercial loan originations in Massachusetts, Rhode Island, New Hampshire, Vermont and Maine.
“I have known Leon for over 10 years,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “We completed a number of CMBS conduit transactions in hospitality, multifamily and retail in New England that closed smoothly prior to Leon forming a residential home lending company in 2000.”
“Leon has a very friendly demeanor and always got along well with borrowers and other intermediaries,” recalled Sneden. “Leon will hop in a car or catch a plane at a moment’s notice to meet with a potential borrower, and that’s the attitude you need to compete in today’s market. With our back office support and excellent reputation for underwriting and closing commercial loans, I expect Leon to be very successful originating loans throughout New England.”
Elliott will primarily originate CMBS conduit loans, SBA 504 and SBA 7(a) loans and agency multifamily loans. In addition, he will further establish relationships with community banks in New England to assist bankers with their SBA originations and programs.
Country Bank has announced that it is expanding its SBA lending footprint to include New York, New Jersey, Connecticut, Pennsylvania and Delaware. Country Bank will consider fixed- and floating-rate loan transactions secured by owner-occupied real estate in conjunction with the SBA 7(a) and SBA 504 lending programs within the five-state region. In addition, Country Bank will consider transactions that qualify for the USDA Business and Industry (B&I) lending program within these areas.
“Country Bank has always been active in SBA lending, ramping up significantly since 2009 when President Obama signed the American Recovery and Reinvestment Act (ARRA) that increased loan eligibility limits to $5 million for the SBA 7(a) and SBA 504 programs,” commented Tim Moffett, Vice President and head of Government Guaranteed Lending at Country Bank. “Furthermore, the SBA 504 refinance program enacted in February is providing low-cost refinancing capital for business owners, as the SBA portion of the 504 loan that features 20-year fixed rates is under 5% at this time.”
Country Bank will begin marketing to small business owners in these markets immediately,” commented Carolyn Murphy, Vice President of Marketing for Country Bank. “The bank has committed significant resources to growing its SBA production for 2012.”
Country Bank is a New York State chartered commercial bank with five offices in the New York City metropolitan area and $450 million in assets at December 31, 2010. The bank provides lending and deposit services to small businesses in the New York City metropolitan area.
ValueXpress will be assisting Country Bank in the processing of its SBA loans. “The model for successful community banks is service,” commented Michael D. Sneden, Executive Vice President of ValueXpress. “We have been assisting Country Bank and its clients for a number of years, and we will provide resources to ensure that Country Bank clients have a positive experience through the SBA process.”
After months of development, the Asian American Hotel Owners Association (AAHOA) announced that its online reservation system www.mybesthotelrate.com is now bookable. Guests are now able to search online and book hotel rooms across the country, including both franchised and independent properties. The system offers inventory of more than 40,000 hotels throughout the country, and it is anticipated that the participation will grow as a greater number of AAHOA members register their properties.
AAHOA members are able to register their hotels for free and will receive “preferred” status once they join the system, providing higher placement in search results when customers use the mybesthotelrate.com portal. The purpose of creating the AAHOA-sponsored online reservation system is to decrease commissions paid by AAHOA members to competing online travel agencies (OTAs). Some OTAs charge commissions as high as 25%-30% of a room price, while mybesthotelrate.com’s commission is a much more affordable 8%-10%.
mybesthotelrate.com is able to offer lower commission rates because the revenue is used solely for operating and marketing costs, which differs from the profit motivation of competing OTAs. The portal should provide a benefit to consumers, as hoteliers consider sharing some of the OTA commission savings through lower room rates, and the lower OTA commissions charged by mybesthotelrate.com may create competitive pressure for other OTAs to lower their commissions.
“We’re looking for individuals who are seeking a flexible, entrepreneurial and financially rewarding career path,” commented Michael D. Sneden, Executive Vice President of ValueXpress. “If you are a mortgage banking professional with specific experience in the origination of CMBS conduit loans, SBA 504 loans and SBA 7(a) loans contact me at msneden@valuexpress.com so we can set up a time to talk.”
“With increasing volume of loan originations in the eastern and southeastern portion of the United States from our loan origination team, we are looking to expand our origination platform, primarily in the Midwest and areas west of the Mississippi River,” Sneden said. “For 2012, I see more CMBS conduit volume nationwide; increased SBA 504 production, particularly refinances prior to the expiration of the 504 refinance program in September 2012; and continued-strong SBA 7(a) loan demand. We at ValueXpress also continue to close Fannie Mae Small Balance and Fannie Mae DUS multifamily loans.”
“We do not have complete borrower and community banking coverage in certain parts of the United States, including the mid-Atlantic states, western United States and in the Midwest, where transactions are going to our competitors,” noted Sneden. “That’s why we are seeking qualified individuals who work in these areas to join our team.”
ValueXpress is assisting Country Bank, an affiliate, in its application to become an SBA 504 First Lien Pooler. The SBA created a secondary market for first lien positions of SBA 504 loans as part the Jobs Act. The program allows for the pooling and sale of a portion of first mortgage loans that were closed in conjunction with SBA 504 second mortgage loans. Of the first lien position that is sold, 80% will be backed by Pool Certificates that will be guaranteed by the U.S. government. The program has $3 billion of authorization and less than $200 million has been utilized.
Under the pooling program, a financial institution can make or acquire first lien position loans that were made or acquired in conjunction with an SBA 504 loan. An 85% interest in these loans can be sold to a 504 First Lien Pooler, or a 504 First Lien Pooler can originate first mortgage loans themselves, or a combination thereof can occur. The 504 First Lien Pooler then sells an 80% interest to investors through a broker/dealer, similar to SBA 7(a) guarantee sales, keeping a 20% unguaranteed portion in its loan portfolio (or 5% in the case in which an 85% interest in a first mortgage loan had been purchased from another party). To create a pool, the 504 First Lien Pooler needs only to sell two similarly structured loans (i.e., fixed or floating, but not one of each), which is a low hurdle to create a pool.
With the government credit enhancement, the 80% interest can be sold to investors at a premium to face value, allowing the financial institution to book a profit on the premium. For appropriately priced loans premiums are in the 6%-8% range. In addition, 50 basis points in servicing is retained by the institution that closed the first lien position.
“The reason we are applying to become a 504 First Lien Pooler is to use the Bank’s balance sheet more efficiently and to generate significant fee income,” said Tim Moffett, head of Government Guaranteed Lending at Country Bank. “Our loan portfolio is relatively full, yet we are receiving a constant flow of quality owner-occupied transactions from new and existing borrowers that we want to accommodate. By pooling and selling 80% interests in 504 first liens, we can do five times as many loans compared with a single portfolio loan,” commented Moffett.
ValueXpress will joint venture with other U.S. community banks to develop a 504 First Lien Pooling program, including the origination/purchasing of first mortgage loans originated in conjunction with 504 second mortgage loans, underwriting the loans, forming the pools, selling the 80% interest in the pools and servicing the loans. Contact Michael Sneden, Executive Vice President of ValueXpress, at msneden@valuexpress.com for additional information.
I am pleased to report that the gap between small (less than $1.5 million) SBA 7(a) guarantee bids and large (more than $3 million) guarantee bids has shrunk dramatically. You may remember that back in June I wrote: Initially, secondary market prices for larger loan guarantees above the previous limit of $1.5 million found lower bids relative to loan guarantees under $1.5 million. As the guarantee amount increased, the gap increased between a $1.5-million guarantee bid and a $4.5-million guarantee bid. It was not uncommon to find a $1-million, 25-year term, Prime + 2.75% floating rate, quarterly adjustable loan guarantee bid at 113, while at the same time, a $4.5-million 25-year term, Prime + 2.75% floating rate, quarterly adjustable loan guarantee struggled to receive a 107 bid.
On behalf of one of our banking partners, we recently sold a $4.5-million guarantee (essentially the largest guarantee attainable, on a $5-million Jobs Act loan with a 90% guarantee) for a price of 111.30, a four-point increase from June and only 2 points lower than an equivalent $1.5-million guarantee. The transaction was structured as a Prime plus 2.75% floating rate deal.
“Naturally, our client was ecstatic with these results,” said Michael D. Sneden, Executive Vice President of ValueXpress. “We have 8 bidders for our guarantees and they compete aggressively to win. As a result, we are able to provide the highest prices to our clients.”
ValueXpress recently originated a $6.5-million multifamily loan located in Jacksonville, FL. The transaction closed 32 days from the date the loan Term Sheet was signed. Another recent transaction closed in 48 days. The loans closed quickly due to a combination of factors: the conduit lender’s organized process, ValueXpress’ knowledge of the process to assist the borrower through due diligence, a cooperative borrower and the conduit lender’s legal counsel involvement from day one (but a large part of the increased cost).
We recently noted (“Up-Front Costs Concern Small Balance Conduit Borrowers,” June 30, 2011) that the costs for a CMBS conduit loan in the post-financial meltdown era are significantly higher than pre-crash levels. There are some benefits from the higher costs, namely extremely fast processing and closing time frames.
We also noted that recent spread widening has slowed originations. This has created excess capacity for deal guys at CMBS shops. “The excess capacity and higher up-front fees are providing a tremendous amount of human resources to process each individual deal,“ commented Michael D. Sneden, Executive Vice President of ValueXpress. “In the old days, loan volume was so high and human resources stretched so thin, closing time frames often were missed.”
“I would recommend any time-sensitive transaction, including acquisitions, to utilize CMBS conduit execution,” said Sneden. “The deal will get done on time, avoiding any financial risk for a delayed closing.”
RBS and Wells Fargo priced a $1.1-billion CMBS transaction on November 1 that found strong demand. With the crisis in Greece appearing to settle down and the capital markets recovering some lost ground during the week, the transaction found strong demand, driven largely by investors returning from the sidelines.
The entire RBS-Wells offering, backed by 75 mortgages on 98 properties, was placed with investors. Similar to other recent CMBS issues, the issue has a heavy concentration of loans on retail properties, which comprise 46% of its collateral pool. Hospitality properties, including a loan contributed by ValueXpress, were 12.5% of the collateral pool.
The $763.8 million of super-senior notes, with 30% of subordination, priced with spreads 5-10 basis points (bp) tighter than guidance. The deal’s largest class encompassed $471 million of super-senior bonds with a weighted average life of 9.7 years. That paper went for 145 bp over swaps, down 5 bp from price talk.
The $85.9-million class of junior triple-A notes with a 9.8-year term and 22.13% of subordination was pre-sold to an undisclosed investor. The going rate in the secondary market is 325-350 bp for comparable paper from recent issues.
Among the remaining subordinate classes with investment-grade ratings, two tranches of those 9.9-year notes priced at substantially tighter spreads than initial talk. The double-A bonds went out the door with a 425-bp spread, down from talk in the range of 450-475 bp. The single-As priced at 525 bp, down from 575-600 bp. The triple-B-plus bonds went for 675 bp, at the tight end of price talk. However, lackluster demand at the most-junior level forced the issuers to boost the spread on the triple-B-minus class 35 bp to 835 bp.
The delinquency rate for securitized commercial mortgages has dropped for three months in a row, reaching its lowest level of the year in October, according to Fitch, but increased 21 basis points (bp) to 9.77%, according to Trepp. The percentage of CMBS loans that are at least 60 days past due hit 8.56% on October 31, down 4 bp from a month earlier, according to Fitch. The CMBS delinquency rate is now at its second-highest level ever, according to Trepp. Only the 9.88% reading in July 2011 was higher.
The difference in delinquency between Trepp and Fitch is due to Fitch reporting loans 60 days past due as delinquent, while Trepp reports loans 30-plus days past due in its statistics.
According to Fitch, last month’s batch of 139 newly delinquent mortgages had an average balance of only $11 million, with just one exceeding $100 million. “The new delinquencies consisted largely of smaller loans defaulting at maturity, which may be indicative of a developing positive trend,” said Fitch Managing Director Mary MacNeill. She noted that such loans generally get resolved at a much faster pace than mortgages that fall into arrears during their terms.
Trepp reported the following delinquency by property type:
| % 30+ Days Delinquent (Property Type) |
|---|
| Oct-11 |
Sept-11 | Aug-11 | 3 Mo. | 6 Mo. | 1 Yr. | |
|---|---|---|---|---|---|---|
| Industrial | 11.59 | 11.38 | 11.24 | 11.09 | 10.76 | 6.27 |
| Lodging | 14.12 | 13.30 | 13.76 | 15.04 | 15.45 | 14.92 |
| Multifamily | 16.73 | 16.96 | 16.44 | 16.94 | 16.77 | 14.63 |
| Office | 8.95 | 8.29 | 8.17 | 8.17 | 7.20 | 6.68 |
| Retail | 7.61 | 7.62 | 7.38 | 7.85 | 8.15 | 7.17 |
Recently I took a call from one of our most active CMBS conduit relationships. “Mike, I need $100 million in CMBS conduit loans by year-end, can you help me out?” On one hand, I was surprised; on the other, not so much. It’s just another example of how quickly the CMBS conduit lending market can change course. A few weeks ago, I was worried that CMBS conduit lenders were going to stop providing quotes for new loans amid unending spread widening that sapped profits from closed loans waiting to be securitized. Plus, the repricing of loans that were being underwritten while spreads were widening was unnerving for both borrowers and CMBS conduit lenders. Pricing for new loans being put under application was extremely difficult. The CMBS conduit lending market was very uncertain.
Fast forward a few weeks: The stabilization of loan spreads (albeit at much higher levels) has provided confidence to a handful of CMBS conduit lenders that now need to meet year-end production goals. These lenders believe spreads have stabilized in the near term and are pricing loans at these levels in anticipation of quick securitization. Hence the need for volume to get this accomplished.
“We have completed a number of transactions this year with this relationship,” said Michael D. Sneden, Executive Vice President of ValueXpress. “It is our go-to relationship as all the loans closed at promised loan proceeds levels. In fact, one borrower received more proceeds than what he applied for.”
“So I told our relationship manager that we would help him meet his goals,” said Sneden. “Now I need help from my colleagues in the field to submit loans as soon as possible.”
ValueXpress, which provides CMBS investment advisory services to community banks, has recommended a select set of 2005 AJ CMBS for its bank clients to purchase, and many have made purchases in the past week at yields in excess of 6% for CMBS with an average life of about four years. This compares very favorably with rates on whole loan originations while using only one-fifth of the bank’s capital.
“For most of 2011, CMBS prices on new issue CMBS (post-2010) and legacy CMBS (pre-2008) rose to very high levels, depressing yields to the 3%-4% area and dollar prices well above par on better legacy and new CMBS, which were pretty attractive relative to Treasury securities, but not so great on a risk-adjusted basis,” said Jim Brett, head of CMBS analytics at ValueXpress.
Through this summer, as spreads widened on new CMBS issues, spreads were also widening on legacy issues, particularly in the AM and AJ classes, including certain high-quality AJ bonds from 2005. About half of the bonds we like are AAA/Aaa-rated by Standard and Poor’s and Moody’s and half AA/Aaa. Both of these ratings provide for 20% risk-weighted capital charge for banks versus 100% risk-weighted charge for a whole loan.
Having originated many CMBS conduit loans in CMBS securities, ValueXpress is able to analyze the loans underlying each CMBS issue, determine those issues with better performing loans, and then make recommendations to its community bank clients to invest in those CMBS issues. The rigorous analytics and resulting conclusions have held up well, providing significant profits for ValueXpress bank clients that followed its CMBS investment recommendations during the financial collapse in 2008-2009 and subsequent market recovery in 2010.
The U.S. Small Business Administration (SBA) has relaxed regulations on loan qualifications, and as a result, the 504 loan program has begun accepting applications from a greater number of small businesses to refinance existing real estate debt. The SBA received extensive feedback from the 504 industry, banks and small businesses on a number of issues related to the initial 504 refinancing regulations over the past six months. The SBA also noted the low volume of refinance loans that have been processed since the program's inception last February and decided to revise a number of restrictions that were part of its initial regulations.
A major change in the regulations enables a small business to refinance existing debt and, more important, use excess equity to obtain working capital that can be used for financing of eligible business expenses. Borrowers will be able to refinance up to 90% of the current appraised property value.
“This means the 504 refinancing program may be able to provide ‘cash to the borrower at closing’ if property equity is in excess of program minimums and if the cash-to-borrower is for eligible expenses,“ said Michal D. Sneden, Executive Vice President of ValueXpress. Eligible expenses include salaries, rent, utilities, inventory, paying down payables and satisfying other obligations of the business. “With a little creativity, we may be able to help borrowers recapture some excess equity in their properties,” said Sneden.
Earlier this month Reis reported that U.S. apartment vacancies fell to a five-year low in the third quarter of 2011 to 5.6%, enabling landlords to increase rents even though the overall economic picture is less than rosy. The 5.6% vacancy rate is the lowest since the third quarter of 2006 and compares with 5.9% in second-quarter 2011 and 7.1% a year ago. The average monthly effective rent rose to $1,004 from $997 in the second quarter and $981 a year ago. Mounting foreclosures, tighter credit for homebuyers and young people moving out on their own have increased demand for apartments after the vacancy rate reached a three-decade high of 8% at the end of 2009.
“The impact of increasing occupancy and rents has been an improvement in operating performance for multifamily properties,” said Jim Brett, chief underwriter at ValueXpress. “Better market and property occupancy allow lower vacancy assumptions in CMBS conduit multifamily underwriting, providing more underwritten income that flows to larger loan proceeds, which is all borrowers care about right now.”
“We at ValueXpress have a new relationship with a mezzanine lender to plug the gap should first mortgage proceeds fall short of borrower needs,” Brett said. “The program starts at $1 million and can entertain mezzanine loans upwards of $20 million.”
“Bottom line, we are placing more multifamily loans under application with property operating fundamentals improving,” said Michael D. Sneden, Executive Vice President of ValueXpress. “Most of the properties do not qualify for Freddie Mac or Fannie Mae execution for one reason or another, but still need a loan.”
The performance of securitized commercial mortgages improved slightly last month, according to Fitch, while Trepp reports little change in delinquency for September. The 60-day delinquency rate for commercial mortgage backed securities (CMBS) loans finished September at 8.6%, according to Fitch, down 5 basis points (bp) from a month earlier and 41 bp from its peak of 9.01% on July 31, 2011. The late-payment rate has averaged 8.7% over the first nine months of the year.
After two very sharp moves over the last two months -- a huge jump in July and a big dip in August -- CMBS delinquencies stabilized in September, according to Trepp. For at least one month, the reading reverted to its pattern from earlier in the year when modest bumps in the rate were the norm. In September, the delinquency rate for U.S. commercial real estate loans in CMBS inched up 4 bp to 9.56%. The CMBS market has now seen its delinquency rate fall in three of the last five months.
Trepp notes that for the month of September hotel delinquency rate fell while other major property types increased; multifamily remained the worst performer. Below is a summary of the delinquency rates by asset class:
The Office of Financial Assistance announced an update to the Standard Operating Procedure (SOP) 50 10 5. This update, known as SOP 50 10 5(D), will be effective on October 1, 2011. This version of the SOP will apply to all applications received by SBA on or after October 1, 2011.
Change Highlights:
“The SOP is the bible for lenders and the key to any guaranty collection,” said Jim Brett, chief underwriter at ValueXpress. “It must be followed religiously.”
CMBS investors lined up for super-senior CMBS from recent transactions, hopefully signaling the end to spread widening that began in May. On Wednesday, September 14, Morgan Stanley and Bank of America priced the bulk of a $1.5-billion multi-borrower offering at tighter-than-expected spreads. Among the transaction’s $1.04 billion of super-senior bonds with 30% subordination, all but the smallest class was placed at spreads 15-30 basis points (bp) below initial price guidance. The 9.7-year super-senior CMBS priced at 185 bp over swaps, below initial price guidance of 205-215 bp.
On Friday, September 16, JP Morgan priced a $1-billion offering at similar spreads. The 9.7-year super-senior CMBS priced at 185 bp over swaps, similar to the Morgan Stanley offering. However, the shorter classes priced tighter, with the 2.6-year class A-1 pricing at 100 bp over swaps and the 4.8-year class A-2 pricing at 175 bp over swaps, compared with 115 bp over swaps and 185 bp over swaps for the corresponding classes of the Morgan Stanley offering.
Finally, on Thursday, September 22, Goldman Sachs and Citigroup priced a commercial CMBS offering that had been delayed for two months after S&P pulled its ratings (see our 7.28.11 article “S&P Suspends Ratings on New Issue CMBS 2.0 Deals” for details). The 9.6-year super-senior CMBS priced at 170 bps over swaps, 15 bps tighter than the Morgan Stanley and JP Morgan issues. The shortest class also priced tighter than the JP Morgan offering, with the 2.3-year class A-1 placed at 90 bp over swaps, 5 bp tighter than the JP Morgan offering. And Goldman and Citi evidently placed all of the subordinate investment-grade bonds, unlike the issuers of the two previous deals.
“The stabilization and tightening of spreads is a welcome relief for CMBS origination shops,” said Michael D. Sneden, Executive Vice President of ValueXpress. “We have yet to see these results flow to new CMBS loan quotes, but if commercial CMBS pricing can grind tighter, I think borrowers will see some spread reduction in the near future, reducing loan rates from the current 6% area to more competitive levels.”
Recently, Jay Bhakta, who runs the Mississippi office for ValueXpress, and Michael Sneden, Executive Vice President of ValueXpress, traveled to Houston, TX to assist a borrower in the closing of his CMBS conduit loan secured by a hotel as well as assist another hotel borrower refinance a conventional loan into an SBA 7(a) loan. Coincidentally, the bank being paid off with the CMBS conduit loan for one transaction is the same bank that converted the conventional loan into an SBA 7(a) loan for a second borrower.
The conduit borrower did not want us to disclose the payoff of the CMBS conduit loan, fearing the lender would be upset with the payoff. Oddly enough, the reverse was true. Recently, the FDIC has been encouraging the re-classification of hotel loans as “commercial real estate,” similar to other income-producing loans such as office buildings and retail centers, in which rentals from tenants are the primary source of loan repayment. Formerly, there was flexibility to classify owner-operated hotels under another category, known as “commercial and industrial” loans. The reclassification has negatively impacted banks that are significant hotel lenders by increasing the concentration of “commercial real estate” loans as a percentage of capital by adding hotel loans to the total.
The banker we met with was happy to see the loan pay off as it helped reduce the bank’s commercial real estate concentration, which is well in excess of regulatory guidelines. Our assistance in the conversion of portfolio hotel loans into SBA 7(a) loans will help also, since the 75% guaranty provided by the SBA reduces commercial real estate loan exposure for that loan by 75%.
“The bad news is that hoteliers are facing a significant reduction in hospitality lending by community banks in their markets,” commented Jay Bhakta. “The economic recession and credit challenges in the banking industry have already diminished hotel loan demand at banks, and the regulatory reclassification now just makes matters worse,” said Bhakta.
With 10-year Treasury rates below 2%, borrowers that qualify for Fannie Mae (and Freddie Mac) multifamily loans are seeing loan quotes at levels not seen since the formation of the Fannie Mae multifamily program in the 1950s.
ValueXpress is active in both the Fannie Mae Delegated Underwriting and Servicing program for larger loan balances and the Fannie Mae Small Balance Multifamily Loan program. Surprisingly, the benefits of lower rates are flowing to the small balance borrower as well as the borrower with larger loan balances. For example, ValueXpress recently placed a borrower under application for a $3-million Fannie Mae Small Balance Multifamily loan in Virginia. The borrower was pleasantly surprised to find out that the indicative rate for an 80% LTV, 10-year fixed-rate loan paid on a 30-year amortization schedule would be under 5%. Needless to say, the borrower said to step up the underwriting pace.
“The timing for a Fannie Mae loan has never been better,” commented Michael D. Sneden, Executive Vice President of ValueXpress. “However, it has become a challenge to explain to CMBS conduit borrowers why multifamily conduit loans are at 6%, while Fannie is sub-5%. Once I explain that the market perceives Fannie to have U.S. government credit support, while CMBS has purely private credit market support, borrowers begin to understand why there is such a large rate differential.”
The Small Business Administration's (SBA) 504 loan program is providing long-term, fixed-rate financing for commercial real estate and the purchase of long-term capital assets at the lowest interest rates since the program's inception. The debentures that funded this month's 20-year 504 loans were sold to investors at an interest rate of 2.85%, below the previous low of 3.88% in June 2010. The 10-year loan debentures were sold at an interest rate of 1.53%, eclipsing the previous low of 1.81% in November 2010.
The official interest rates should be published by September 12, but it is expected that the low rates for the debenture sales this month will result in estimated effective interest rates for small business borrowers – including servicing fees – of only 4.69% for a 20-year loan. For a 10-year loan, the estimated effective interest rate is a low 3.75% for September.
The SBA’s 504 loan program provides long-term, fixed-rate financing for small business owners nationwide. Since the program's inception, 504 loans have funded over $62 billion in loans to over 130,000 small businesses. In turn, those small businesses have created or retained over 2.1 million jobs for the U.S. economy. Certified Development Companies (CDCs) continue to work with small business owners who are taking advantage of these record-low interest rates to purchase, build and expand their facilities or purchase capital-intensive machinery and/or equipment.
SBA 504 loans are designed to cover up to 40% of a project's costs with a maximum of $5 million in funding; however, the CDC partners with a bank that provides 50% of the project financing and the borrower typically puts in 10% as a down payment.
Freddie Mac plans to accelerate its program to purchase loans backed by apartment buildings, increasing the availability of financing for landlords and helping bolster the multifamily real-estate market. Freddie Mac, the U.S. government-backed mortgage-finance giant, will likely fund more than $16 billion in apartment-building loans this year, up from $14.8 billion in 2010, according to David Brickman, head of multifamily funding for the McLean, VA, company. More than half of this year's anticipated total will come in the second half, including a just-closed $73.5-million loan on Rosslyn Heights apartments, a 366-unit complex in Arlington, VA, according to Brickman. The bulk of the loans will be packaged into commercial mortgage-backed securities (CMBS) and sold to investors. CMBS issued by government-backed entities such as Freddie Mac and Fannie Mae have been in demand among investors. Fannie Mae invested $10.5 billion in the multifamily market for the first half of 2011, putting it on track to exceed the $16.9 billion in purchases last year.
The demand for Freddie Mac's commercial mortgage bonds was apparent last month, when its eighth deal of the year was caught in the middle of a ratings drama. An 11th-hour internal review at Standard & Poor's prevented the firm from delivering final ratings on a $1.5-billion CMBS offering from Goldman Sachs Group Inc. and Citigroup Inc. and on a $1.04-billion offering from Freddie Mac. The Goldman-Citigroup issue still had a rating from Morningstar, while the Freddie Mac deal still had a rating from Fitch Ratings. Freddie Mac's deal went off anyway, as investors told dealers they were comfortable with the Freddie Mac CMBS, even with just the single Fitch rating.
After a dismal July delinquency reading, the CMBS market rebounded smartly in August, according to Trepp. The delinquency rate for U.S. commercial real estate loans in CMBS fell 36 basis points (bp) in August to 9.52%. This is the second-largest drop since the beginning of the credit crisis in 2008 and the third time the rate has dropped in the past four months.
After a streak of bad headlines that lasted from late spring through summer, the CMBS market was thirsting for some positive news. Between lenders pulling back, a failed deal closing, and concerns that European banks and the U.S. economy were headed for the rocks, CMBS investors had turned very bearish on CMBS prospects.
The drop in CMBS delinquencies in August appears to be the first piece of good news for the market in a while. As in July, a big part of the change in the rate was the result of the way some special servicers have been reporting data. In July, special servicers started to flag many “dual-tracked loans” – those in which the special servicer was pursing both a modification and a foreclosure strategy – as having a workout code of “in foreclosure.” This caused the rate to spike sharply in July. However, what the special servicers giveth, the special servicers taketh away. In August, the special servicers reversed many of these reclassifications, putting some downward pressure on the rate.
Below is a summary of the delinquency rates by asset class:
Recent spread widening and market volatility are taking their toll on new CMBS loan originations. Transactions totaling only $3.1 billion are in the pipeline for the fourth quarter, down from an average of $8.6 billion in the first two quarters of 2011, according to Commercial Mortgage Alert.
As previously reported, CMBS spreads have blown out in recent weeks, raising the cost of capital for lenders and forcing them to become more cautious. Securitization programs have widened loan spreads significantly, making them less competitive against portfolio lenders. Many shops have effectively halted originations until the volatility subsides. Wider spreads were sparked by economic woes unconnected to the commercial real estate market -- the downgrade of U.S. Treasury bonds, poor economic data and an uncertain debt picture in Europe. The economic turmoil has rattled the CMBS market.
“It’s one step forward, two steps back as the CMBS industry fights its way to normalcy,” lamented Michael D. Sneden, Executive Vice President at ValueXpress. “We were just gaining traction with a steady flow of executed CMBS conduit loan applications that have now slowed considerably as conduit lenders take stock of the economic risks relative to the current levels of profitability from CMBS securitizations.”
From the restart of CMBS securitization in 2010 through May 2011, CMBS spreads on AAA-rated senior bonds marched downward from 165 basis points (bp) over swaps in June 2010 to 110 bp over swaps in May 2011, providing excellent returns for securitization shops and market enthusiasm, allowing CMBS loan originators to consider higher LTVs and deals with just a little hair on them. “Now the deals have to be pretty clean to get a quote,” said Sneden. “However, I am optimistic the spread widening will reverse itself over time and the recovery in CMBS originations can resume later this fall.”
Hotel owner M. P. Patel won a new 32GB IPAD 2 at the ValueXpress booth at the Leuva Patidar Samaj of USA National Convention and Trade Show in New Orleans, LA on Saturday, July 30, 2011. Over 3,000 members attended the National Convention and Trade Show. The majority of the members are hospitality property owners. M.P. was thrilled to have won; he was thinking of acquiring an IPAD for his family anyway!
Mr. Patel is the owner of the Esquire Inn hotel located on Highway 49 in Belzoni, MS. The 40-unit property was the first hospitality property Mr. Patel purchased and he continues to reside at the property in true “owner-operator” style. Mr. Patel owns three other independent hotels in Belzoni and Ruleville. In addition, M.P. and his son Keshan have developed and sold numerous Subway restaurants in the Mississippi region.
“We were thrilled to present M.P. with the IPAD as the winner of our drawing,” said Jay Bhakta, who runs the Mississippi office for ValueXpress. “I have known M.P. and his family for a long time and could not have expected a more deserving winner. M.P. is a leader in the Asian-American community and great businessman.”
Investors continue to prefer investment in U.S. apartment buildings over most commercial properties, even commercial office space; total multifamily sales volume jumped nearly 80% in 2011’s second quarter from a year ago. Although still just a fraction of its mid-2007 peak, the nearly $15 billion in sales in the second-quarter 2011 brought total investment for the first half of the year to $24.5 billion, according to CoStar Group data.
The average per-unit price of apartment properties reached $88,500 in the quarter, the highest since third-quarter 2008, according to CoStar Global Strategist Michael Cohen during CoStar's Mid-Year 2011 Multifamily Review & Forecast. Meanwhile, strong renter demand continues to push down apartment vacancy rates and nudge up rents. With capitalization rates for existing properties seeing strong compression in some high-flying markets, larger multifamily developers have responded by starting to ramp up their development pipelines with new projects.
Average apartment capitalization rates continued to fall in the second quarter to slightly below 7%, while weighed-average cap rates, driven by the large high-priced transactions in prime markets, declined to 5.7%. However, cap rates for mid-size value-add and opportunity deals are also declining. Cap rates on smaller transactions remain in a holding pattern.
“The operating improvements in the multifamily sector are helping this asset class to clear existing debt when the properties approach loan maturities,” said Gary Unkel, a Senior Loan Originator at ValueXpress. “We have a number of multifamily projects under application for different programs, depending on the situation. Newer properties located in markets where Fannie Mae and Freddie Mac are active are finding the best terms from these agencies. Other markets and/or Class B apartment complexes are finding CMBS conduit execution is the way to go,” said Unkel.
Spreads on recent issue CMBS widened further on Monday, August 8, in the wake of Standard & Poor’s decision on Friday, August 5, to lower its triple-A ratings on U.S. Treasuries. Spreads recovered as the week progressed, but benchmark spreads on recent issue AAA-rated senior paper were still 25-30 basis points (bp) wider on August 11 compared with a week ago. And that was after spreads widened by a similar amount the prior week.
The bottom line? Secondary spreads on 10-year senior paper from so-called CMBS 2.0 transactions are wider than ever. Amid the wider pricing, Deutsche Bank and UBS priced a $1.7-billion CMBS offering on August 11, and its 10-year triple-A bonds priced at 200 bp over swaps. This compares with 170 bp over swaps for the Wells Fargo/RBS CMBS transaction that priced on July 21, 2011.
With 10-year triple-A bonds at 200 bp over swaps, the “breakeven” spread on a typical 10-year, fixed-rate conduit loan is currently around 310 bp, and quotes to borrowers are now in the 340 bp to 350 bp area. The absolute rate charged to borrowers hasn’t widened as much, as the decline in 10-year Treasury rates and corresponding swap rates (the 10-year swap rate approximates 2.40%) has mitigated the impact of the spread widening, leaving the all-in interest rate to the borrower at around 6%.
The following chart shows the widening trend in spreads for recent CMBS transactions:
| Deal | Issue Date | AAA Spread (10-yr) |
|---|---|---|
| JPMorgan 2011-C4 | 5/25/11 | 110 |
| WFRBS 2011-C3 | 5/26/11 | 115 |
| Morgan Stanley 2011-C3 | 6/9/11 | 147 |
| DBUBS 2011-LC2 | 6/17/11 | 140 |
| WFRBS 2011-C4 | 7/21/11 | 170 |
| DBUBS 2011-LC3 | 8/11/11 | 200 |
Markit, a firm that provides credit default swap information and valuation services, is putting the finishing touches on a new total return swap index, dubbed TRX.2, designed to help CMBS lenders hedge their warehoused loans. With the recent volatility in CMBS spreads, securitization shops are anxious to find better techniques for hedging their risk against swings in CMBS pricing.
While the index is almost ready, Markit wants to wait until after Labor Day to debut it because many market participants are on vacation in August. It also wants to start off the index with the largest possible pool of referenced securities, including those from a $1.5-billion conduit issue that Wells Fargo and RBS priced on July 21 and a $1.7-billion offering that Deutsche Bank and UBS priced this week.
The new index will track daily price movements on triple-A-rated, multi-borrower CMBS with weighted average lives of 8-12 years that were floated since last year. So far, Markit has identified more than $7 billion of bonds from 18 conduit deals that meet the criteria. Ultimately, the index will reference securities from the 25 most-recent qualifying CMBS issues, updated on a quarterly basis.
The index will provide a basis for creating and pricing total-return swaps. That would enable CMBS lenders to short senior bonds from the latest crop of deals, thereby hedging their long positions -- namely, loans they’ve written and stockpiled for securitization. Dealers would seek counterparties to take the opposite sides of derivatives pegged to the index.
With more than two months left in its fiscal year, the SBA has approved more than $16.4 billion in loans through its flagship 7(a) lending program. This record pace, however, has its downside. The 7(a) program is authorized to do only $17.5 billion in loans this fiscal year. Once that cap is reached, the SBA won’t be able to approve any more 7(a) loans until a new fiscal year begins on October 1.
SBA officials, however, think they can avoid shutting down the 7(a) program. SBA Associate Administrator Steven Smits said it is going to be "really close" whether SBA 7(a) will exhaust its funding for the fiscal year. July SBA approvals totaled $15 billion. The fiscal 2011 authority is $17.5 billion. SBA is currently funding loans at $300 million per week. With nine weeks left in the fiscal year and absent a last-minute surge of funding, SBA 7(a) lending should not be interrupted for more than a few days. Calculated another way, SBA has funded 86% of its authority with 83% of the fiscal year remaining. However, SBA will be instituting 7(a) lending queues to help manage the process. Beginning in early September, loans to refinance debt will be placed in a funding queue. "SBA wants to allow new dollars and those loans that create jobs to be funded first," said Smits. A queue of all SBA 7(a) loans will be instituted around September 15. This will allow SBA to manage funding on a daily basis. There will be no interruption of SBA 504 funding.
The CMBS market suffered a setback last week when bond spreads widened sharply again. According to Commercial Mortgage Alert, the spread on the benchmark triple-A class of an offering led by Wells Fargo and RBS priced on Thursday, July 21 at 170 basis points (bp) over swaps. That was 35 bp wider than initial price talk and 40 bp wider than the comparable class of the previous CMBS transaction.
The sharp drop in bond prices further complicates the outlook for CMBS lending. After standing at 105 bp over swaps in early June, triple-A spreads have now widened 65 bp. CMBS shops are going back to borrowers under application and repricing those deals to reflect the new economics as well as resetting internal loan pricing for new applications.
“The spread widening is a big disappointment at this stage of recovery in CMBS lending. The CMBS market is struggling to get footing and the spread tightening on the triple-A class through June was really helping the market,” said Michael D. Sneden, Executive Vice President of ValueXpress. “Now the reverse is occurring; a few shops have stopped lending and the remainder are worried about the economics of the business.”
Since the benchmark triple-A class represents approximately 85% of a CMBS issue, there is nearly a 1:1 relationship between the increase in the spread widening from 140 bp a few weeks ago and the current 170 bp level. “Our borrowers have been repriced by about 30 bp this week, after a 40 bp jump a few weeks ago when the spread on the benchmark triple-A class moved from 105 bp to 140 bp,” said Sneden. “Luckily, we are able to explain the market changes to our borrowers in a way they can understand and no one withdrew their applications. But if spreads do not reverse, it will likely create a slowdown in new applications.”
RBS reported that Standard and Poor’s Rating Services (S&P) announced on July 27 it will not currently assign ratings to U.S. conduit CMBS transactions, including the most recent $1.5-billion CMBS transaction offered by Goldman Sachs Group Inc. and Citigroup, Inc. that was scheduled to close on July 28. The action stunned the CMBS market and caused Goldman and Citi to pull their transaction. S&P said it is reviewing its criteria for CMBS and can’t provide a rating, presumably until its review is complete.
“Ratings are a condition precedent to closing and settlement,” Goldman Sachs and Citigroup said in their joint statement. “Standard & Poor’s had previously informed Goldman and Citi that it was prepared to rate the transaction.”
“S&P is reviewing the application of our conduit/fusion CMBS criteria in relation to the calculation of debt-service coverage ratios,” the risk assessor said in a statement. ”The review was prompted by the discovery of potentially conflicting methods of calculation.”
The action appears to be related to the relatively low subordination levels of 14.5% awarded to the triple-A senior classes of the Goldman/Citi transaction. This compares with subordination levels of 17%-21% for other multi-borrower transactions since the revival of CMBS issuance in April 2010. Investors noted no significant difference in the credit quality of the collateral loans that would warrant the lower subordination levels awarded by S&P on the Goldman/Citi transaction.
Goldman and Citi attempted to salvage the deal by creating a super-senior portion of bonds with 20% subordination and a junior triple-A class with the original 14.5% subordination. This restructuring became moot when S&P pulled the rating altogether.
Now Goldman and Citi are trying to regroup on their deal. One possibility is to have the deal rated by Moody’s. Another is to include the collateral in another offering being teed up by other conduit shops. Despite the outcome, the situation is another setback for the CMBS market recovery.
On July 13, SBA's Inspector General (IG) issued a scathing audit criticizing Banco Popular for its underwriting procedures for the Huntington Learning Centers (HLC) franchise. The IG wrote that the bank failed to properly analyze and underwrite applicant projections. This failure warrants the denial of the SBA guaranty for all of the bank's HLC franchise loans, according to the IG.
The SBA audit says Banco Popular did not adequately assess repayment ability for 12 SBA-guaranteed HLC franchise loans when approving the loans. In fiscal 2007, a total of 12 HLC franchises received SBA-guaranteed loans from Banco Popular for the acquisition of their businesses. The loans ranged in amounts from $196,500 to $379,900. Banco Popular approved these loans based on first-year projections that showed that the franchises would generate revenues ranging from $483,000 to $650,025. This level of performance is questionable given that the HLC, Inc. Franchise Offering Circular, which was effective April 1, 2006 and reviewed by the lender, showed that the average revenue of franchises in operation for one or more years was $468,442 in 2005. Nevertheless, the lender expected the newly formed franchises to not only meet this average, but to exceed it, with generally no explanation for how the businesses would achieve this level of performance.
“Lenders need to be extremely careful in the underwriting of SBA loans,” commented Jim Brett, senior underwriter at ValueXpress. “The SBA’s Standard Operating Procedures (SOP) is an intensive document of 400 pages, but it must be studied, understood and followed to ensure the SBA will honor the guarantee. Plus, following the SOP is just good credit practice that will result in fewer defaulted loans,” said Brett.
After the terrific response to our iPad raffle at the Asian-American Hotel Owners Convention, ValueXpress plans to give away an iPad to another lucky winner at the upcoming Leuva Patidar Samaj of USA National Convention and Trade Show in New Orleans, LA at the Marriott Convention Center. The trade show occurs on Friday, July 29 and Saturday, July 30, 2011. Make sure you stop by our booth and enter to win. The iPad winner’s name will be drawn at 5 p.m. on Saturday, July 30.
Leuva Patidar Samaj of USA is a non-profit organization with over 7,000 members throughout the United States. Patidars and their Asian-American descendents, who reside all over the world but with many in the United States, are compassionate, hard working and very resourceful people. A main goal of the organization is to preserve family values and heritage. This year, over 3,000 members are expected to attend the National Convention and Trade Show. The majority of the members are hospitality property owners.
“We provide these giveaways to collect contact information from members so that we can email them our bi-weekly newsletter with loan rates and terms, and articles on the lending market,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “Too many times I have heard from clients that they needed financing, but lost our contact information. With the newsletter, we can stay in front of our clients all the time.” To sign up for our newsletter, visit www.valuexpress.com.
Jay Bhakta, senior loan originator at the ValueXpress Jackson, MS office, will represent ValueXpress at the trade show. “Many hoteliers are not fully aware that the CMBS conduit loan market is aggressively seeking quality hospitality loans from owners of hotels that performed through the 2008-2009 recession. In addition, with the increase in SBA loan limits to $5 million and the expansion of the SBA 504 program to allow refinancing, hoteliers have more options than ever to secure financing for their hotels,” Sneden said.
ValueXpress welcomes the opportunity to meet with hotel owners at the trade show to explain in detail its SBA 7(a), SBA 504, USDA B&I, CMBS conduit and conventional loans for hospitality properties. Call Jay Bhakta at 1-601-918-2850 to schedule your personal appointment.
According to Commercial Mortgage Alert, the latest weakening in the CMBS market makes it likely that a pair of $1.5-billion multi-borrower issues due to price the week of July 18 will wind up with senior spreads matching the widest levels seen this year. Goldman Sachs and Citigroup are leading one of those offerings, and Starwood Property is also contributing loans. Wells Fargo and RBS are bringing the other deal, which includes mortgages from GE Capital.
The latest turn in the market has erased recent gains on senior CMBS bonds. Spreads on long-term, triple-A bonds from fresh conduit issues had contracted to about 130 basis points (bp) over swaps at the end of June. But those benchmark spreads now have returned to the 140-bp level seen a month ago, when a long-running CMBS rally ground to a halt and bond values plummeted.
CMBS spreads are widely expected to keep fluctuating as debt crises and economic concerns roil global financial markets, before tightening later this year. As demonstrated this week, it remains difficult for lenders to time their offerings to achieve the narrowest spreads.
Goldman and Citi are marketing the $85.3 million of 2.4-year senior bonds from their latest multi-borrower offering with a suggested spread of 80-85 bp. But for the longer-term classes of triple-A paper, they floated price talk yesterday of 145-150 bp. Those classes consist of $332.5 million of 4.9-year paper, $90.7 million of 7.4-year notes and $753.7 million of 9.8-year bonds. The guidance is the same for all three of those tranches due to a steep yield curve on benchmark swap rates, which recently has been sufficient to compensate investors for taking longer-term risks.
A key ValueXpress lending partner continues to seek high leverage hospitality loans. The bridge loan program is designed for transactions with loan amounts of at least $20 million for properties seeking shorter term funds to restabilize property cash flow after the recession, newer properties that have not reached stabilization, or other situations in which shorter term funds are needed. Typical loan structure is a 3-year term with payments based on a 25- to 30-year amortization schedule. LTV can be as high as 85% and debt-service coverage can be as low as 1.10x. Rates are in the mid-7% area for more than 80% LTV and can be lower for less leverage.
ValueXpress recently completed a transaction on a hotel property in which the borrower owns excess land and expects to construct another hospitality property within 24-36 months. “The borrower did not want to encumber the subject and excess land (which is not on a separate parcel) with a 5- or 10-year CMBS conduit loan,” said Sneden. “In addition, the borrower needed 80% leverage to clear the existing debt. The bridge loan was perfect as the borrower expects to obtain a construction loan/permanent loan solution to refinance the bridge loan and provide construction funds for the new property at bridge loan maturity.”
“We are working on another transaction in which the borrower constructed a full-service Hilton hotel in Texas a little over two years ago. The borrower wants to construct another Hilton hotel, but the existing property loan of $25 million is at the legal lending limit with the construction lender,” said Sneden. To provide a little challenge, the property is not fully stabilized and does not qualify for enough proceeds for a CMBS conduit loan to clear the existing $25-million loan. “This bridge loan program was the perfect solution,” commented Sneden. “The loan will provide $27.5 million in proceeds at an 80% LTV, with the cash out providing some of the equity for the new project.”
Small balance ($2-$10 million) CMBS conduit borrowers no longer enjoy programs that feature fixed transaction costs for third-party reports and lender’s legal charges that are a relative bargain. Those programs, in effect prior to the 2008 CMBS conduit loan market meltdown, no longer exist. Today’s borrowers are being hit with $25,000-$40,000 in up-front charges to process a CMBS conduit loan without full assurance that the loan will be approved at the requested loan amount. Formerly, fees for these expenses were $10,000-$15,000 as conduit lenders subsidized the costs by charging a few extra basis points in the loan spread to recover the expenses through securitization profits. The current charges have made it difficult to convince small balance borrowers to proceed through a conduit loan application.
“We have always been careful to complete substantial due diligence up front before accepting a conduit loan application and deposit,” notes Michael D. Sneden, Executive Vice President at ValueXpress. “Now we are even more cautious. We are requesting more detailed operating data for longer periods of time, investigating market rents, cap rates, occupancy and other market factors more in-depth than we did prior to 2008. We cannot afford to damage our reputation with a transaction that does not close at the borrower’s expected levels.”
“Our models now value properties in advance of application, using our appraiser’s cap rates for the particular market, market rent adjustments and expense comparables," Sneden said. “Following this regimen lessens the chance of an appraisal falling short of expectations. I cannot recall the last time we had a transaction under application that did not appraise at expected levels. By following this protocol, we are able to provide comfort to our clients that their large, up-front deposit will result in a closed transaction at expected levels.”
Recent SBA 7(a) guarantee sales by ValueXpress partner banks confirm tremendous demand from secondary market loan guarantee broker/dealers, even for higher guarantee amounts above the $1.5-million maximum guarantee that existed prior to September 2010. When the SBA 7(a) loan limit was increased to $5 million in September 2010, SBA 7(a) loan guarantees increased to $4.5 million during the period in which the Jobs Act was in place (through March 2011) and to $3.75 million currently.
Initially, secondary market prices for larger loan guarantees above the previous limit of $1.5 million found lower bids relative to loan guarantees under $1.5 million. As the guarantee amount increased, the gap increased between a $1.5-million guarantee bid and a $4.5-million guarantee bid. It was not uncommon to find a $1-million, 25-year term, Prime + 2.75% floating rate, quarterly adjustable loan guarantee bid at 113, while at the same time, a $4.5-million 25-year term, Prime + 2.75% floating rate, quarterly adjustable loan guarantee struggle to receive a 107 bid.
The reason for the bid difference involves prepayment risk the investor assumes when purchasing a loan guaranty at a premium. With SBA 7(a) loans providing weak prepayment restrictions of 5% in year 1, 3% in year 2 and 1% in year 3, if a purchased guarantee pays off early, the investor will suffer a loss on the premium paid to purchase the guarantee. The way this risk is minimized is to invest in a pool of guarantees. If an investment is made in piece of a diversified pool of, say, 40 $1-million loan guarantees, if one or two pays off early, the overall rate of return for the pool is not dramatically affected. But if the same pool consisted of, say, 8 $4-million loan guarantees, one or two early payoffs would have a substantial negative impact on returns.
As a result, larger loan guarantees were bid poorly relative to smaller loan guarantees. However, recently a few broker-dealers have stepped up their bids on larger guarantees, presumably by creating larger balance pools that lower the concentration of larger loan guarantees in the pool. We recently settled on two loan guarantees sales with balances between $2 million and $3 million that received bids at the same level as smaller guarantees, in excess of 113. This is great news for loan guarantee sellers.
Following tremendous success at the Asian American Hotel Owners (AAHOA) Trade Show in Las Vegas, NV, ValueXpress will be exhibiting at the Leuva Patidar Samaj of USA National Convention and Trade Show in New Orleans, LA at the Marriott Convention Center on Friday, July 29 and Saturday, July 30, 2011.
Leuva Patidar Samaj of USA is a non-profit organization with over 7,000 members throughout the United States. These Patidars and their Asian-American descendents, who reside all over the world with many in the United States, are compassionate, hard working and very resourceful people. A main goal of the organization is to preserve family values and heritage. This year, over 3,000 members are expected to attend the National Convention and Trade Show. The majority of the members are hospitality property owners.
“ValueXpress has completed over 85 hotels loans during this period with many of those loans to Asian-Americans. The trade show presents an excellent opportunity to allow hotel owners to meet personally with us to learn how we can assist them with their financing needs,” according to Michael D. Sneden, Executive Vice President at ValueXpress.
Jay Bhakta, senior loan originator at the ValueXpress Jackson, MS office, will represent ValueXpress at the trade show. “Many hoteliers are not fully aware that the CMBS conduit loan market is aggressively seeking quality hospitality loans from owners of hotels that performed through the 2008-2009 recession. In addition, with the increase in SBA loan limits to $5 million and the expansion of the SBA 504 program to allow refinancing, hoteliers have more options than ever to secure financing for their hotels,” Sneden said.
ValueXpress welcomes the opportunity to meet with hotel owners at the trade show to explain in detail its SBA 7(a), SBA 504, USDA B&I, CMBS conduit and conventional loans for hospitality properties. Call Jay Bhakta at 1-601-918-2850 for your personal appointment.
Hotel owners who attended the recent Asian-American Hotel Owners (AAHOA) Convention and Trade Show in Las Vegas, NV were encouraged by the improvement noted in room sales in late 2010 and 2011 to date after poor business conditions resulted in revenue declines of at least 10%-30% during the 2008-2009 recession. Most hotel owners agreed the worst was over for this downturn in the business cycle.
With optimism in hand, hotel owners were looking for debt capital to replace maturing loans, purchase properties and take cash out of existing properties to reinvest in other opportunities. Others have been offered discounts to pay off lenders trying to reduce hotel loan exposure in their portfolios.
Business was brisk at the ValueXpress booth at AAHOA; we were offering fixed-rate non-recourse CMBS conduit loans with rates starting at 5% for loans $5 million and up. This loan program is most attractive for owners who want to obtain cash-out on a refinance, lock in a low fixed-rate before rates rise, or those who have been offered discounts to pay off debt on performing properties. Some financing requests presented to ValueXpress at the show included (1) an $11-million loan on a Hilton Garden Inn located in West Virginia with a bank loan maturing this year without a likelihood of loan renewal despite 80% occupancy and a $100 ADR and (2) a $9-million loan on a Comfort Inn in San Antonio, TX looking for a 5.5% rate to replace a higher rate bank loan.
For loans under $5 million secured by both franchised and independent properties, ValueXpress presented SBA 504, SBA 7(a) and conventional loan options depending on the situation.
“The show was an enormous success for us,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “My associate Jay Bhakta and I are busy following up on six immediate loan requests for approximately $50 million. I will be headed down to Washington D.C. next week to work on two deals totaling $15 million that need immediate attention.”
Hotel owner Subhash (Sam) Shah was the winner of a new 32GB IPAD 2 at the ValueXpress booth at the Asian-American Hotel Owners (AAHOA) Convention and Trade Show in Las Vegas, NV last week. When we first contacted Mr. Shah and told him he’d won the IPAD, he responded, “No, I don’t want to buy an IPAD!” Then just as quickly he remembered the ValueXpress drawing and realized he had won the IPAD! The excited Mr. Shah came right over to our booth to claim his IPAD.
Mr. Shah is the owner of the Bali Hai hotel located on North 1st Street in Yakima, WA. The hotel is designed in “Tiki” style, including a distinctive neon sign. The lobby has Tiki décor and Sam has neat reproduction postcards of the Bali Hai in its early days. Sam has owned the 28-room property for 4 years. The property has a nice pool and a great family atmosphere.
“We were thrilled that Sam was in the trade show hall when we drew his winning card,” said Jay Bhakta, who runs the Mississippi office for ValueXpress. “It was a pleasure to meet and speak with Sam.” A big success, over 300 cards were submitted for the IPAD drawing.
The senior spreads on a $2.1-billion CMBS offering by UBS, Deutsche Bank and Ladder Capital are shaping up to be slightly tighter than those on another multi-borrower issue that priced last week.
The second offering of the year from this trio of lenders is slated soon, following another week of volatility in the financial markets that caused CMBS spreads to fluctuate in the secondary market.
As for the conduit issue led by UBS and Deutsche, the largest class consists of $831.5 million of triple-A bonds with a weighted average life of 9.8 years. Those bonds were being shopped yesterday at 140 basis points (BP) over swaps. That was 8 BP lower than the spread on comparable bonds from a $1.2-billion multi-borrower issue that Morgan Stanley and Bank of America (BofA) priced on June 9, amid a selloff in the stock and bond markets.
Price talk from UBS and Deutsche on the other two senior, fixed-rated classes of their offering was 100 BP for $257.8 million of five-year paper and 140 BP for $568.7 million of 4.9-year notes. The smaller class ranks first in line for principal payments on distribution dates. The larger tranche is more similar to the 4.9-year bonds from the triple-A portion of the Morgan-BofA deal, which priced at 147 BP.
Unlike the Morgan-BofA deal, the offering led by UBS and Deutsche includes $116.1 million of senior floating-rate bonds. The anticipated spread on the 6.7-year floaters is 105 BP over one-month Libor.
Many investors concurred with the price talk on the senior notes from UBS and Deutsche, and some expressed a preference for the collateral when compared with the Morgan-BofA deal. But market participants said it was proving more difficult to place the deal’s subordinate paper at the suggested spreads. Some buy siders predicted that price guidance on the junior bonds, all of which have 9.9-year terms, would have to be widened by as much as 25 BP.
The U.S. commercial mortgage-backed securities (CMBS) delinquency rate fell in May to 9.6% for loans 30 or more days delinquent, in foreclosure or REO, according to Trepp LLC, New York. Despite a 5-basis-point (bp) decline, it represented the biggest rate drop for U.S. commercial real estate loans in CMBS in nearly two years, setting aside October 2010 – after the Extended Stay Hotels loan resolution. The May decline follows a 23 bp increase in April. The delinquent loan value in May was $61.5 billion.
“Last month [April], the delinquency rate posted its biggest rate of increase since late 2010 – a 23 [bp] jump,” said Manus Clancy, managing director at Trepp. “The increase took many CMBS pros by surprise as it came after three consecutive months of improving results.”
While the delinquency percentage of loans dropped overall last month, seriously delinquent loans – 60 or more days delinquent, in foreclosure, REO or non-performing balloons – increased 6 bp from April to 8.96% in May. Foreclosures were at 2.98% and 90 or more days delinquent were at 2.7%. The industrial delinquency rate increased 120 bp in May, up to nearly 12%. Six months ago, the rate was below 7%. Office delinquencies increased 3 bp in May, but the property type remains the best performing with a 7.23% delinquency rate.
Delinquencies in all other major property types declined for the month. The multifamily rate dropped 6 bp, but it remained the worst major property type with a 16.71% delinquency rate, followed by lodging at 15.37% after an 8 bp decline.
“While there may be additional bumps along the way, we think the May numbers accurately reflect a leveling off in the market,” Clancy said.
According to Jordan Blanchard at CDC Direct, May was a very active month for SBA 504 First Mortgage Pool (FMP) originators. Four pools settled a total of just over $18 million (guaranteed portion). Total 504 FMP volume through May 2011 is $135.7 million. With 18 pools issued to date, the average guaranteed interest approximates $7.5 million. The total number of loans pooled stands at 96. The average gross loan amount is $1,767,885.
The SBA FMP program allows lenders to sell 85% of the first mortgage provided in an SBA 504 transaction to a pool originator, retaining 15%. The sale provides premium and servicing income to the selling bank and reduces loan exposure. The pool originator will sell 80% of the loans to investors, who receive an SBA guarantee as security. The pool originator retains the 5% balance. The FMP program offers the most flexibility to sellers because it allows the lender to set the approval criteria. All property types eligible for SBA financing are eligible for FMP pooling.
Increasingly aggressive property appraisals, so-called "incentive management fees" for hotel properties, and the limited return of "pro forma" underwriting are among the troubling trends that Standard & Poor's (S&P) cites as red flags in the quickly evolving revival of the commercial mortgage-backed securities (CMBS) market. In a report released earlier this week, S&P identifies several new trends – and a return to questionable "old" trends – in recent CMBS transactions. The U.S. CMBS market experienced "a somewhat swift evolution between late 2009 and early 2011, as single-borrower transactions gave way to a market characterized by relatively larger, more complex multi-borrower deals," the rating agency wrote. “Several structural features have been loosened, while some property valuations are overly optimistic.”
"We continue to see instances where we believe that valuations are questionable, especially within the larger loans for certain property types, particularly office and hotel, in primary markets," wrote S&P Credit Analyst James Manzi. "This is probably attributable to the fact that lending is very competitive in these types of markets, where insurance companies, pension funds, foreign investors, and REITs could be bidding alongside CMBS issuers.”
"The part that we believe should be most alarming to investors is that the appraisals appear to be building in upside in rents and occupancy to arrive at a value for the properties in question instead of using in-place rents and tenancy at the time of closing," Manzi added.
S&P also cited numerous examples of a limited return of pro forma underwriting. According to S&P, the phrase "pro forma" indicates that some aspect of the loan underwriting for a collateral property is based on the occurrence of an anticipated (future) event, such as a projected increase in rents or an assumption that a tenant will occupy a currently vacant space and begin to pay rent.
The rating agency also noted more loans in recent deals with single-tenant exposure, which is generally more risky than buildings with large, diversified tenant rosters. Moreover, several top-10 loans in recent CMBS offerings are based on leases that expire before loan maturity. In that situation, there is always the risk that the tenant will not renew; there is a significant time and cost involved with replacing a major tenant if it leaves or defaults.
S&P said it is also watching other trends including an increase in the number of partial-term interest-only loans, a weakening of "recourse carve-outs" for bankruptcy and fraud, and increased deal structure complexity, as measured by the number of bond classes per transaction.
Commercial Mortgage Alert reports $17.4 billion of U.S. CMBS are in the pipeline to price by the end of September. This figure includes two multi-borrower transactions totaling $2.9 billion that are now in the market and expected to price next week. The offerings, at approximately $1.4 billion each, are led by J.P. Morgan and Wells Fargo/RBS, respectively.
This estimated $17.4 billion of issuance, together with the $9.4 billion of transactions that have already priced this year, would bring total volume to $27 billion through the third quarter. Some other offerings are likely to materialize in the meantime from lenders still getting their revived conduit shops off the ground. Also, a few lenders are chasing single-borrower financings. In all, that activity puts the sector roughly on target to reach the $39-billion annual issuance total predicted by a panel of market pros at the beginning of the year.
Of the 12 deals in the pipeline, 4 weren’t previously listed: a $2.3-billion offering by Deutsche Bank and UBS in July; a $1.6-billion deal by Wells Fargo, RBS and GE Capital in July; and two third-quarter issues -- a $1.5-billion offering by J.P. Morgan and a $1.5-billion issue by Morgan Stanley and Bank of America.
The current securitization pace, while still far below the level of the market’s heyday, is running well ahead of a year ago, when issuance totaled only $11.6 billion.
A B-piece buyer's appetite for taking on 5% risk and the buyer's future affiliation with special servicing will depend on a final risk-retention rule required under the Dodd-Frank Act. The comment period on the banking agencies' risk-retention proposal ends June 10.
According to Brian Hanson, managing director at the Bethesda, MD, office of CWCapital, at the recent Mortgage Bankers Association's Commercial/Multifamily Servicing and Technology Conference, under Dodd-Frank, an operating adviser, or a trust or senior adviser would have surveillance of special servicer activities and could affect a B-piece buyer's decision to add capital into a deal.
"There[in] lies the rub because if the B-piece buyer takes on risk, the operating adviser gives an annual review of the special servicer,” Hanson said. “If the B-piece buyer invests money and is not eliminated as a special servicer, and the operating adviser said the special servicer is not adhering to the deal or trust, [the operating adviser] can recommend [special servicer] removal, which is also not appetizing. Organizations want to clarify the language, and how that plays out will determine whether B-piece or special servicing holders will be in the market.”
“The master servicer may also have to consult with an operating adviser; after a control event occurs, the special servicer would consult with them on resolutions. If the operating adviser believes the special servicer should be replaced, they would receive a vote from bondholders,” said Greg Winchester, managing director at TriMont Real Estate Advisors Inc., Atlanta, GA.
However, whether operating advisers are special servicers or another industry group plays that role is still vague. Winchester said a special servicer would play the best role of operating advisor because special servicers have skilled staff and real estate experts in place with “a quick and speedy” approach, and they understand Pooling and Servicing Agreements. “This is what drives the market to the large extent and capital from the B-piece market is key,” Winchester said.
Since the CMBS market revamped last year, now CMBS 2.0, underwriting started out conservatively, which has some industry participants concerned. Hanson said first loans made after a recession are typically solid loans, and compared to aggressively underwritten vintage loans from 2006 to 2008, “it would hard to not be better as a group. If you look at any special servicers, the defaults are primarily seen on those vintage deals,” he said.
However, Hanson said weighed against more conservative underwriting and past experience are nearly 23 to 25 new conduit lenders. “There is a lot of competition for loans and, with that, comes risk and the possibility of more aggressive underwriting,” he said.
After losing a recent bid on a pool, Hanson said that as a B-piece buyer, CWCapital would have wanted some of the loans taken out of that pool -- under an “unwritten rule” that it could negotiate with an issuer. He said the weak loans were a reflection of some markets still in trouble and problems with loan sponsorship. “We are definitely aware that there is a new crop of B-piece buyers,” Hanson said. “Who is in the market and how long they are in will depend on many things, including risk retention.”
ValueXpress recently obtained a commitment from its partner bank, Country Bank on a hotel located in Brooklyn, NY. A FEMA flood determination on form 81-93 required by the SBA found the property located in a Special Flood Hazard Area (SFHA). The SBA requires that borrowers obtain flood insurance under the National Flood Insurance Program (NFIP) on real estate and business personal property if any portion of a building that is collateral for the Loan, or any business personal property is located in a building that is located in a SFHA. The amount of flood insurance should be the lesser of the maximum amount of insurance available or replacement cost. It is important to note that the maximum amount of flood insurance available under NFIP programs is limited to $500,000 for both building and contents coverage, combined, so coverage in this case was limited to the lesser NFIP maximum of $500,000.
Flood Insurance coverage under the NFIP may be purchased through an insurance agent who will obtain the policy either directly through the NFIP or through a Write Your Own (WYO) company that has agreed to write and service NFIP policies on behalf of FEMA. Flood insurance also may be available from private insurers that are not federally backed.
Country Bank obtained a quote of $30,000/year for $500,000 of coverage for real estate and business personal property, which was exceptionally high. ValueXpress worked the private market and discovered that the base property insurance coverage provided $250,000 real estate and business personal property, and ValueXpress was able to purchase another $250,000 in the private market for a few thousand dollars/year, saving the client a substantial amount of money.
Commercial mortgage bonds are experiencing the largest rally in 10 months on growing confidence that declining unemployment will boost the economy enough to stem a tide of loan defaults. Top-rated securities backed by U.S. property loans returned 1.41% in April, while AAA-ranked corporate bonds gained 1.28%, a gap of 0.13 percentage points, the biggest since January, according to Bank of America Merrill Lynch index data. In March, corporates returned 0.07% versus 0.02% for bonds tied to skyscrapers, hotels, apartments and shopping centers.
The $700-billion market for commercial mortgage debt is gaining favor as a 45% decline in real estate values since 2007 slows and the jobless rate drops to a two-year low. The balance of delinquent loans bundled and sold into bonds fell in March for the first time in more than three years. On May 1, Warren Buffett said that prices have been “pretty strong” in multifamily real estate.
“As we’ve seen the employment picture improve, people feel better about taking the worst-case scenario off the table,” said James Grady, a managing director at Deutsche Asset Management in New York, which has $240 billion in assets under management including commercial-mortgage debt. “Vacancy and lease rates are starting to improve, and that supports prices in commercial real estate.”
Relative yields on AAA-ranked commercial mortgage securities have fallen to 173 basis points, or 1.73 percentage points, the lowest since January 2008, according to Bank of America Merrill Lynch data. The index ended 2010 at 200 basis points.
Killeen-Temple-Fort Hood, Texas claimed the top spot in the 2010 Best Performing Cities index, according to the Milken Institute. The area edged up from second place in 2009. The area is heralded for its economic performance amid severe national recession. The metro area’s job growth ranked in the top 10 last year and over the five years from 2004-2009, but its overall performance was fueled by its first-place position in wage and salary growth over the five-year (2003-2008) and one-year (2007-2008) periods examined. Additionally, it ranked third in year-over-year job growth in the 12 months ended April 2010. Expansion at Fort Hood with the associated economic ripple effects is the primary catalyst for this stellar performance.
Rounding out the top 10 large MSAs are the following:
| Metropolitan Statistical Area (MSD) | 2010 Rank | 2009 Rank |
|---|---|---|
| Killeen-Temple-Fort Hood, TX | 1 | 2 |
| Austin-Round Rock, TX | 2 | 1 |
| Huntsville, AL | 3 | 8 |
| McAllen-Edinburg-Mission, TX | 4 | 4 |
| Kennewick-Richland-Pasco, WA | 5 | 6 |
| Washington-Arlington-Alexandria, DC-VA-MD | 6 | 25 |
| Raleigh-Cary, NC | 7 | 10 |
| Anchorage, AK | 8 | 40 |
| El Paso, TX | 9 | 14 |
| Houston-Sugar Land-Baytown, TX | 10 | 5 |
“We are current working on three hospitality loans in Killeen, Texas,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “Two of the loans are CMBS conduit loans and one is an SBA 7(a) loan. The hotels are operating at 75%-80% occupancy and posted stable revenue during the 2008-2009 recession. With CMBS conduit lenders, and in fact all lenders, focused on market performance in addition to property performance, we keep a lookout for lending opportunities in better performing markets, using reports like those from the Milken Institute as a guide to locating better performing regions of the United States.”
As some banks discovered as they tried to move new 504 refinance loans through the SBA regional approval centers, their loans were getting thwarted -- not by the SBA, but by the lender that held the note the new lender was trying to refinance.
SBA Form 2416 was modified effective April 14, 2011, so it no longer needs to be completed by the lender currently holding the first mortgage/deed of trust, unless it is the same institution. The original form was a problem for lenders looking to refinance debt held by another institution because if the loan was of sufficient credit quality to be refinanced by a “new” lender, then the current lender would likely not want to lose the loan out of its own portfolio. This is particularly true today with as much liquidity as banks currently have and banks’ strong desire to finance any good owner-occupied credit that they can find.
Until recently, Form 2416 had to be certified by the originating lender. When the originating lender received the authorization form, which required it to certify that the loan was in good standing, it could call the borrower and “derail” the refinance by offering a loan of similar or better terms to the borrower.
Credit the SBA for recognizing that this policy was quashing many refinance opportunities for other lenders and using a lot of resources and time. So now, Form 2416 needs to be completed only when a lender is refinancing its own debt. So CDCs and lenders that were reluctant to take on new transactions for fear they would be “taken back” by the current lenders need no longer be concerned about this prospect.
ValueXpress will be exhibiting at the annual Asian American Hotel Owners (AAHOA) Trade Show in Las Vegas, Nevada June 16-17, 2011. ValueXpress will be located in booth 452 at the Sands Expo and Convention Center noon-6:00 p.m. on both Thursday, June 16 and Friday, June 17.
“ValueXpress is an Allied Member of AAHOA and has been exhibiting at the AAHOA Trade Show for over ten years,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “We have completed over 85 hotels loans during this period with many of those loans to AAHOA members. The trade show presents an excellent opportunity to allow hotel owners to meet personally with us to learn how we can assist them with their financing needs.”
“This year it’s particularly important for us to talk with our clients,” stressed Jay Bhakta, a senior loan originator at the ValueXpress Jackson, MS office and active AAHOA member. “Many hoteliers are not fully aware that the CMBS conduit loan market is aggressively seeking quality hospitality loans from owners of hotels that performed through the 2008-2009 recession. In addition, with the increase in SBA loan limits to $5 million and the expansion of the SBA 504 program to allow refinancing, hoteliers have more options than ever to secure financing for their hotels.”
ValueXpress welcomes the opportunity to meet with hotel owners at the trade show to explain in detail its SBA 7(a), SBA 504, USDA B&I, CMBS conduit and conventional loans for hospitality properties. Call Jay Bhakta at 601-918-2850 for your personal appointment.
Underwriting on CMBS loans is loosening as originators compete for more business in a sector that's starting to heat up again. "The first transactions to emerge from CMBS 2.0 were very conservative in most facets, benefiting an industry emerging from a very stressful period," said Huxley Somerville, group managing director and head of U.S. CMBS for Fitch. "However, standards, not surprisingly, are beginning to loosen as competition amongst originators intensifies and the economy continues to rebound."
In the past year, CMBS loan attributes have moved from being very conservative to more traditional, while still healthy, according to Fitch. "The CMBS market is likely to balk at further loosening of underwriting standards since future deals would become increasingly uneconomic," Fitch reported.
Greater competition among originators in the CMBS arena arrives as loan performance improves within the segment. The percentage of CMBS loans paying off on their balloon date hit a two-year high in March, according to Trepp, a commercial mortgage analytics firm.
In March, 55.5% of CMBS loans paid off when they reached their balloon date, making it only the second time in 27 months for the payoff percentage to crack 50%. Comparatively, the average percentage of loans paying off each month held at about 36.7% this past year.
Trepp said larger loans tended to pay off in a more "timely fashion" in March, suggesting that "larger loans and trophy properties are having an easier time finding financing in the current environment." Before the onset of the 2008 financial meltdown, payoff percentages remained above 70% on average, Trepp said.
In 2009 and 2010, the SBA provided notice that it was increasing its level of supervision over certain higher risk SBA lenders that participate in the secondary market. Specifically, the notices covered all SBA lenders that seek to sell loans into the secondary market and are subject to (1) a Cease & Desist order, (2) a Consent Agreement affecting capital or commercial lending issues, (3) other supervisory action that cites unsafe and unsound banking practices or other items of concern to SBA, or (4) where the SBA lender’s auditor issued a Going Concern opinion in the audited financial statements (collectively, the “Actions”).
The SBA is concerned that once the Guaranteed Portion of an SBA loan is sold, the guarantee effectively changes from a conditional guarantee to the SBA lender to an unconditional guarantee to the guarantee buyer (“registered holder”). If a borrower defaults, SBA generally purchases the Guaranteed Portion from the registered holder out of the Secondary Market and, as appropriate, pursues the SBA lender for any repairs or denials based on a post-purchase review. However, if an SBA lender is placed in receivership by the Federal Deposit Insurance Corporation (FDIC), SBA may be limited in its ability to receive its entitled reimbursement of the portion of the purchase amount denied or repaired from the failed institution.
Effective June 30, 2011, SBA will, in general, no longer review each individual loan prior to sale. Instead, SBA lenders subject to any one or more of the four Actions defined above will be required to enter into a Reserve Account Agreement (“Agreement”) with SBA prior to requesting SBA approval to sell loans into the Secondary Market. Under the Agreement, before SBA will approve the sale of any Guaranteed Portion on the Secondary Market, the SBA lender will be required to establish a Reserve Account at a well-capitalized FDIC-insured depository financial institution and fund the account as follows:
ValueXpress has lowered the minimum loan amount for CMBS conduit loans to $1 million, effective immediately. On CMBS conduit loans between $1 million and $5 million, 5- and 10-year loan terms are available based on 25-year amortization (30 years for multi-family and manufactured housing communities). Qualifying assets are urban/suburban office, anchored and unanchored retail, multi-family, manufactured housing communities, credit single tenant, and self storage. Hospitality is not being considered in loan amounts of under $5 million at this time.
Desired markets include top MSAs and adjacent cities with populations of at least 50,000. Maximum LTVs are currently 65% for non-multi-family assets and 70% for multi-family and manufactured housing communities, with minimum net cash flow DSCR of 1.35 and 1.30, respectively. Asset quality is expected to be “B” or better. Typical CMBS conduit features apply, including yield maintenance pre-pay provision, escrows for taxes, insurance, capital improvements and TILCs (if applicable). Please visit our website valuexpress.com to obtain our latest term and pricing sheets for CMBS conduit loans.
“As the demand for commercial mortgage-backed securities continues to strengthen, originators are scrambling to find quality loans for CMBS pools,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “I felt it would only be a matter of time until small balance loans would again be included in securitizations. ValueXpress has historically originated a significant amount of smaller balance CMBS loans and we are pleased to add the small balance product to our menu of CMBS options.” In addition, ValueXpress provides 75% LTV/1.25 DSCR CMBS conduit loans including hospitality loans in amounts above $5 million.
CMBS prices have slowly risen since the earthquake and tsunami in Japan on March 11 and subsequent concerns about unrest in the Middle East. Prices have recovered close to levels seen before the disaster. Spreads on senior investment-grade CMBS have generally tightened 5-10 basis points weekly. Better performing legacy CMBS pools, primarily those issued prior to 2006, have tightened more dramatically versus 2007 issues.
“We took the opportunity during the period of volatility to add more CMBS exposure at attractive prices for our client Country Bank,” said Michael D. Sneden, Executive Vice President at ValueXpress. “We have advised Country Bank on the purchase and sale of over $200 million of CMBS since the height of the credit crisis in late 2008, and the program helps us keep in constant touch with supply and demand on the CMBS side of the market. The appetite for new originations is very strong right now.”
The Small Business Administration (SBA) will allow more businesses to refinance their commercial real estate mortgages through its 504 loan program. The SBA initially restricted this new refinancing option to small businesses that faced balloon payments on their mortgages before December 31, 2012. Beginning April 6, however, it will open the 504 refinancing option to businesses with balloon payments due after that date.
“With the collapse of the real estate bubble, many small business owners have found themselves unable to refinance as a result of inflated real estate values at the time they took out their mortgage,” SBA Administrator Karen Mills said. “SBA’s temporary 504 refinancing program was first made available to those small businesses with the most immediate need. Today’s step opens this critical assistance to more small businesses, giving them the opportunity to restructure their debt and free capital that will be essential to keeping their doors open and also their future ability to grow and create jobs.”
The Small Business Jobs Act, which was enacted last September, allowed the 504 program to be used to refinance existing loans on owner-occupied commercial real estate through September 2012. To be eligible for refinancing, the mortgage must be at least two years old and the business must be current on its payments for the past 12 months. Borrowers can refinance up to 90% of the current appraised property value or 100% of the outstanding mortgage, whichever is lower.
The SBA’s 504 loans are used to finance fixed assets, primarily real estate. Typically, a 504 project includes a first mortgage from a private second lender that covers 50% of the cost, an SBA-guaranteed second mortgage from a certified development company that covers 40% of the cost, and 10% equity from the small business borrower.
The successful CMBS offering by Goldman Sachs and Citigroup (see our 3.23.11 News Article) that priced on March 23rd marks the fifth multi-borrower deal completed in 2011. Combined issuance in the five deals totaled nearly $8 billion. With over 20 CMBS conduit shops having jumped into the resurgent CMBS conduit loan origination market, the competition for quality loans is fierce. With market goals in excess of $50 billion on a combined basis from figures provided by the conduit shops, there may not be enough business to go around. As a result, the shops are getting creative on originations without sacrificing underwriting standards, at least for now.
“We are getting quotes and signing up borrowers for CMBS conduit loans on a variety of projects that would not have worked as little as three months ago,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “It is starting to feel like old times.” Examples of recent quotes include three limited service hotels, one of which is located in a secondary market. All of these loans are $5-$10 million. “Few loans below $10 million were being quoted at the beginning of the year. Now these $5 million-and-up loans are needed to fill out the CMBS pools,” said Sneden.
Recent approvals also include a small CVS drugstore loan of $2.5 million. “Credit-tenant drug stores are in high demand; any size Walgreen’s or CVS can obtain a CMBS conduit loan as long as the lease is not maturing soon,” notes Sneden. Other examples of the appetite for qualified CMBS conduit candidates include a recent application for an $8-million self-storage portfolio in a secondary market and an underlying co-operative apartment loan in New York City.
“In general, it looks like the asset classes found in CMBS located in primary and secondary markets prior to the 2007 crash can obtain a CMBS conduit loan as long as operating performance has been stable, near-term rollover risk is low and the borrower requests reasonable leverage,” observes Sneden.
Goldman Sachs and Citigroup priced a $1.4-billion CMBS transaction March 23; with the crisis in Japan and turmoil in Libya a significant widening in CMBS spreads occurred. With capital markets recovering some lost ground during the week, the transaction was able to clear the high end of price guidance.
Similar to other recent CMBS issues, the issue has a heavy concentration of loans on retail properties, which comprise 60% of its collateral pool. The transaction has been divided into ten principal paying classes and one interest-only class rated by Fitch and DBRS. The deal’s four AAA classes have an 18.25% subordination level, at the upper end of 15%-18.25% subordination levels for recent multi-borrower deals. Its unrated class, a balance of $38.5 million, comprises part of the deal’s B-piece, which was acquired by Rialto Capital. Wells Fargo is the deal’s master servicer and Midland Loan Services is the deal’s special servicer.
The $81-million class A1 CMBS with a 2.5-year average life wound up pricing at an 80 basis point (bp) spread. The $399-million class A2 CMBS with a 4.8-year average life went out the door at 125 bp over swaps, and the $128-million class of 7.2-year paper went for 140 bp. The class A4 CMBS with a 9.7-year average life was substantially oversubscribed by investors at 125 bp over swaps.
In February 2011, a borrower contacted ValueXpress explaining he wanted to purchase an existing retail business that operated as a home center in a 60,000-square-foot facility in Mississippi. The borrower, previously a general manager of a truck stop that comprised fuel and a convenience store, now owned rental real estate and had obtained bank financing for income-producing properties, but had never obtained a business loan.
After explaining that the highest likelihood of a loan approval would be through the SBA 7(a) program, ValueXpress assisted the borrower through each step of the loan process. “The first step was to direct the borrower to our website,” said Jay Bhakta, a senior loan originator at the ValueXpress Jackson, MS office. “On our website, we have all the forms to complete an SBA 7(a) loan package, but more important, we have detailed instructions on how to fill out the forms. Many lenders provide forms, but no instruction.”
“After the borrower got a nice start on the package, I went to meet with him at his office and we went through each form,” notes Bhakta. “I got Jim Brett, our SBA underwriter in New York, on the phone to work through any SBA technical issues that could negatively impact the transaction.”
“Once the package was complete, we held a conference call with the seller, a long-time owner of the business, to collect information on the business history, sales segmentation, management, operating expenses and future growth. This information is required for the loan credit memorandum,” said Bhakta. “Subsequent to the conference call, Jim completed the credit memorandum and both the lender and borrower portion of the SBA package and sent it off to the SBA Loan Guaranty Processing Center in Hazard, KY. The entire process was completed in three weeks.”
The Business Council of Westchester County, N.Y. has announced that Michael D. Sneden, Executive Vice President at ValueXpress, will return as the keynote speaker at its Circles of Influence social networking event beginning at 4:30 p.m., March 31, at the Hilton Rye Town in Rye Brook, N.Y.
Sneden’s presentation, “Access to Capital for Small Business,” a follow-on to his January 20th talk, will show participants what is required to prepare a complete business loan application for a Subway restaurant business purchase that was subsequently approved. By providing and reviewing the loan application, Sneden will show participants how they can prepare complete business loan applications for their own businesses. Copies of the business loan application will be available at the conclusion of the presentation.
In his January 20th presentation, “How Can SBA Loans Help Your Business?” Sneden used a Subway restaurant business as an example to walk listeners through the underwriting of the purchase of the real estate and business; attendees learned how business and personal cash flows are determined when obtaining approval of an SBA loan.
For additional information and to register for the March 31st 30-minute seminar, “Access to Capital for Small Business,” call Carolyn Murphy at Country Bank at (212) 883-6448. Hors d’oeuvres and drinks will be provided from 5:00-7:00 pm.
The faith that investors have shown in the legacy U.S. CMBS market over the last few months was validated on Wednesday when the Trepp Delinquency Report reported that the core delinquency rate for February had one of its smallest increases since the beginning of the credit crisis.
In February, the delinquency rate for U.S. commercial real estate loans in CMBS edged up 5 basis points (bp), putting the rate at 9.39%. That is once again the highest percentage of loans 30-plus days delinquent, in foreclosure or REO in the history of the CMBS market. This 5 bp increase, however, is arguably the smallest increase since we started publishing numbers 18 months ago.
A dip in the delinquency rate occurred in October 2010 when the huge Extended Stay Hotel (ESH) loan was liquidated at a loss. If the ESH loan is removed from the equation, February’s 5 bp jump is the smallest in almost two years.
| Period | % 30 Days or More Delinquent |
|---|---|
| Feb-11 | 9.39% |
| Jan-11 | 9.34 |
| Dec-10 | 9.20 |
| 3 Months Ago | 8.93% |
| 6 Months Ago | 8.90 |
| 12 Months Ago | 6.72 |
The rate of increase has averaged 23.8 bp per month over the previous 12 months (after backing out the Stuyvesant Town impact in March and the ESH impact in October). The percentage of loans seriously delinquent (60-plus days delinquent, in foreclosure, REO or non-performing balloons) is now 8.75%, up 16 bp. If defeased loans were taken out of the equation, the overall delinquency rate would be 9.90%, up 4 bp from January 2011. One year ago, the overall U.S. delinquency rate was 6.72%, while six months ago, the overall U.S. delinquency rate was 8.90%. One year ago, the rate of U.S. loans seriously delinquent was 5.97%, while six months ago, the rate of U.S. loans seriously delinquent was 8.14%.
| Delinquency Status | Percentage |
|---|---|
| Current | 90.22 |
| 30 Days Delinquent | 0.64 |
| 60 Days Delinquent | 0.47 |
| 90 Days Delinquent | 3.07 |
| Performing Matured Balloon |
0.39 (1) |
| Non-Performing Matured Balloon |
0.86 |
| Foreclosure | 2.77 |
| REO | 1.58 |
(1) Loans that are past their maturity date but still current on interest are considered current.
Larger commercial mortgage-backed securities deals are starting to come back to the market just 15 months after a few smaller transactions priced following a period of dormancy, according to an S&P research note this week. The return of the market, referred to as CMBS 2.0, began in late 2009 with three single-borrower transactions that are not as complex as some of the more recent deals, S&P said.
"Three $1.2 billion-plus conduit/fusion deals were issued this month, each of which included an average of ten principal and interest bonds and two interest-only classes," said S&P analyst James Manzi. "Compared with late-2009 issuances, the newer multi-borrower deals have higher leverage, less debt-service coverage, and somewhat looser underwriting."
The report noted that the ten most recent CMBS transactions were valued well below peak levels reached in 2007, but the amounts issued in the more recent transactions trump the single-borrower deals valued at $453 million that came to market in 2009, according to Credit Analyst Brian Snow.
"Compared with the first two single-borrower deals in late 2009, issuer loan-to-value ratios are up about 10% and debt-service coverage ratios are down quite a bit," S&P Analyst Kurt Pollem said. "Additionally, rating agency stressed loan-to-values have shifted upward -- to the low 90s most recently -- and stressed debt-service coverage ratios have trended down to about 1.2x from 1.5."
The Obama Administration seeks $818 billion for small-business programs, including the 7(a) program, in its 2012 budget that will begin in October 2011. This total is just over half of what it received for these programs in 2010, when the agency was flush with supplemental stimulus money to spur lending and borrowing. While this appears to be a “cut,” it would be the highest annual appropriation for the agency in nominal dollars since at least 2000.
For fiscal 2012 the administration is asking for a subsidy that would permit up to $16.5 billion in 7(a) lending. That is $1-billion less than what the SBA sought for fiscal 2011 and less than it loaned in calendar 2010, when extended Recovery Act provisions made 7(a) loans unusually attractive by raising the guarantee to 90% and eliminating fees. Demand for 7(a) loans has fallen sharply since those provisions expired at the end of calendar 2010, according to SBA Administrator Karen G. Mills, and while the agency expects an uptick, it doesn’t expect to have to turn borrowers away. (Even in pre-recession years, 7(a) lending did not top this ceiling.) But, she added, the SBA already charges borrowers and lenders the most it is allowed by law, so if Congress appropriates a smaller subsidy, the agency will be forced to guarantee still-fewer loans.
“The subsidy only lasts for so many loans, and that restricts our ability to meet market needs,” said Ms. Mills.
“While the proposed appropriation for the SBA appears to be a large reduction from 2010, the Jobs Act benefits are over and new loan production post-Jobs Act is way down,” notes Michael D. Sneden, Executive Vice President at ValueXpress. “One unknown though is the new higher loan limits; if a large number of higher balance loans are funded in 2011, we could see a moratorium on guarantees at the end of the fiscal year, which has happened in the past, but I do not foresee it happening is 2011.”
The SBA's 504 refinancing program has finally been implemented. It gives owner-user commercial real estate owners with existing mortgage loans facing imminent loan maturity or balloon payments the opportunity to refinance with a government-guaranteed SBA 504 loan.
Some of the program parameters are as follows:
The SBA 504 refinancing program will be very helpful for business owners who operate their business in owned commercial real estate that face a loan maturity or balloon in the next 24 months. “While there are surely some owners with these pressures, a larger universe of potential borrowers would develop if the 504 refinance program had adopted the more liberal SBA 7(a) rules, which include a payment savings test and no fast rules on balloon maturities,” noted Michael D. Sneden, Executive Vice President of ValueXpress.
CDC Direct Capital has announced an SBA 504 Secondary Market solution with the Morgan Stanley SBA 504 First Mortgage Secondary Market Program. This program enables a bank to sell the entire first mortgage on any SBA 504 loan.
Morgan Stanley is offering a 100% loan purchase program pertaining to the SBA 504 loan program available through CDC Direct Capital. Morgan Stanley will purchase 100% of a first mortgage of an SBA 504 loan. When a bank sells the entire 504 first mortgage loan its benefits will include
increased liquidity and capital;
premium income generated from sale of the loan; and
an ability to offer more competitive rates and terms as well as obtain regulatory relief through the minimization of commercial real estate loans.
“This will be a great addition to the developing secondary market for SBA 504 first mortgage loan sales,” commented Michael D. Sneden, Executive Vice President of ValueXpress. “Unfortunately, the program will not accept special purpose properties such as hospitality and restaurants, which have limited options in today’s market and therefore are less competitive for lenders to win the business. Hopefully that segment will open up in the future.”
The prognosis for CMBS conduit loan origination in 2011 and beyond was discussed at this year’s MBA CREF convention by three of the most active originators of CMBS loans right now, Richard Schlenger of Citigroup, Roddy O’Neal of Goldman Sachs and Dennis Schuh of JPMorgan. In addition, Warren DeHaan of Starwood Property Trust provided insight into hospitality lending and CMBS. The panelists suggested that large loans will be prevalent near term; they all said that current staffing levels are modest relative to the peak of the market and staff is struggling to keep up with deal flow. In addition, within the deal flow many transactions do not meet current CMBS lending criteria, but are consuming resources as loans are screened. As a result, smaller loans are being set aside to focus human resources on larger loans.
Second, the panelists echoed that CMBS buyers are now completing more due diligence on the underlying loans than in the past. This includes investors in all classes of the bonds, even senior investment-grade bonds. In order for investors to be able to analyze the underlying real estate, the number of loans must be limited to around 50 loans. This is also driving larger average loan size. John Prout, COO of UBS US Real Estate Finance, confirmed that investors were challenged to review all 47 loans on 83 properties prior to deal pricing on Monday, February 7 for its CMBS deal with Deutsche Bank. He noted the average loan size in the deal was over $40 million.
With regard to underwriting standards, the panelists noted that debt yields are compressing fairly quickly and they are concerned about it. The first CMBS deals in 2010 provided debt yields in the 14% area; now they are quickly headed to 10%. The most recent 2011 CMBS deals provided debt yields of slightly over 11%, but look for new deals to be in the 10% area. One panelist noted that they closed a multifamily deal at slightly over 8% debt yield and another noted that deals are starting to be limited by 1.25x debt service coverage and/or 75% LTV rather than debt yield.
The message: Look for a continuation of fewer, larger loans in CMBS issues in 2011, but with increasing leverage. Until the large loan inventory is depleted, originators will not have much interest in small balance loans in the near term.
Form 1086 has been updated to include clarifications to prevailing program rules along with additional lender certifications. In a program notice to SBA employees and SBA Lenders, the SBA updated Form 1086, Secondary Participation Guaranty Agreement (Form 1086) that is used in the 7(a) loan program to document sales of guarantees in the secondary market. More important, the revised form removes all reference to a warranty period for loans sold at a premium in the secondary market. A change in financial accounting rules issued in June 2009 restricted lenders from recognizing gain from premiums earned on secondary market sales until the end of the warranty period. SBA solicited public comment by Federal Register Notice on March 19, 2010 on just how this accounting rule change should be applied to SBA secondary market sales (FR Vol. 75, No 53, pages 13329-13330). On review of submitted comments, SBA concluded that it is in the best interest of the program at this time to remove the warranty provisions from the form.
As a result, 7(a) lenders will be able to record the gain on secondary market sales of guarantees in the same quarter in which the sale occurs. Previously, the warranty period of 90 days required the gain to be recorded in the next accounting quarter after the guarantee sale. The new rule is effective for loan sales after February 15, 2011.
On the heels of a CMBS industry conference where cautious optimism was the common theme, and a week in which several new CMBS deals were announced, a record setting delinquency rate of 9.34% for January indicates that the CMBS market still has some ground to make up, according to a report from Trepp.
In January, the delinquency rate for U.S. commercial real estate loans in CMBS jumped 14 basis points (bp) to 9.34%. That is the highest percentage of loans 30-plus days delinquent, in foreclosure or REO in the history of the CMBS market.
| Period | % 30 Days or More Delinquent |
|---|---|
| Jan-11 | 9.34 |
| Dec-10 | 9.20 |
| Nov-10 | 8.93 |
| 3 Months Ago | 8.58 |
| 6 Months Ago | 8.71 |
| 12 Months Ago | 6.49 |
While the rate continues to head higher, optimists can point to the fact that the rate of increase is significantly smaller than it was in the prior two months. In November, the delinquency rate stepped up 35 bp from October, and in December it was up 27 bp from November. Pessimists can counter with the fact that the jump comes despite the fact that new issues continue to make their way into the calculation and servicers continue to resolve troubled loans. The new deals – which theoretically should have low delinquencies for a while – will continue to put downward pressure on the rate as issuance continues to grow in 2011. Similarly, the resolution of troubled loans will also help to reduce the rate.
TABLE 2| Property Type | Jan-11 % |
3 Months Ago % | 6 Months Ago % | 12 Months Ago % |
|---|---|---|---|---|
| Industrial | 10.12 | 6.27 | 9.34 | 9.34 |
| Lodging | 15.08 | 14.92 | 9.34 | 9.20 |
| Multifamily | 16.85 | 14.63 | 9.34 | 8.93 |
| Office | 6.88 | 6.68 | 6.35 | 3.90 |
| Retail | 7.72 | 7.17 | 6.90 | 5.69 |
On December 28, 2010, Goldman Sachs and Citigroup teamed up on an $876-million CMBS transaction backed by 43 commercial mortgages they had recently originated. The deal, GS Mortgage Securities Trust, 2010-C2 was the most recent multiborrower CMBS transaction. The market awaits new CMBS issues from Deutsche Bank, UBS, Ladder Capital, Morgan Stanley, Bank of America and others in February.
Although the top loans in the issue capture a lot of attention, most mortgage bankers who originate commercial loans in the $3- to $10-million size range or assets outside the highly desired four asset groups of retail, office, industrial and multifamily might find sharing information on the bottom 10 loans (versus top 10) and non-traditional asset classes more useful.
The smallest loan in the pool is a $2-million loan on a shopping center in Westminster, MD. So small loans in CMBS are possible; however, the loan was 10% LTV/8x DSCR and is anchored by Petsmart. Of the smallest 10 loans 3 were Walgreens drug stores ($3.0 million, $4.5 million and $5.0 million), so Walgreens appear to be highly desired. In addition, a few other single-tenant credit loans appear in the bottom 10, including a Home Depot ($3.9 million) and a Best Buy ($6.0 million). The Walgreens sported DSCR in the 1.30-1.50x area, but the Home Depot and Best Buy DSCRs were > 2.0x.
An interesting bottom-10 loan is Amazing Spaces Storage. This $3.4-million loan is small and not in any of the four key asset groups. The loan has a 68% LTV and a 1.59x DSCR and the property is located in Houston, TX. Other interesting non-core-asset loans in the pool include four hospitality loans. Hospitality loans are the second-worst performing asset class in CMBS with a 14.3% delinquency rate as of December 2010, according to Trepp. The loans ranged in size from $12.5 million to $24.4 million and were secured by full-service hotels in major metro areas including New Orleans, LA; Spokane, WA; and Brentwood (a suburb of Nashville), TN. LTVs were 65%-75% and DSCR ranged from 1.50x to 2.25x.
“My takeaway on the bottom-10 loans in this pool is that small CMBS conduit loans can get done, but mainly secured by long-term leases to national credit tenants,” observed Michael D. Sneden, Executive Vice President of ValueXpress. “But it was encouraging to see hospitality and self-storage represented at LTVs and DSCRs that were not ultra-conservative.”
Small businesses at the Shore received 177% more money from U.S. government-backed loans during the quarter that ended December 31, 2010 than the same time a year earlier, the U.S. Small Business Administration said Wednesday. Volume was aided by a program that temporarily waived fees and increased the amount the U.S. government could back. But one expert said there are signs the credit freeze that slowed the economy is thawing.
"I do see lenders still lending," said John Fudge, senior vice president of USA Funding, a small-business loan consultant in Freehold Township. "I wouldn't say we're (back to) normal yet, but I'd say we're trending in that direction."
With banks tightening underwriting standards in the wake of the financial meltdown, the U.S. government eased some of the terms in SBA programs: The SBA raised the amount of a bank loan it would guarantee to 90% from 75%. The program has expired, but SBA officials said it paid off. The agency approved 92 loans for $50.4 million in Monmouth and Ocean Counties during the first quarter of fiscal 2011, up from 53 loans for $18.2 million a year earlier. It approved 570 loans for $311.3 million in New Jersey during the quarter, up from 333 loans for $133.4 million a year earlier, the agency said. The top lenders statewide were JPMorgan Chase Bank, which approved 59 loans for $8.7 million; TD Bank, which made 51 loans for $10.8 million; and Pennsylvania-based Metro Bank, which approved 44 loans for $50.4 million, according to the SBA.
Matthew Putnam, regional sales manager of SBA loans for TD Bank, said credit remains tight, but businesses and consumers appear to be gaining confidence. The bank itself is hiring employees to increase its small-business lending. "The worst of the recession is . . . behind us, and we are seeing an increase in applications," Putnam said. "Our message is: We've got money to lend when they're ready to borrow."
Our ValueXpress biweekly News & Recent Closings is now available on WordPress. Subscribers can continue to receive News & Recent Closings via our biweekly email Blast; however, for those of you who have been challenged by spam filters and other issues, this is your answer: Go to http://valuexpress.wordpress.com and sign up to have the biweekly delivered directly to your in-box as soon as we post it. Get it faster! Save the above ValueXpress WordPress URL in your Favorites folder and see how easy it is to search and find information from past News & Recent Closings using the WordPress search engine.
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Recently one of our bank partners asked us whether it should hold SBA-guaranteed loans in portfolio for ongoing net interest income or sell the guarantee for an up-front profit. We replied that the answer depends on a variety of factors, including bank capital and deposit levels, loan portfolio growth (or lack thereof) and perceived difficulty in collecting on the guarantee.
Sell versus Hold: We can only generalize some situations for a thought process to see how it might relate to the bank. In general, SBA can be a balancer between loan portfolio size, growth and core earnings versus immediate earnings impact from sales. At Country Bank, we start with a thought process of selling all SBA loans and placing all non-SBA loans on portfolio. In periods of slow portfolio loan growth or high runoff, we may hold some SBA loans until the loan portfolio returns to desired levels and then sell the held SBA loans, maintaining overall desired portfolio levels.
Reasons to Sell
Reasons to Hold
The first week of 2011 saw a ferocious rally in CMBS: spreads plummeted across all classes of CMBS in new and older vintage issues. The benchmark CMBS issue, GSMS 2007-GG10, ended the week at 210 basis points (bp) over swaps and is poised to break 200 bp, a level not since early July 2008. Also, pronounced spread compression was apparent in AM class and AJ class CMBS. Spreads tightened on 2006 and 2007 vintage class AM CMBS by 50 bp while 2006/2007 class AJ bonds were tighter by about 75-90 bp.
“We took advantage of this rally to help one of our banking clients take profits,” said Michael D. Sneden, Executive Vice President of ValueXpress. “Throughout 2010 we recommended and helped the client purchase a $50-million portfolio of about 15 CMBS position in 2005 vintage AM and AJ bonds. We identified a short list of better-performing issues using Trepp to analyze the cash flow performance of the underlying real estate loans,” said Sneden. “We like 2005 issues because overly aggressive loan underwriting was starting to take hold, but was not yet out of control. The portfolio was purchased at an average dollar price of about 98 cents and sold in the 103-104 area, providing a profit over $2 million.”
“We are recommending the client reload on class B new issue CMBS. Class B only has 14% subordination relative to the 20% provided by Class AM CMBS, but we are convinced that 2010 and 2011 CMBS will be the best-performing issues over the next 10 years as we start the cycle of conservative underwriting to aggressive underwriting all over again,” said Sneden. “We anticipate losses of no more that 3%-4% on new issue CMBS, affecting the lowest classes but providing an ample 10% loss cushion for the class B CMBS.”
ValueXpress is talking with a southern community bank about working together in originating government guaranteed loans [SBA 7(a), 504 and USDA B&I] in Mississippi, Louisiana, southern Alabama and the panhandle of Florida. The relationship would extend ValueXpress’ direct government guaranteed lending relationships to cover the entire Southeast. ValueXpress will serve as the “back office,” processing and servicing government guaranteed loans on behalf of the bank while working with the SBA.
“The relationships we have established in Mississippi are working very well,” commented Jay Bhakta, a senior loan originator with ValueXpress who is located in its Jackson, MS office and is managing the southeastern banking relationships. “All of the SBA loans we have processed have been approved, and by providing the processing function, it has allowed the loan officers to stay in the field sourcing new loans,“ said Bhakta.
The new relationship will allow ValueXpress and its partner to service more clients in a wider geographical region,” commented Michael D. Sneden, Executive Vice President of ValueXpress. “We are actively seeking additional banking partners in the Middle Atlantic states and the Midwest to fill in our target footprint, which is all states East of the Mississippi River and Texas.”
“I think 2010 will be noted as the turning point for commercial lending after the financial market collapse that began in fall 2007 and resulted in little commercial lending for the most part of two years,” according to Michael D. Sneden, Executive Vice President at ValueXpress.
In 2010, a boost to lending was provided in part by the Small Business Jobs Act. On September 27, 2010, President Obama signed the Act into law; it is the most significant piece of small business legislation in over a decade. The legislation extended 90% guarantees and reduced fees through December 31, 2010 on SBA loans, including the most popular 7(a) and 504 loans. While this temporary incentive helped boost lending through the fall of 2010, the permanent features of the legislation will provide increased loan originations in terms of gross dollars in future years. This is because the law permanently increases the maximum loan size to $5 million from $2 million in the 7(a) and up to $10 million (in combination with a first mortgage) in the 504 program. “We had many 7(a) and 504 borrowers with real estate collateral that requested 7(a) loans exceeding $2 million and 504 loans exceeding $5 million, the general limit in the market,” said Sneden. “With larger limits, we will be able to process more loans with larger balances, up to $10 million in the 504 program, thereby increasing both the amount of loans funded and gross dollar amounts going forward.”
Also in 2010, we saw the beginnings of a recovery in CMBS conduit loan lending. U.S. issuance amounted to $11.6 billion, a fourfold increase from 2009, although still a fraction of peak issuance of $228.6 billion in 2007. Nevertheless, seven multi-borrower fixed-rate deals were offered in 2010 at attractive bond spreads, indicating strong demand from investors. JPMorgan topped the rankings of bookrunners in 2010, leading $4.2 billion of transactions. More important, more than a dozen securitization shops either resumed or started originating commercial mortgages for securitization; Barclays is the latest lender considering getting back into the CMBS conduit loan business.
“Projections for CMBS originations are in the $35-billion area for 2011,” notes Gary Unkel, a senior loan originator at ValueXpress. “Alhough these are levels seen in 1999 and 2000, it shows improvement and we expect to participate in our share of these originations.”
The Business Council of Westchester County, NY has announced that Michael D. Sneden, Executive Vice President at ValueXpress, will be the keynote speaker at its Business After Business social networking event beginning at 4:30 pm, Thursday, January 20, 2011 at the Crown Plaza Hotel on Hale Avenue in White Plains, NY. The seminar is free. Those in the Westchester County area can sign up for the seminar by calling Carolyn Murphy at Country Bank at 1 (212) 883-6448. Afterwards, cocktails and Hors d'oeuvres will be provided from 5:00-7:00 pm. The fee for the post-seminar reception is $20 for members and $40 for non-members.
Sneden’s talk “How Can SBA Loans Help Your Business?” will review changes in the SBA program and highlight bank capital requirements that are forcing community banks to rely on SBA programs more than ever.
“After the brief SBA overview, I will go through a drill I call “Let’s Approve an SBA Loan in 15 Minutes,” said Sneden. “I have found that many borrowers think we collect business and personal tax returns and simply shove them in a file. Using a Subway restaurant business as an example, I will walk listeners through the underwriting of the purchase of the real estate and business to show them how business and personal cash flows are determined when obtaining approval of an SBA loan,” noted Sneden.
Another potential lift in SBA lending may arise from a provision in the Jobs Act that allows for the refinancing of loans using the SBA 504 program. Prior to the legislation, projects were ineligible to utilize the SBA 504 program for refinancing; now the program can be used for refinancing 504 loans for expansion under the following criteria:
“I am concerned the criteria may be too limiting,” notes Jim Brett, senior underwriter at ValueXpress. “Renovation or construction creates additional risks beyond simply the ability to repay the loan; it adds construction overruns and potential liens to the mix. Most lenders are not experienced in monitoring construction loans and would have less of an interest in SBA 504 loans with construction.”
“The criteria for SBA 504 refinancing as proposed is much more restrictive than SBA 7(a) refinances,” said Brett. “An SBA 7(a) loan refinance must also benefit the business, have been current for an extended period of time and provide better terms, but there is no expansion requirement.”
But there may be hope. The final regulations on SBA 504 refinances have not been established. The rules are expected to be issued in January 2011. Some interpretations of the proposed regulations do not require expansion as a qualifier. We hope the eventual rules follow the SBA 7(a) program and then 504 refinances will have the potential to take off!
The deadline for SBA 7(a) loan submissions under the Small Business Jobs Act of 2010 for non-Preferred Lenders Program (PLP) lenders was 11:00 p.m. EST on December 15, 2010 for lenders using E-Tran. In what seems par for the course, ValueXpress and its partner banks -- Country Bank based in New York and Guaranty Bank based in Mississippi -- received four loan applications during the week of December 6 totaling almost $15 million . . . and all were predicated on a 90% guaranty and a waiver of the guaranty fee under the Small Business Jobs Act of 2010.
“Some would have been paralyzed by the situation, but I thought it was a great opportunity to get stuff done,” said Michael D. Sneden, Executive Vice President at ValueXpress. “We have been harassing our borrowers for months to get their applications in for processing to no avail. The impending deadline finally got them off the sidelines and moving.”
ValueXpress worked pretty much non-stop 12-14 hours a day beginning December 8, when Jim Brett, senior underwriter at ValueXpress, took a car service from the Manhattan-based ValueXpress office to meet a borrower in central New Jersey and pick up 18 inches of paperwork. At the same time, Sneden visited property in the Red Hook section of Brooklyn, NY for this first transaction, the purchase of an 81-room Quality Inn hotel. This $5-million transaction was underwritten and submitted on December 10. Next, ValueXpress turned to two additional hotel transactions that were complicated due to a change of ownership. The Small Business Administration (SBA) requires a thorough valuation be completed to support the proposed consideration amount when there is a change of ownership. ValueXpress completed 15-page reports for each property to support the proposed price for the purchase of the remaining ownership interest that the guarantor did not already own. These two deals, $3.5 million and $5.0 million, respectively, were submitted on December 13, 2010. All three deals were sponsored by Country Bank.
“Just when Mike thought he was through, I hit him with another transaction,” said Jay Bhakta, a senior loan originator located in the ValueXpress Jackson, MS office. “The transaction was straightforward on the surface, the construction of a mostly owner-occupied retail building located in Vicksburg, Mississippi,” explained Bhakta. “But when I mentioned to Mike that there were four operating company co-borrowers and that the guarantors owned 30 affiliated companies, I was met with dead silence on the other end of the phone line.”
“Okay, so there we were on December 13, 36 hours away from cutoff, and we had to obtain 90 tax returns, 30 interim financial statements and debt schedules, and write the deal up,” said Jim Brett, senior underwriter at ValueXpress. “I told my wife I would see her in a couple of days.”
Bhakta got out his scanner and went to the borrower’s accountant’s office in Jackson, MS and starting scanning documents, while interim financial statements and debt schedules were completed. ValueXpress uploaded 130 files to the SBA through E-Tran at 7:00 p.m. on December 15, 2010, four hours before the SBA deadline.
“Mike even got home in time to watch the Giants demolish the Vikings,” said Brett. “Meanwhile, I got bronchitis and could barely breathe.”
Commercial Mortgage Alert reports that Goldman Sachs and Citigroup have priced an $875.5-million CMBS transaction backed by commercial mortgages they recently originated. GS Mortgage Securities Trust, 2010-C2 will likely be the last multi-borrower transaction for 2010. The issue has a heavy concentration of loans on retail properties and office buildings, which comprise 38.8% and 33.8% of its collateral pool, respectively. The transaction has been divided into eight principal paying classes and two interest-only classes rated by Fitch and Moody’s. The deal’s three AAA classes have a 17.50% subordination level compared with a 15%-18.25% subordination level for recent multi-borrower deals. Its unrated class, with a balance of $28.5 million, comprises part of the deal’s B-piece, which was acquired by BlackRock Financial. Wells Fargo is the deal’s Master Servicer and Midland Loan Services is the deal’s special servicer.
According to Commercial Mortgage Alert, the $876.5-million offering’s two senior classes wound up pricing at spreads that were 5-10 basis points (bp) wider than price talk. A $347-million class with a 4.9-year average life went out the door at 130 bp over swaps, up from price talk of 120-125 bp. A $376.1-million class of 9.8-year paper went for 140 bp, up from 130-135 bp.
Goldman and Citi found stronger demand for the three investment-grade classes with lower ratings, all with 10-year terms. The double-A bonds printed at 195 bp, down from price talk of 210-220 bp, and the single-As priced at 265 bp, down from 280-290 bp. The triple-B-minus class priced at the low end of talk, at 380 bp.
Timing evidently was also partly to blame for the soft demand because the deal came to market as many on the buy side were already on the sidelines, wrapping up their books for the year.
SBA loan guidelines were changed recently to allow self-storage, mini-storage and mini-warehouse businesses as an eligible business type. Previously self-storage facilities were only eligible if more than 50% of the business revenue came from sources other than monthly rents. The new SBA guidelines now say that a business with “passive income” (i.e., rental income) where the owner controls both entry and exit is eligible; this now makes almost all mini-storage facilities eligible for SBA financing.
“I recently had a discussion with Kevin Monahan of Sussex Business Lenders regarding SBA lending opportunities for self-storage facilities,” said Michael D. Sneden, Executive Vice President at ValueXpress. “Kevin is my go-to guy for everything SBA. Kevin has more years of experience in SBA lending than I can ever possibly achieve.” Kevin said the SBA lending market in the New York metro area is saturated with experienced lenders who know how to aggressively make loans on typical SBA-eligible properties. But guess what, Kevin figures these lenders have no experience in self-storage and probably will take a while to become comfortable with the product type. I bet Kevin is right on the money.
“This got me thinking about ValueXpress." Sneden said. "We are very experienced in the underwriting of self-storage properties as an active originator of CMBS conduit self-storage loans. With the CMBS market not interested in smaller (< $5 million) self-storage loans, the SBA can fill the gap. Plus, with our experience, we can underwrite the loans immediately and get out ahead of the competition. Thanks to my conversation with Kevin, I got out a bulletin to our partner banks to seek out self-storage loans as an opportunity in 2011.”
Tightening credit spreads for U.S. CMBS since the highs reached in the first quarter of 2009 should continue to spur new CMBS issuance in the near term, according to Standard and Poors (S&P). The agency notes that issuance for the fourth quarter of 2010 could fall within $4-$8 billion, the largest total since early 2008, based on the current public pipeline of CMBS transactions.
Annualizing S&P’s fourth-quarter forecast would indicate $24 billion of issuance in 2011; however, the agency projects a higher $35 billion based on its regression estimates relating CMBS issuance to CMBS spreads and U.S. Treasury yields, with adjustments for some positive qualitative factors. Its 2011 forecast assumes that spreads and 10-year U.S. Treasury yields remain at current levels.
"While $35 billion may seem high relative to the amount of issuance during the past two years, it would roughly equate to the levels we saw in 1996 and 1997," S&P says.
Other factors aside from spreads and interest rates are expected to affect U.S. CMBS issuance in 2011. Several new lenders have entered the market and many existing lenders are planning to significantly boost their issuance volumes. Furthermore, several of the new financial regulations are anticipated to be only a minor impediment to new CMBS issuance.
"Finally, $40 billion of fixed-rate CMBS matures in 2011, in addition to as much as $300 billion of non-CMBS commercial mortgages. This rollover could provide opportunities for CMBS lenders to increase their loan origination volume," the agency concludes.
A traditional strategy for reducing portfolio risk is to tighten lending standards and reduce availability of credit. This strategy is particularly harmful to small businesses that rely heavily on access to debt for sustainability and growth. The 7(a) program allows banks to have the best of all worlds. They can meet the needs of their small business customers, continue growing the loan portfolio and reduce portfolio risk while continuing to generate interest income. An example of a 7(a) loan achieving all four of these outcomes involves a very successful, rapidly growing company that needed additional capital for growth. The community bank had an existing relationship with this customer, but was uncomfortable with increasing its credit exposure. The bank had planned to ask the customer to find a new home, which neither the bank nor the borrower wanted to happen. The 7(a) guaranteed loan program enabled the bank to refinance its existing debt and provide the small business with new funds for growth and equipment purchases. Although the loan amount tripled, the credit exposure actually declined since the bank received a 90% guarantee from the SBA. The bank reduced its portfolio risk without stunting loan growth and retained an important customer.
“This exact scenario played out in a recent SBA 7(a) loan closed by ValueXpress and its partner bank, Lumbee Guaranty Bank,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “The bank was able to accommodate an important, long-standing client that was at its policy loan limit with the bank. The SBA 7(a) program provided a solution for all involved.” Lumbee, based in Pembroke, N.C., and ValueXpress are currently seeking addition SBA 7(a) opportunities in North and South Carolina.
Third-quarter loans for conduit CMBS grew 940% compared with the same quarter of 2009, according to the Mortgage Bankers Association's Third-Quarter Origination Survey. The average third-quarter 2010 loan size was $30.5 million versus $18.2 million a year ago. The average conduit loan size in the second quarter of 2010 was $37.4 million; however, the loan origination volume index rose 43% to 16 loans in the third quarter from 11 in the second. The index is based on an average of 100, or the level of commercial real estate originations seen in 2001. Conduit CMBS loans remain at low levels.
Jamie Woodwell, analyst at the MBA, said the percentage increase doesn't mean monumental strides in the CMBS market, but does indicate an attractive environment for commercial lenders. "What investors are looking at in terms of returns for CMBS, those yields are down considerably from three, six, or nine months ago," Woodwell told HousingWire. "Deals that wouldn't have made sense to do through CMBS six or nine months ago now do make sense."
The total loan origination volume index stood at 70 for the quarter, up 14.8% from 61 in the second quarter and up 32% from 53 a year ago. This is the highest the index has been in seven quarters. Commercial bank originations decreased 49% year over year to an index of 32, as did originations from government-sponsored enterprises, down 16% to an index of 120. Loans originated through life insurance companies jumped 154% from a year ago, to an index of 176. The industrial sector saw the most origination growth in the third quarter, up 129% from a year ago to an index of 145, followed by the multi-family sector (up 37% to an index of 101), the office sector (up 39% to an index of 45) and the retail sector (up 19% to an index of 84). Both the hotel and healthcare sectors experienced a decline in the amount of originations in the third quarter; down 20% year over year to an index of 46 and down 46% to an index of 99, respectively.
As part of a new rule change, the SBA is removing the 90-day warranty period from Form 1086, the participation form required on SBA 7(a) loan sales. While the warranty is in effect, the seller is prevented from taking sale treatment, in accordance with FAS 166, for 90 days. The changed form is now under review in accordance with federal rules and an update to Form 1086 is expected in the next 60-90 days. It seems unlikely that the changes will be implemented in time for sellers to enjoy sale treatment before calendar year end.
Solutions to the issue of relatively poor loan guarantee sale bids in the secondary market for loan guarantees that exceed the former limit of $1.5 million for SBA 7(a) loan guarantees were recently discussed by Bob Judge, Partner of Government Loan Solutions, and Bob Coleman, Editor of the Coleman Report. According to Judge, sometime in 2011, the SBA will allow larger loans to be split into smaller pieces. This will allow pool assemblers to create diversified pools of SBA loan guarantees mitigating prepayment risk (see our 11.2.10 article below) and increasing premiums offered on the smaller pieces. The time frame for approval from the SBA to allowing splitting is an estimated three to six months.
Splitting large loan guarantees into $500,000 increments, as proposed by the SBA, is not anticipated to provide complete pricing recovery for large loan guarantees. This is due to a proposed rule that prohibits more than one piece of a split loan to be included in any one pool. This means a longer holding period while pools are assembled to sell all the pieces, resulting in more risk and hence lower premiums from pool assemblers.
Another idea presented was to request that the SBA allow a lender to split the loan into multiple notes. Despite concern over the inconvenience and increased closing costs, some lenders are making plans in this area. It is unclear, however, that the SBA will allow this as each SBA Authorization clearly states: “One 7(a) loan may not be split into two 7(a) loans merely to benefit the Lender.”
“We will have to stay tuned on the outcome of this situation,” commented Michael D. Sneden, Executive Vice President of ValueXpress. “In the meantime 6 points on a $4.5-million loan guarantee is still not bad.”
SBA loan guarantee assemblers (often referred to as “poolers”) buy SBA loan guarantees [primarily SBA 7(a)] at a premium from banks and other originators usually on a one-off basis. Banks sell the guarantees to earn up-front income that flows to the bank’s bottom line and are able to reduce the capital required to hold the loan by the amount of the loan guarantee sale. In addition, the bank earns servicing income on the entire loan amount. In today’s low interest-rate environment, loan guarantee sale premiums are very high, exceeding 10% of the loan guarantee for a Prime + 2% loan on a 25-year SBA 7(a) loan.
Loan premiums on individual loan sales to poolers are a function of markets rates and other factors, including the diversity of the loan guarantee amounts within a pool. Historically, SBA loan pool assemblers have created diversified pools of SBA loan guarantees based on the former guarantee limit of $1.5 million and pool sizes that exceeded $30 million for larger pool assemblers. This means that if a $30-million pool of loan guarantees contained a few $1.5-million loan guarantees, the largest concentration in the example pool would be 5% ($1.5 million divided by $30 million). Diversified loan guarantee pools are very important to investors as the more diversified pools mitigate prepayment risk. If loans within a pool prepay and investors have paid a premium to invest in the pool, then the investor will suffer a loss on the prepayment because any prepayment penalty goes to the SBA. For example, if a $1-million pool has four $250,000 loans, and an investor pays 110% for the securities backed by the pool ($1.1 million), and one loan pays off immediately, then the investor takes a $25,000 loss because the investor received prepayment of $250,000 on a security that cost $275,000 (110%). But if the pool contained forty $25,000 loans, the prepayment of one or two loans does not create a significant loss relative to the income earned from the pool.
ValueXpress is experiencing an extraordinary flow of SBA 7(a) applications that is expected to continue through yearend. The demand for 7(a) loans is a result of the combination of fee waivers, higher guarantees (90% versus 75%) and higher loan limits for borrowers ($5 million). ValueXpress received its first SBA approval for a loan with a guarantee greater than the former limit of $1.67 million last week. In addition, ValueXpress expects approval of a $5-million loan with a $4.5-million guarantee this week. The savings from the fee waiver will be $157,500, a huge savings for the borrower. Both transactions were refinances that will result in significant payment savings for the borrower. One transaction featured a discounted payoff of the prior lender, which is difficult to get approved.
“We have been in contact with as many borrowers as possible to stress the benefits of getting loans approved before the fee waiver ends,” explains Michael D. Sneden, Executive Vice President of ValueXpress. “The amount of savings is substantial, and the savings is getting borrowers to move quickly on their applications. It is important to note that the loan does not have to close by the end of the year; it just needs to be approved by then. And the SBA allows up to one year to close approved loans.”
Although the fee waiver technically runs through the end of the year, it will end early if funds run out. And it is expected that funds will run out by the end of November, so borrowers should move now.
ValueXpress and Lumbee Guaranty Bank, based in Pembroke, NC, recently teamed up to secure a $1,950,000 SBA 7(a) loan commitment secured by a 57-room Country Inn & Suites hotel located on I-95 in Lumberton, NC. The borrower is a client of both ValueXpress and Lumbee Guaranty Bank. ValueXpress provided a $2.5-million CMBS conduit loan for the borrower in 2007. Lumbee provided an SBA 504 loan on another limited-service hotel owned by the borrower in 2008. The borrower arranged for Lumbee and ValueXpress to work together on the refinancing, recognizing that ValueXpress has substantial experience in the origination and packaging of SBA 7(a) loans, while Lumbee could continue to build on its long-standing client relationship by sponsoring the loan. In addition, Lumbee could not provide a loan for the client without SBA assistance, as the proposed loan amount in combination with other loans Lumbee had provided to the client would exceed bank policy guidelines.
“I was impressed by the quality of work, knowledge of the SBA 7(a) program and speed at which ValueXpress processed the loan,” comments Kyle Chavis, Senior Vice President of Lumbee Guaranty Bank. “We are a relatively small community bank and I wear a lot of hats; to be able to shift the processing burden to ValueXpress was a big reason we pursued the transaction,” he said. “Based on the positive experience, I am hopeful that Lumbee Guaranty and ValueXpress will work together on more SBA 7(a) transactions in the future.”
Multifamily property loans have been slow to return to CMBS conduit transactions, primarily due to the high leverage and low initial DSCR that has resulted in poor performance of multifamily properties in CMBS transactions. According to Trepp, 14.4% of multifamily transactions are delinquent as of September 30, 2010. This is the second-highest delinquency rate after hotels (19.3%) in the CMBS universe. In comparison, retail, office and industrial properties report delinquencies in the 6%-7% range for the same period.
That said, underwriting for quality multifamily transactions is changing for the better. A key CMBS conduit loan relationship has begun to solicit Class A and Class B apartment loans in primary and secondary cities. Multifamily LTV will be limited to 75% and debt-service coverage must be at least 1.40x, resulting in a debt yield of no less than 10%. (To determine debt yield, take underwritten net cash flow and divide by the loan amount). Interest rates are currently in the 5.5% area for a 10-year fixed-rate term based on a 30-year amortization schedule. Loans of $5 million and up are preferred. “Loan amounts are being limited primarily by LTV,” observes Gary Unkel, Senior Loan Originator at ValueXpress. “With cap rates in the 7.5%-8.5% area for Class A- and Class B apartments, debt-service coverage and debt yields are not typically limiting the loan proceeds, but LTV is. This new program represents an increase from 70% LTV to 75% LTV, which will result in more proceeds to the borrower.”
The program is expected to be competitive for loans that do not qualify for Fannie Mae execution. “Fannie is the best game in town for apartment loans,” explains Michael D. Sneden, Executive Vice President of ValueXpress. “But not all properties qualify, so this CMBS conduit alternative is well suited for those transactions that cannot obtain Fannie Mae financing.”
For the week ended October 15, spreads on recent vintage super senior AAA-rated CMBS tightened 8-12 basis points (bp). The spread of 265 on the GG10’s on October 15 was the tightest closing level for that bond in 2010 to date. The GSMS 2007-GG10 A4 bond outperformed the broader market as the spread on the GG10 CMBS fell 19 bp over the course of the week. That was consistent with other similar super senior AAA-rated CMBS that were trading at higher spreads compressed more significantly over the week than did better performing AAA-rated CMBS issues.
This was on top of spreads on super senior AAA-rated CMBS that had dropped 5-10 bp the prior week. The GSMS 2007-GG10 A4 bond outperformed the broader market by tightening 28 bp for the week ended October 8.
Separately, the strong rally that lifted prices on mezzanine AAA bonds (“AMs”) over the last six weeks has spread to the junior AAA market (“AJs”). The prices on AJ bonds -- especially those from 2005 and 2006 -- popped sharply last week.
According to an SBA spokesperson, the SBA “will be ready to accept applications for loans in excess of $2 million starting the week of October 18,” despite a recent report by Randy Griffin, President of CSRA Business Lending, that suggested the increase in SBA loan amounts to $5 million will take 60-120 days.
This good news came on the heels of this October 8th press release from the SBA:
“WASHINGTON -- On the heels of completing final approvals of loans to nearly 2,000 firms that has been in its loan queue waiting for final approval of the Small Business Jobs Act, the U.S. Small Business Administration has finished implementation of another major element of the bill: increasing maximum sizes in several of its loan programs.
“The changes -- effective today -- are permanent for general small business loans under SBA's 7(a) guaranteed loan program, fixed asset loans through the 504 Certified Development Company program, Microloans, and International Trade, Export Working Capital and Export Express loans. A temporary increase for SBA Express loans is good for one year.”
SBA's own trends show increasing demand for larger loans. The percentage of lending volume for guaranteed loans greater than $1.5 million has grown from 13% of total dollars approved in fiscal 2005 to 21% in fiscal 2010, with many loans actually at the $2-million maximum. In the 504 program, the percentage of loan volume committed to loans greater than $1.5 million also has grown, from 15% of total dollars approved in fiscal 2005 to 25% in fiscal 2010.
The SBA has already put in place the alternate size standard that expands eligibility for SBA-backed loans that was included in the Jobs Act, increasing the alternate size standard to include those small businesses with less than $15 million in net worth and $5 million in average net income.
“We have two borrowers ready to be first in line,” commented Michael D. Sneden, Executive Vice President of ValueXpress. “The first is a $5-million loan that could not meet the tangible equity test under the B&I Loan Guarantee program, and the second is a borrower that needs a second SBA loan that brings his SBA exposure above $2 million.”
A projected threefold increase in securitized lending next year would boost spirits among prospective borrowers but do little to help the majority of commercial real estate investors obtain financing, experts say. Issuers of CMBS continue to shun riskier secondary markets.
CMBS issuance nationally totaled $3.9 billion in the first three quarters of 2010, already putting this year’s issuance ahead of the $3.1 billion recorded in all of 2009, according to Standard & Poor’s Ratings Service.
In 2011, a surge in new loans is expected to push CMBS issuance to $35 billion for the year, according to the rating agency in a June 30th report.
“We’re already seeing some momentum for the fourth quarter,” says James Manzi, Senior Director of global structured finance research at Standard & Poor’s. Issuance in the fourth quarter is projected to be $6 billion, predicts Manzi, who authored the report.
At that pace CMBS issuance would total $24 billion in 2011, but Manzi increased his projection by $11 billion based on feedback from lenders who plan to ramp up originations in the coming months.
The forecast calling for $35 billion in CMBS issuance in 2011 will have ripple effects that increase the availability of funding from other sources, according to Bill Hughes, Senior Vice President and Managing Director of Marcus & Millichap Capital Corp., a financial intermediary based in Encino, CA.
Although Hughes is pleased with recent gains in securitized lending volume, he is waiting to see if the underwriting criteria is extended to include a wider swath of properties as collateral. And he is not alone.
Challenges remain.
Issuers’ narrow focus on high-quality, stabilized assets in prime markets is the main obstacle to renewed CMBS volume, according to Paul Mancuso, a vice president with third-party research firm Trepp LLC.
New CMBS deals are backed almost exclusively by the upper crust of commercial properties, all stabilized assets that command excellent locations in prime markets. By definition that excludes investors with properties outside the major markets or with properties operating with some level of vacancy.
“We have yet to see new origination or refinancing activity trickle down to secondary and tertiary properties from suburban locations,” said Mancuso.
Conservative underwriting is keeping CMBS loans out of most borrowers’ reach, according to Sam Chandan, Global Chief Economist at New York-based Real Capital Analytics.
“The question is, are the CMBS players going to be willing to move into tertiary markets? Are they going to move into properties with occupancy levels that are a little bit down?”
Commercial Real Estate News reports that JPMorgan Chase has launched a $1.1-billion CMBS transaction backed by 30 mortgages it recently originated. JPMorgan Chase Commercial Mortgage Securities Trust 2010-C2 is the second multi-borrower transaction and third CMBS deal issued by the investment bank in the past three months, making it the most active issuer so far this year. Last June, it priced a $716.3-million deal, and earlier this month, it priced a $484.6-million deal that provided financing for 72 properties owned by Centro Properties Group. Like those two deals, the bank’s upcoming transaction has a heavy concentration of loans on retail properties, which comprise 66.7% of its collateral pool. Office loans comprise 15% of the pool, industrial 10.3% and other property types 8%. The deal’s 10 largest loans amount to 74.6% of its balance. The transaction has been divided into 11 principal paying classes and two interest-only classes that are being rated by Fitch and S&P. The deal’s three AAA classes have an 18.25% subordination level compared with a 15% subordination level for JPMorgan’s last multi-borrower deal. Its unrated class, with a balance of $22 million, comprises part of the deal’s B-piece, which was acquired by H/2 Capital Partners, a Stamford, CT investment manager led by Spencer Haber, a former president of iStar Financial. Midland Loan Services is the deal’s master and special servicer. The transaction is the first of a number of multi-borrower deals that are expected to price before the end of the year. On deck are deals from Deutsche Bank, RBS and Wells Fargo, each of which could total $1 billion.
“Although the report by Randy Griffin, President of CSRA Business Lending, a CDC in Augusta, GA, details all the positive elements of the Small Business Jobs Bill, it was very discouraging to discover the increase in SBA loan amounts to $5 million will take 60 to 120 days,” noted Michael D. Sneden, Executive Vice President of ValueXpress. “This effectively locks out any of the higher loan amounts from the 90% guaranty/fee waiver as the funding will be exhausted or the December 31, 2010 expiration will likely occur before the new rules take effect and the SBA begins to accept applications at the higher limit.”
Griffin’s positive report detailing the dramatic changes attached to the Small Jobs Bill is detailed below:
As expected President Obama signed into law HR 5297, the Small Business Jobs Bill, which will provide banks an avenue to borrow funds from the U.S. Treasury to make small business loans. Also attached to this bill were dramatic changes to SBA lending programs -- waiving fees, increasing guarantees, increasing loan amounts, and changing the SBA 504 program to allow it to be used for debt refinance.
Effective this morning fee waivers are once again in place for SBA 7(a) and 504 loans. The fee waivers will be in place as long as the funding lasts or until December 31, 2010. We do not anticipate the funds for fee waivers will last until the end of the year so any borrower who wants to take advantage of the fee waivers needs to apply as soon as possible. The next step for the other enhancements (larger loan amounts and refinancing under 504) will be for the SBA and the Office of Management and Budget (OMB) to write the new regulations. These changes will not be in effect until those regulations are completed and they are expected to take 60-120 days. The SBA is keenly aware that small business owners and their banks are in need of these new loan products and will work as quickly as possible to get the regulations written, get them to OMB for approval, and then published in the Federal Register as required under federal law so that applications can begin. SBA enhancements included in the bill will happen in two phases (1) immediate and (2) in 60-120 days.
Immediate: Certain fees on SBA 7(a) and SBA-504 loans will be waived through December 31, 2010 or until funds to pay those fees allocated in the bill expire, and the guaranty on an SBA 7(a) loan will increases to 90% from 75% through December 31, 2010 or until funds to pay those fees allocated in the bill expire.
Next 60-120 Days: Once the SBA writes regulations on new programs it must clear those regulations through OMB and then publish them in the Federal Register. This process is expected to take 60-120 days. When the rules are issued they will permanently increase the maximum amount of an SBA 7(a) loan to $5.0 million from $2.0 million and permanently increase the amount of an SBA 504 loan to $5.0 million from $2.0 million.
In addition they will change the rules to make refinances on real estate eligible under the SBA 504 program for two years (refinances currently are not eligible). With the current very low fixed rates on SBA 504, this is expected to be a very popular tool. The program will be in effect for two years after enactment. The final rules will establish the exact rules on refinances, but the bill hints at what may be in the rules: maximum $5.0 million on SBA’s 504 second mortgage portion (when you combine the bank portion of a 504 projects could likely be as high as $10-$12 million); the loan(s) being refinanced would have had to be eligible originally (i.e., owner-occupied fixed assets no investment or non-owner occupied properties); the business would have to have been in business more than two years; the business will only be able to refinance debt that is older than two years old; the debt being refinanced cannot already have a federal guaranty (i.e., cannot be a 7(a), 504, or B&I currently); and any Note being refinanced could not have been past due over the previous 12 months. The SBA will likely establish and clarify further rules on cash out and other provisions of the new refinance program in the final rules.
Country Bank, a $450-million community bank based in New York City, has appointed Tim Moffett, Vice President, to lead its expanding SBA loan platform. Moffett has worked in Country Bank’s lending area for six years. The appointment was spurred by the bank’s increased participation in the SBA loan programs.
“Country Bank has always participated in the SBA loan programs, mostly the 504 program,” commented Carolyn Murphy, Vice President of Marketing for Country Bank. “However, when President Obama signed the American Recovery and Reinvestment Act (ARRA) in 2009 that increased the loan guarantee for the SBA 7(a) program to 90%, Country Bank took a closer look at the program’s merits and is actively seeking more 7(a) loans in addition to 504 loans.”
Country Bank is primarily seeking owner-occupied loans secured by real estate, as the bank has traditionally been and continues to be a lender on income-producing and owner-occupied commercial real estate. Country Bank’s trade area is metropolitan New York, which consists of the five boroughs, southern New York, northern New Jersey and lower Connecticut. “With the increase in the SBA limits to $5 million expected to be permanently in place by December 2010, we are hoping to attract larger SBA loans as we move into 2011,” commented Moffett.
ValueXpress will be assisting Country Bank in the processing of its SBA loans. “The model for successful community banks is service,” commented Michael D. Sneden, Executive Vice President of ValueXpress. “We have been assisting Country Bank and its clients for a number of years and we will provide resources to ensure that Country Bank clients have a positive experience through the SBA process.”
The U.S. Senate approved legislation to cut taxes and ease credit for small businesses in a long-delayed victory for Democrats eager to show voters they are working to create jobs. If the U.S. House passes the bill as expected as early as next Wednesday, it would head to President Barack Obama to sign into law by perhaps the end of next week.
“This bill contains significant enhancements to the SBA program,” noted Michael D. Sneden, Executive Vice President of ValueXpress. “These improved SBA provisions are contained in the ‘Small Business Access to Credit’ section that has been awaiting approval since spring. We expect a significant increase in SBA loan volume as we immediately switch about 12 loans that we have in limbo into the enhanced 7(a) and 504 programs.”
Specifically, if the bill is approved as drafted, the following improvements will be in effect for the SBA program:
• Extends the authority for the SBA to offer 90% guarantees (versus a standard 75%) on SBA 7(a) loans through December 31, 2010 or until $505 million in appropriations is obligated;
• Extends the authority for the SBA to waive SBA guarantee fees on SBA 7(a) loans through December 31, 2010 or until $505 million in appropriations is obligated;
• Extends the authority for the SBA to waive a 0.50% fee on the
first mortgage balance on SBA 504 loans through December 31, 2010;
• Permanently increases the maximum loan amount to $5 million
on SBA 7(a) loans, with a standard maximum guarantee of 75% ($3.75 million) and a temporary guarantee of 90% ($4.5 million);
• Permanently increases the maximum loan amount to $5 million
on SBA 504 loans. Assuming a typical 50% conventional first mortgage and 40% SBA 504 loan on a general-purpose building, a $12,000,000 maximum combined conventional/SBA 504 loan can be achieved; and
• Allows SBA 504 loans to be used to refinance short-term real
estate debt into long-term, fixed-rate loans
“We are immediately increasing our SBA loan limits to correspond to the new limits,” said Sneden. “Next week we begin processing loans at the new levels in anticipation of the bill becoming law.”
JPMorgan issued $485 million in CMBS backed by 72 shopping centers owned by Centro Properties. The 10-year loan amortizes on a 30-year schedule and carries a 6.27% interest rate. The underlying loan included $89 million of subordinate financing. The largest allocated loan balance ($40.4 million) was secured by Rockland Plaza, a 251,000-square-foot shopping center located in Nanuet, NY. The allocated balances for the remaining collateral properties ranged from $650,000 to $25.5 million. The loan was underwritten with a 1.78 DSCR and a 58% LTV. The debt yield approximated 12.2%.
The CMBS was structured with five classes. Class A1 and A2 were rated AAA by three agencies. The $70-million Class A1 pays interest plus principal from amortization on the underlying loan such that the class is scheduled to pay off just prior to loan maturity. The class A1 CMBS sold at $101 to provide a yield of 3.1%. The A2 Class has a 10-year expected life and sold at $101 to provide a yield of 4.3%. The $43.4-million Class B CMBS, rated AA, sold at $100 to provide a yield of 5.1%. The $38.6-million Class C CMBS, rated A, sold at $100 to provide a yield of 5.5%. The $60.5-million Class D CMBS, rated BBB-, sold at $97 to provide a yield of 6.2%.
“According to our calculations, the weighted-average coupon paid to bondholders was about 4.55%,” noted Michael D. Sneden, Executive Vice President at ValueXpress. “This represents a healthy spread of 172 basis points (bp) between the rate paid the bondholders and the 6.27% paid by borrowers. This converts to a nice profit for JPMorgan.”
It is also encouraging that subordinate financing was available to bridge the likely gap between the CMBS loan proceeds and the loan payoff. This source of financing will become increasingly important on future transactions on properties that cannot qualify for full loan payoff at maturity.
Loan delinquencies in commercial mortgage-backed securities accelerated in August after two months of slowing, according to Trepp LLC, New York. Treppwire reported CMBS loans 30 or more days delinquent, in foreclosure, or REO up 21 bp in August to 8.92% overall, following a 12 bp increase in July and a 17 bp jump in June. Despite last month's increase, the rate remained below the 35 bp average monthly increase during the previous 11 months – after backing out the Stuyvesant Town impact in March. Delinquency rates increased 1.7% from February to May this year.
“The August numbers may give ammunition to those who argue that the commercial real estate crisis is far from over,” the report said.
Similarly, seriously delinquent loans of 60 or more days, in foreclosure, REO or non-performing balloons jumped 20 bp to 8.15%. Without defeased loans, the CMBS delinquency rate would increase to 9.49% overall. The highest delinquency rates occurred in 90-days delinquent, foreclosure and REO categories.
In August, short- and long-term SBA loan guarantee premiums soared to record high levels as uncertainty around the next phase of economic stimulus options continued to drive loan origination volume down, according to BoeFly. The BoeFly Loan Sale Index for 25-year Prime+2% increased 80 basis points (bp) to 110.8%, while for 10-year Prime+2% loans, the Index jumped 100 bp to 108.4%. Individual transactions also hit record highs with a 25-year Prime+2.75% deal fetching a premium of 113.28% and a 10-year Prime+2.75% deal getting 110.77%.
“The market for SBA loan guarantees reflects the current search for yield,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “With Treasury rates at record lows, there is nowhere to find investments that can deliver decent yield, which is driving up the prices on SBA loan guarantees and other high-quality investments that can deliver an attractive yield.”
CMBS prices continue to climb as a result of low Treasury yields and steady spreads. The bigger story, however, was the strength in AM and AJ bonds over the last five trading days including Friday, August 27, 2010. According to Trepp, Mezzanine AAA bonds (AMs) from 2005 and 2006 started to trade above par (100) for some of the strongest issues.
The AM market has remained largely immune to any weakness lately and Monday, August 30, 2010 was no exception. Trepp reported a host of AM and AJ trades once again lit up bond dealer screens, and the results continued to impress, particularly a set of late-day AM and AJ bonds from 2005 and 2006. The AM bonds all covered above of $99, while the AJ bonds covered in the low and mid-$90s.
“The CMBS market continues to see a steady increase in prices” said Michael D. Sneden, Executive Vice President at ValueXpress. “We advised a client on the purchase of over $30 million in AM class CMBS over the past three months at prices in the low $90s, but at $100, I do not know where the next opportunity to make money in CMBS will come,” said Sneden. At these prices, the good news is that issuers are likely to be salivating at the potential profits from new CMBS issues, should they find qualifying loans to package into new CMBS.
Many borrowers are facing a difficult time finding lenders interested in construction or rehabilitation loans right now. But multi-family owners with a need and desire to rehabilitate their multi-family properties are finding the HUD 221(d)4 program a viable alternative. “We direct clients with moderate levels of rehab into the 223(f) multi-family refinance program first,” commented Gary Unkel, an originator in ValueXpress’ New York office. “You can stay in the 223(f) program if the amount of rehab is less than 15% of post-rehabilitation appraised value or $6,500 per unit (except in high-cost areas), whichever is greatest. Repairs may not include replacing more than one major building system such as plumbing or electric. The reason for staying in the 223(f) program is quicker processing time and lower consulting/professional costs.”
But in the case of substantial rehabilitations, which are defined as projects that include either rehabilitation costs equal to the greater of 15% of post-rehabilitation appraised value or $6,500 per unit (adjusted for applicable high cost factor) or else replacement of two or more major building components, the 221(d)4 program can be very attractive. “We are working on a multi-family deal in Houston, Texas, in which the property that was severely damaged by Hurricane Ike, and the project received less in insurance proceeds than what was required to rebuild the property. The $13-million 221(d)4 loan will include $6 million in renovation funds and the existing lender, a conduit servicer, is going to allow a discounted pay-off to make the project work,” said Michael D. Sneden, Executive Vice President at ValueXpress.
Rich Balka is hungry for capital. The Trenton, NJ entrepreneur whose company makes specialty rubber products, says he needs the money to buy raw materials, pay his workers and weather the last stretch of the recession. Balka’s sales fell 30% last year, forcing him to lay off one-third of his staff and trim benefits for the remaining employees. Though he has never missed a payment on a loan, his bank is wary of his weak balance sheets and won’t lend him any more cash.
Long-awaited legislation before the U.S. Congress aims to spur lending to firms such as Balka’s. It would pay for higher loan guarantees, lower fees and other breaks for cash-strapped small businesses. But as the U.S. Senate adjourned for its summer recess this week, the bill remained stuck in a partisan stalemate. Small businesses desperate for government help in getting loans will have to wait at least until September before Congress moves on the issue.
"This bill would allow me the opportunity to find a new lender and infuse capital into the business," said Balka, 48, owner of the Home Rubber Co. "What’s really disgusting is that partisan politics is preventing it from happening. It’s politics at the expense of the people."
The next month or more may be angst-ridden for many business owners. Nationwide, 995 government-backed small business loans approved since last spring are now stuck in limbo until Congress acts. “The gridlock is fueling pessimism among owners, who may hold off on hiring if federal support dries up,” said John Sarno, president of the Employers Association of New Jersey. "Employers are really being whipsawed by this continual stalemate. If businesses don’t have the ability to invest and expand, there is going to be minimal job creation for sure."
Small firms are struggling to secure loans from banks and other lenders – which are becoming increasing harder to obtain. "Something has to be done," said Usha Villarreal, who had to pay $11,000 in extra borrowing fees after her government-guaranteed loan to expand her Mission Viejo, CA, assisted-living business got held up. "Our only other option was to wait in line, and there were 136 other applications ahead of us."
Senate Democrats vowed last week to take up the measure again when lawmakers return to work next month. But they acknowledged it may be difficult to break an ongoing Republican filibuster of the bill, which is caught in partisan squabbling despite its broad popularity. "We will have to fight this out a step at a time," said Senator Mary Landrieu (D, LA), the bill’s author.
For five weeks, progress on the bill had been stalled in the Senate, interrupted by other business and punctuated by bitter infighting. Sen. Landrieu held forth at all hours on the chamber floor, frequently pressing her case late into the night for the small businesses that both parties promote as an engine of the economic recovery. "If we don’t get small business started up again and focus on them and help them, this recession will never come to an end," she said.
The package of small business proposals before the Senate includes money to allow the Small Business Administration (SBA) to guarantee up to 90% of loans made by banks and community lenders to small businesses. Most SBA loans are now available with guarantees of only 50%-75%, making them riskier and less attractive to lenders.
The SBA would be allowed to waive points and other fees and reduce down payments on many loans, and set up a fund to provide $30 billion to stimulate small business lending by community banks. Funds to support the SBA guarantees and fee reductions ran out in May, and lending to small businesses has dropped precipitously since.
The bill was passed by the U.S. House, but it ran into trouble in the Senate when members from both parties began attaching amendments to support their favored causes.
Bankers say they are also waiting for Congress to act. Regional banks, in particular, are eager to begin drawing on $30 billion in federal bailout money that President Obama has asked Congress to make available to community lenders. Lenders that use the money to make loans to small businesses will get a discount on the interest rate that they must pay to the federal government for borrowing the money.
“The fund would provide community banks with the capital they need to safely make loans in an environment where money is tight,” said Steve Verdier, chief lobbyist with the Independent Community Bankers of America. "It would really provide a terrific incentive for community banks to provide those loans."
*This story contains material from The Los Angeles Times. ©2010 NJ.com. All rights reserved.
The Small Business Administration’s (SBA) 504 loan program is providing long-term, fixed-rate financing for the purchase of commercial real estate at one of the lowest interest rates since the program's inception. The SBA's lending partners, Certified Development Companies (CDCs), are busy working with small business borrowers who are taking advantage of this current low interest rate to purchase or build new facilities.
NADCO, the trade association for the nation's CDCs, reports that the interest rate for a 20-year SBA 504 loan continued to fall to a low of 4.93% this month. The August bond sale to investors that funded SBA loans was sold at a rate of 3.52%, which resulted in an effective interest rate – including fees – of only 4.93%, one of the lowest since the program began in 1986.
The SBA’s 504 loan program has funded nearly $60 billion in loans to growing small businesses over the past 24 years. Right now, the interest rates are low and one of the best aspects of an SBA 504 loan is the low down payment -- typically only 10% -- required by a borrower. CDCs across the country are busy helping small business borrowers who are taking advantage of these record low interest rates to purchase, build, or expand their own facilities.
Recent loan data has shown that a large percentage of SBA 504 borrowers are professional practices. The greatest concentration of loans has been to physicians, dentists, veterinarians, lawyers and accountants. Chris Crawford, NADCO President, observed, "It's not surprising that accountants and lawyers recognize the benefits of SBA 504 loans, but it's gratifying to see so many other professionals also realizing that owning their own building to fix their business occupancy costs is a very savvy financial move. More business owners would be wise to make similar investments."
Jean Wojtowicz, Chair of the NADCO board and Executive Director of Indiana Statewide CDC, observed "a commercial loan below 5% is an incredible rate for 20-year, fixed-rate money. When you consider the drop in the price of commercial real estate and the inventory currently on the market, small businesses have a real opportunity to expand or buy their first building right now."
Chris Crawford said, "There is just no better deal available for the purchase of real estate or for expansion of existing facilities. I urge any business owner thinking about expanding to call their banker and ask about the SBA 504 program today. Our CDC members are working hard with our bank partners, and we have money available for sound, small business real estate projects."
*This story contains material from the National Association of Development Companies (NADCO).
According to Commercial Mortgage Alert, demand easily outstripped supply for the $788.5-million CMBS conduit issue from Goldman Sachs, Citigroup and Starwood Property that rolled out on August 4. The issue collateral consists of 23 mortgages secured by 40 properties. The majority of the collateral (78%) comprises retail properties. The weighted average coupon is 6.08%. The $232-million Class A1 tranche (Aaa/AAA), with a 4.96 weighted average life was shopped at 125 basis points (bp) over swaps (~3%), 5 bp tighter than initial pricing guidance. The $410.6-million Class A2, with a 9.9 weighted average life, priced at 135 bp over swaps (~4.2%). Spreads on the $27.6-million junior Class B and $35.5-million Class C also narrowed by 10-35 bp at swaps plus 190 (~4.8%) and swaps plus 265 (~5.6%), respectively.
The bonds were 2-3 times oversubscribed at the initial pricing guidance and even after dealers pulled in spreads, Class A1 was 2.25x oversubscribed and Class A2 was 1.75x oversubscribed. Elliott Management acquired the B-piece after strong competition.
“This is another great milestone in the recovery of the CMBS conduit loan business,” noted Michael D. Sneden, Executive Vice President at ValueXpress. “It is clear there is tremendous demand for CMBS. It is now up to us, the origination machine, to find and close loans to feed the issuers,” commented Sneden.
On August 2, Tom Wallace, president of IDS Corporation, reported on the status of HR 5297, the Small Business Jobs and Credit Act of 2010. HR 5297, if passed, will create the Small Business Lending Fund Program and give the U.S. Secretary of the Treasury the authority to make capital investments in eligible institutions to increase the availability of credit for small businesses, amend the Internal Revenue Code of 1986 to provide tax incentives for small business job creation, and for other purposes.
“Obviously, last week did not pan out as we might have hoped. Missing cloture by a single vote now means that if our legislative package gets moved, it will be in September, when the House returns to session, or not at all. However, in order to make even that come true, we need to have a cloture vote in the Senate, likely by August 10 or 11. That happy event consists of getting one more vote on the “side of the angels.” Senator George LeMieux (R, FL) has nominated himself for the role; however, last week, he failed to vote for cloture.
The industry needs to help lend some clarity to Sen. LeMieux’s thinking. Prospects/borrowers who have been or may be impacted by the failure to pass this bill need to contact the good gentleman from Florida. He already knows, thanks in large part to your prior efforts, where the bankers stand on this matter.
Consider this: If your borrowers are paying higher fees (anyone in the queue!), needing larger loan sizes, and/or refinancing a commercial mortgage with a balloon, then they should contact Sen. LeMieux. Their message should be succinct and straightforward: “If you support a bill that you say is bipartisan and that you say the Senate should pass, why aren’t you voting for cloture and subsequent passage?” Ideally, the prospect/borrower should round this out by saying, “We employ x people in Florida and are looking to employ more, but need your support.” Subtlety is over-rated at this point.
If each of you contacts a single prospect/borrower who would then send an email to Sen. LeMieux it could make a significant difference. Like the rest of you, I look forward to coming to work and not having CSPAN open on my computer all day. If we push now, we might escape that fate for the balance of the year.
CMBS prices picked up about 45 basis points (bp) in July based on the change in spread for the benchmark CMBS bond, GSMS 2007-GG10 A4. At the beginning of July, the benchmark bond was trading at about 390 bp over swaps, while finishing the month at 345 bp over swaps. In fact, some of the better performing 2007 vintage A4 bonds are trading at even tighter spreads in the area of 275-300 bp over swaps. At these spreads, 2007 A4 bonds are trading at significant premiums to par, or a dollar price of $1.04-$1.08. However, the premiums are bumping up against the limits of what many investors are willing to pay. Market participants are indicating that if dollar prices do not drop soon, investors will begin to look elsewhere for higher yields.
“We have been avoiding A4 CMBS for a while for our managed accounts,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “ For about two years now we have been performing analytics on the underlying properties in all of the CMBS issues for 2004-2008 and have identified those issues that are anticipated to outperform. We have been buying AAA-rated Class AM and Class AJ bonds from 2004-2006 for a client at dollar prices in the low 90s, providing excellent yields in the 6.5% area, superior to the 5-5.5% afforded by A4s,” said Sneden.
“ValueXpress is providing a significant amount of CMBS loan quotes to borrowers,” according to Gary Unkel, a loan originator for ValueXpress. “LTVs are now routinely 70%, up from 65% just 30 days ago.” ValueXpress is providing quotes on food- and drug-anchored shopping centers, big box shopping centers, CBD and major metro multi-tenant office buildings, Class A apartment projects/manufactured housing communities, multi-tenant industrial properties and even hotels. A recent quote on a big box shopping center provided a rate of 5.6% for a loan in excess of $20 million that carried a 10-year term and a 30-year amortization. Minimum DSCR was 1.40x and LTV was 70%. The minimum debt yield was 10.30%. “CMBS conduit loan terms are finally getting to attractive levels for quality properties,” said Michael D. Sneden, Executive Vice President at ValueXpress. “What is encouraging is debt yields that were 12%-13% as little as 60 days ago are compressing, and pretty quickly,” commented Sneden. “I think the success of the recent JPMorgan offering and the presale of the subordinate CMBS securities for the upcoming Goldman Sachs/Citigroup deal (see story below) has created optimism among CMBS conduit shops and that optimism has allowed them to become more aggressive in quoting deals.”
The U.S. Senate voted last Thursday to include a proposed $30-billion lending program in a package of aid for small businesses; two Republicans joined Democrats to support the amendment.
The vote was 60 to 39, with Senators George LeMieux (R, FL) and George V. Voinovich (R, OH) delivering crucial support despite harsh criticism of the proposal by some of their fellow Republicans who derided it as a “bailout” and a mini version of the Troubled Asset Relief Program (TARP), the huge government rescue program of the U.S. financial system.
The U.S. Senate must still vote on the overall small business measure, which also includes more than $12 billion in various tax breaks and an expansion of several other government lending programs. Republican leaders are pressing to offer amendments to the bill, and it is not yet clear if it will be approved.
Senator Mary L. Landrieu (D, LA), chairman of the Small Business Committee, waged a fierce fight in support of the $30-billion lending program, which would be administered by the Treasury Department through local community banks.
“This is something that we want to do to help Main Street, to help small business,” Sen. Landrieu said in one of a series of floor speeches. “This isn’t about Wall Street. It’s not about bailouts. It’s not about troubled assets. It’s not TARP. It’s a small business lending fund, a strategic partnership with community banks.”
Procedural wrangling over the amendment and other issues delayed the Senate vote until after 10 p.m.
The $30-billion lending program was so controversial that last Wednesday, Majority Leader Harry Reid (D, NV) removed it from the base text of the small business bill and instead proposed it as a separate amendment; his hope was to keep the legislation alive even if the amendment failed.
Supporters of the lending program said that it would help community banks increase lending to small businesses and that the banks would potentially be able to leverage the $30 billion into $300 billion in loans. The Treasury Department helped design the program.
Critics said the program would encourage banks to make risky loans. “I believe this is the same old song and dance, expand the reach of the heavy hand of government,” said Sen. Richard C. Shelby (R, AL), the senior Republican on the U.S. Banking Committee. “Like TARP, this program does not lend money directly to small businesses; it would have the government take ownership interest in hundreds of banks.” He added, “This is TARP-2.”
But Sen. LeMieux disagreed. “TARP went to the big banks that were failing at the end of 2008, a lot of which were selling mortgage-backed securities and other exotic investments that they shouldn’t have been selling,” he said in a floor speech. “This has nothing to do with that. These are small banks. This is the banker you know down the street – the banker who’s at your Rotary Club meeting, who you see at church or synagogue. This is not some Goldman Sachs banker. This is the community banker who loans to the tailor, to the construction business, the folks that employ people in your hometown.”
Even as woes mount in the commercial real estate market, a once-vital source of funding for commercial property owners is showing signs of life. In the coming weeks, banks, including J.P. Morgan, Chase & Co., Goldman Sachs Group Inc. and Citigroup Inc., are expected to launch two offerings of commercial mortgage-backed securities, or CMBS, totaling $1.4 billion, according to people familiar with the matter. Representatives at the banks declined to comment.
J.P. Morgan is leading a $650-million offering backed by properties owned by real-estate investment trust Vornado Realty Trust, people with knowledge of the situation said. Vornado, of Paramus, N.J., will use the proceeds to repay existing debt, these people said. A spokeswoman for the company declined to comment.
Goldman and Citigroup are leading a $750-million CMBS issue that includes a $100-million loan Citigroup is making to Flagship Partners LLC. The landlord is using the loan to refinance debt on the portion of 660 Madison Ave. in Manhattan that houses the Barneys New York retail department store.
These transactions, along with four CMBS issues sold earlier this year, represent further evidence that some big banks are coming off the sidelines, partly because property values have started to stabilize after plunging more than 40% from the peak in August 2007. But the CMBS market is coming back only in drips, enabling the strongest owners to get stronger by taking advantage of distressed prices.
Few expect a rush of new CMBS deals in the near term as the real estate industry braces for more than $1 trillion of maturing debt over the next five years. While the handful of fresh issues has begun to revive one of the most important funding sources for commercial real estate in the past decade, it will likely provide little solace to owners of hundreds of billions of dollars of office buildings, strip malls and other commercial property now worth less than their mortgages.
"It won't help the borrowers who are deeply underwater," said Scott Simon, managing director and head of mortgage- and asset-backed securities portfolio manager at Pimco, a leading bond house.
The rise in delinquencies on existing CMBS loans also is worrying issuers and investors. Today, more than 8% of $578.6 billion of loans packaged into CMBS are at least 60 days past due. Credit rater Standard & Poor's expects that rate to reach as high as 11.5% by year's end.
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*As reported in the Wall Street Journal
6.28.10: JP Morgan Closes CMBS Issue
According to Trepp, JPMorgan’s $716.3-million CMBS issue, the second conduit package to go on the market this year, closed on June 24. The $416-million Class A1, representing 58% of the issue with an average expected life of 4.5 years, carried a coupon of 3.85%. The $131-million Class A2, representing 18% of the issue with an average expected life of 6.75 years, carried a coupon of 4.61%, and the $61-million Class A3, representing roughly 9% of the issue with an average expected life of 9.5 years, carried a coupon of 5.06%. These CMBS classes were rated AAA and Aaa by Fitch Ratings and Moody’s, respectively. In total, 85% of the issue was rated AAA/Aaa. Classes B through H carried ratings of AA/Aa2 through B-/B3. The $11.6 million of CMBS that was not rated represented 1.625% of the issue. This class will absorb the first losses incurred by loans that default and are liquidated at less than the loan amount. Should losses on the underlying loans over the life of the issue exceed $11.6 million, then class H will begin to experience losses.
The issue contains 36 loans with a weighted average debt-service coverage of 1.64x and a weighted average loan-to-value ratio of 61.5%. The loans in the pool have a weighted average interest rate of 6.40%. Although there was indication of some slow selling, particularly Class B (rated AA/Aa2), all the classes eventually sold, according to dealers.
“According to our calculations, the weighted average coupon paid to bondholders was about 5%,” noted Michael D. Sneden, Executive Vice President at ValueXpress. “This represents a healthy spread of 140 basis points between the rate paid the bondholders and the 6.40% paid by borrowers. This excess interest spread represents ongoing profit to the issuer that can be monetized into up-front profit through the sale of Class X bonds, an interest-only class that pays the excess interest between the borrowers and the bondholders to the Class X bonds,” said Sneden “I am no expert in figuring out the proceeds from the sale of the Class X bonds, but they appear to be well in excess of the 1%-3% of the total issue amount that was typical prior to the 2008 CMBS market collapse.”
“Frankly, I hope the issuers made a lot of money. This will create economic incentive for other issuers to consider originating loans for future CMBS issues,” commented Sneden.
6.24.10: New Loan Poolers Will Help Jump Start Secondary Market for 504 Loans
The U.S. Small Business Administration (SBA) announced the first nine loan pool originators authorized by the agency to assemble and sell pools of 504 program first mortgage loans, a major step to jump starting a secondary market that should make fixed-asset financing more widely available for small businesses. The new program was approved under the American Recovery and Reinvestment Act.
Prior to the recent disruption in the credit market, a private secondary market for these loans existed, but it has not revived as the economy has started to rebound. The SBA expects this new program to breathe life into that secondary market and improve access to credit for small businesses by providing a resource that can help boost liquidity to small business lenders.
"With the resources provided in the Recovery Act, we have engineered a turnaround in its SBA lending, putting nearly $30 billion in the hands of small businesses across the country," said SBA Administrator Karen Mills. "This added support to re-launch the 504 first mortgage secondary market builds on that success and will help leverage even more capital for small businesses to support their growth and create new jobs."
Under the program, the SBA will provide a government guarantee on pools of portions of eligible 504 first mortgage loans assembled by approved pool originators to be sold to third-party investors. Lenders will retain at least 15% of each individual loan, pool originators will assume 5% of the risk, and the SBA will guarantee the remaining 80%.
Typically, a 504 project includes three elements: a loan (or first mortgage) secured with a senior lien from a private-sector lender covering up to 50% of the project cost, a second mortgage secured with a junior lien from a Certified Development Company (backed by a 100% SBA-guaranteed debenture) covering up to 40% of the cost, and a contribution of at least 10% equity from the small business borrower.
Under the new program, portions of the senior liens are pooled by pool originators and sold to investors in the secondary market. To be eligible to be included in a pool, the first mortgage must be associated with a 504 loan disbursed on or after February 17, 2009. The program will be in place until February 16, 2011 or until $3 billion in new pools are created, whichever occurs first.
The pool originators approved so far are
• Bank of America, N. A. of New York, New York;
• Cantor Fitzgerald & Co. of New York, New York;
• Citizens Bank of Elizabethton, Tennessee;
• Coastal Securities, Inc. of Houston, Texas;
• Community South Bank of Knoxville, Tennessee;
• Fidelity Bank of Covington, Georgia;
• Meadows Bank of Las Vegas, Nevada;
• Morgan Stanley Bank, N.A. of Salt Lake City, Utah; and
• Voyager Bank of Eden Prairie, Minnesota.
6.22.10: An Extender Bill for SBA Fee Funding Might Not Pass Anytime Soon
The “Extender” bill (HR 4213) that passed the House a couple of weeks ago and is now in the Senate for consideration might not pass anytime soon, if at all, according to Chris Crawford, President and CEO of NADCO. This huge and controversial bill, which includes funding to continue the offset for the bank first mortgage fee and the CDC processing fee that are normally paid by the borrower, also includes many other spending items, such as unemployment and tax reductions.
These 504 fee reductions are part of the American Recovery and Reinvestment Act passed in February 2009 and funded two additional times over the past 15 months by Congress. However, the mood in Congress for continuing these costly bills is fading; Republicans and perhaps even some Democrats are becoming more concerned about rapidly growing federal deficits in an election year.
According to NADCO’s legislative advisors, it has become extremely difficult for the Senate Majority Leader to gather the votes to move the current extender bill, which includes unemployment, tax relief, and (way down at the bottom) SBA loan program fee funding relief. Late last week, the Senate tried twice to pass versions of this bill and worked the weekend to devise plans to appease dissenting Senators, but had little success.
The number-one question NADCO gets, according to Crawford, is “What about the fee funding for loans in the SBA’s loan queue?” Right now, he said it is looking pretty bleak for funding unless the Senate reaches some agreements on spending cuts. Possible? Yes. Probable? Unknown, but dropping quickly.
What will the SBA do? It’s not likely to “turn off” the loan queue and stop accepting loan packages soon because this would be the Administration’s recognition that the Senate will fail to pass any extender bill. And that’s not a good admission when your party also runs the Senate.
The key now is that every CDC needs to be in close contact with their borrowers who have packages sitting in the loan queue. You need to know how long your borrowers can/will wait for fee relief before needing to have that package authorized for funding.
At some point, the SBA may be told by the Administration to shut down the loan queue by not accepting any more packages. Then, the SBA may be asked to tell every CDC with packages sitting there to inform borrowers that there is not likely to be any more funding for fees and that normal processing with charges for the two fees should resume. We don’t know when this will happen; it could be a month or it could be September, if the Senate cannot act on the extender bill.
One suggestion from Crawford: Ask your borrowers to call their Senators and tell them about the cost of the combined loan fees if Congress doesn’t act. Urge them to work out the compromises to get the bill passed. This may not be very effective, though, as the SBA part of this $100-billion-plus bill is under $500 million.
Unfortunately, future actions by the Senate are not predictable so continuing to submit packages for the SBA loan queue will enable CDC’s to pass on fee savings to those borrowers who are able to wait out this confusing situation with hope that Congress will act to continue the fee relief.
6.10.10: JPMorgan’s Upcoming CMBS Issue Gets High Marks from Rating Agencies
JPMorgan Chase’s upcoming $716.3-million CMBS issue, the second conduit package to go on the market this year, is getting high marks from ratings agencies despite risks attached to some of the underlying loans. There will be more such conduit deals as 2010 progresses, according to the CRE Finance Council, provided transaction volume picks up.
“A big part of seeing new CMBS issues is going to be more properties trading hands and those that are maturing getting refinanced,” Pat Sargent, president of the CRE Finance Council, told GlobeSt.com. “We’re starting to see that, but because of the valuation drops, you’re going to have to have new equity in a number of cases.”
Sargent said it’s encouraging that a conduit sale of this magnitude, as opposed to the three single-borrower CMBS deals that occurred late last year, is going forward. It’s more than twice the size of the $309.7-million issue from the Royal Bank of Scotland in April -- the first such multi-borrower deal in nearly two years. “We see this as a positive return to capital market execution,” he said.
Known as JPMCC 2010-C1, the deal is backed by 36 fixed-rate commercial mortgage loans secured by 96 properties in a variety of asset classes across 31 states. Largest of the loans is on Gateway Center, a 623,972-square-foot lifestyle center in Salt Lake City, UT with $101.1 million in debt. Loans held by JPMorgan Chase Bank comprise 78.4% of the pool with the remainder originated by Ladder Capital Finance.
According to a presale report from Moody’s Investors Service, the pool has a weighted average loan-to-value ratio (LTV) of 80.4% and a debt-service coverage ratio of 1.56X. Similarly, Fitch Ratings said in its presale report that the 78.2% LTV and 1.37X DSCR it assigns to the pool compares favorably with the average 110.7% LVT and 1.05X ratio across Fitch-rated conduit transactions from 2007 and 2008.
“That reflects a return by loan originators to prudent underwriting,” said Sargent. Both Moody’s and Fitch have assigned their top ratings of AAA to $608.9 million of the loans. Among other strengths, the loans in the pool are geographically diverse and tend to be backed by properties with strong tenancies.
However, the agencies do note risks along with the positives. Moody’s said about 71% of the pool balance is exposed to a single property type: anchored retail, although anchored retail is seen by the agency as a “less risky” asset class. “Property type concentrations increase asset correlations, which affect pool default and loss distributions,” Moody’s said in its presale report.
Fitch also sees the heavy retail concentration as a liability, but for a different reason: The agency maintains a “negative” outlook for the sector. A JPMorgan spokesman said the company has no comment on the agencies’ reports.
The conduit sale, which reportedly is expected to price in mid-June, comes as CMBS has been outperforming other forms of debt when it comes to yields. Citing Barclays data, Bloomberg reported that top-rated CMBS yielded about 309 basis points more than Treasuries as of June 4.
6.8.10: U.S. House Could Vote on Small-Business Package This Week
The U.S. House of Representatives could vote as early as this week (week of June 7) to approve legislation that would create a $30-billion fund aimed at spurring small-business lending. The bill embodies a plan first floated by President Barack Obama in his State of the Union address in January. But in a change from the administration's original plan, the $30-billion fund would not be financed with money from the politically toxic Troubled Asset Relief Program (TARP).
The Treasury Department, which announced the move away from TARP funding earlier this spring, feared that small, healthy banks wouldn't want to participate in a program that would associate them with TARP, which has drawn intense criticism from lawmakers and average Americans alike since its inception. Instead, the fund's money would come from Treasury.
Under the House bill, the $30-billion fund would be used to make loans to banks with less than $10 billion in assets. The fund seeks to give incentives to community bank participants to make more loans to small businesses by reducing the dividend or interest rate on the money it gets from the fund relative to how much a bank increases its small business lending. The measure is part of a broader administration effort to boost lending to credit-strapped small businesses. Other efforts include several tax breaks and changes to Small Business Administration lending programs.
"The small businesses that drive our local economies rely on community banks for affordable capital. While stability has returned to large financial institutions, we need this fund to help our local banks, which remain challenged in their efforts to expand loans to our job-creating businesses," said Rep. Melissa Bean (D, IL), a co-sponsor of the House bill.
The House could vote on the measure late this week, though consideration could slip to next week, according to House aides. The House Financial Services Committee approved the legislation 42-23 in a party-line vote on May 19.
The legislation's path forward in the Senate remains unclear. No standalone legislation has been introduced in the chamber. Sen. Mark Warner (D, VA), who led a group of senators in urging the Obama Administration to launch a similar program starting last Fall, is among those in the Senate working on the issue. He and others are still looking for an opportunity to move the bill, according to Senate aides.
6.4.10: Risk-Retention Provision of Financial Reform Bill May Impact CMBS
On May 20, the Senate approved far-reaching new financial rules aimed at preventing the risky behavior and regulatory failures that brought the economy to the brink of collapse two years ago and cost millions of Americans their jobs and savings. As the broad legislation heads to a U.S. House-U.S. Senate conference committee, where lawmakers will work to resolve differences between the Senate and House, the mortgage industry is working to make sure a provision in the bill does not derail CMBS and residential mortgage-backed securities (RMBS) securitizations.
The bill contains a provision requiring lenders to keep on their books 5% of the value of their loans. By requiring them to retain part of the risk, lawmakers aim to raise loan standards and force lenders to keep “skin in the game,” instead of passing along all the risk.
The CMBS industry is concerned about the risk-retention measure; however, the risk-retention measure has received less attention than the higher-profile battles over consumer financial protection and a system to dissolve failing financial firms. In addition, senators added tough amendments including restrictions on credit agencies, higher capital requirements for banks and limits on merchant fees on credit/debit cards.
The CMBS industry lobbied to ensure that buyers of subordinate CMBS would meet the “skin in the game” test. Language in the bill is fuzzy on whether subordinate bond buyers allow a CMBS issue to meet the test because the current language is not specific. The hope is that clarity on subordinate buyers of CMBS meeting the test will evolve from the reconciliation process.
“With the CMBS industry struggling to get back on its feet, I hope the financial reform bill will recognize that subordinate CMBS buyers are sophisticated investors,” said Michael D. Sneden, Executive Vice President of ValueXpress. “The CMBS industry cannot afford another setback as it tries to recover to normalcy.”
5.26.10: But the USDA B&I Program Has Stimulus Money -- for One Week Only!
Karen McDonnell, Business Program Specialist for the N.Y. office of the USDA, reports that although the USDA B&I loan guarantee program has officially run out of stimulus money, an allocation of stimulus money will be available for applications received during the week of June 7, 2010. Ms. McDonnell reminds applicants that the probability of receiving stimulus funds for a project is related to how well the project is “scored” by the USDA. Factors involved in scoring include job creation/retention, demographic characteristics of the location for the project, and how the lender structures the loan, among other factors.
Ms. McDonnell noted the benefits of applying for stimulus funds:
If the project scores well, the loan may be eligible for a 90% guarantee up to $10 million (versus 80% up to $5 million and 70% up to $10 million without stimulus).
Regardless of how well the project scores, the guarantee fee can be reduced from 2% to 1%.
Regardless of how well the project scores, the annual renewal fee of one-quarter percent can be eliminated.
“We have two projects moving through the USDA application process to meet the June 7th application timeline,” commented Michael D. Sneden, Executive Vice President of ValueXpress. “Both transactions have merit, particularly a beverage distributor located in a rural area of Mississippi. The project is in a high-impact area and scored very well. We have indications from Washington, D.C. that this project is a strong candidate for stimulus money, and we look forward to it qualifying for stimulus funds.”
5.31.10: SBA 7(a) Stimulus Money Runs Out Again
On May 31, the Small Business Administration (SBA) will run out of money for the breaks that revitalized its lending programs. The Economic Stimulus Bill that passed in February 2009 increased the government guarantee on the SBA’s flagship 7(a) loans to 90% (up from the typical 75%) and reduced fees on 7(a) loans and the SBA’s 504 loans, which primarily are used for real estate.
These enhancements made SBA loans less risky for lenders and more affordable for borrowers. As a result, SBA lending rebounded. Through May 14, more than $9 billion in 7(a) loans were made this fiscal (October 1) year. That’s nearly twice as much money as was loaned through the program during the same period a year earlier. Nearly $3 billion in 504 loans were made, up nearly $1 billion from a year earlier.
This growth in SBA lending is noteworthy given the constricted market for small-business lending overall. The problem is the higher loan guarantee and reduced fees will disappear, at least temporarily, by the end of the week unless Congress gets its act together. Congress has been extending these breaks on a month-by-month basis ever since the original funding ran out. The latest authorization expires on Memorial Day.
Months ago, the Obama Administration asked Congress to extend these SBA loan enhancements until the end of the year, but it has failed to do so. The House will consider legislation this week that includes this provision, but it is only a tiny part of a nearly $200-billion bill that includes extensions of various tax breaks and unemployment benefits and also slaps on some tax increases to pay for part of its cost. Even if the bill passes the House this week, it’s highly unlikely the Senate will follow suit in time to keep the SBA loan breaks in place.
This means we could see a repeat of what has happened a couple of times before with SBA loans: The higher guarantee and reduced fees will disappear for a while, and banks will put loans on a wait list, hoping Congress will restore the breaks (as it did in the past). This means startups and expansions that would be funded by these loans will be delayed. It would be much better for the U.S. economy, small businesses, and the SBA’s credibility if Congress would do a longer extension of the loan breaks and say, “That’s it,” instead of playing “Now you see it, now you don’t.”
Unfortunately, simple things don’t come easily in Congress. Instead of passing standalone SBA bills, Congress tacks them on to other legislation so it can claim these bigger bills help small businesses.
The Obama Administration also asked Congress to increase the size limits on SBA loans, so they can be used by more manufacturers and franchises. The Administration also wants to allow small businesses to refinance their commercial real estate mortgages with 504 loans in order to address problems in that credit market. These relatively noncontroversial proposals have failed to make it through Congress, however.
Now the word is these SBA proposals may be tacked on to a much more controversial bill: providing $30 billion in government money to community banks so they can make more small-business loans. Republicans have dubbed this proposal TARP Jr., another bank bailout. The odds of it being enacted are slim. Once again, inexpensive and effective enhancements to SBA programs probably won’t happen because they’re being used as sweeteners for expensive and perhaps ineffective legislation.
5.26.10: But the USDA B&I Program Has Stimulus Money -- for One Week Only!
Karen McDonnell, Business Program Specialist for the N.Y. office of the USDA, reports that although the USDA B&I loan guarantee program has officially run out of stimulus money, an allocation of stimulus money will be available for applications received during the week of June 7, 2010. Ms. McDonnell reminds applicants that the probability of receiving stimulus funds for a project is related to how well the project is “scored” by the USDA. Factors involved in scoring include job creation/retention, demographic characteristics of the location for the project, and how the lender structures the loan, among other factors.
Ms. McDonnell noted the benefits of applying for stimulus funds:
If the project scores well, the loan may be eligible for a 90% guarantee up to $10 million (versus 80% up to $5 million and 70% up to $10 million without stimulus).
Regardless of how well the project scores, the guarantee fee can be reduced from 2% to 1%.
Regardless of how well the project scores, the annual renewal fee of one-quarter percent can be eliminated.
“We have two projects moving through the USDA application process to meet the June 7th application timeline,” commented Michael D. Sneden, Executive Vice President of ValueXpress. “Both transactions have merit, particularly a beverage distributor located in a rural area of Mississippi. The project is in a high-impact area and scored very well. We have indications from Washington, D.C. that this project is a strong candidate for stimulus money, and we look forward to it qualifying for stimulus funds.”
5.21.10: CMBS Special Servicers Have Their Hands Full
Commercial mortgage-backed securities special servicers turned to creative workout strategies when volume reached $81.7 billion at the end of the first quarter, according to Fitch Ratings, New York. Nearly 5,000 loans in special servicing rapidly increased workload and staff. "Special servicers are now engaging in bulk note sales, modifications into A/B notes and forbearance," said Stephanie Petosa, managing director at Fitch. "However, the majority of the loan workouts remain within the more traditional realm of extensions, modifications and foreclosures."
Fitch said it expects to complete annual ratings reviews on four of five most active special servicers by the end of this month, and the ratings agency plans to provide a more in-depth overview of current and emerging CMBS special servicing trends in its quarterly report later this month.
In April, CMBS delinquencies increased 89 basis points (bp) and loans 30 or more days delinquent, in foreclosure or real estate owned increased 41 bp to put the overall delinquency rate at 8.02%, according to Trepp LLC, New York.
With more than $798 billion in unpaid CMBS balances within the United States in March, nearly $49 billion of U.S. CMBS loans are either delinquent 90 days or longer, in foreclosure, or real estate-owned properties, said Realpoint LLC of Horsham, PA.
Standard & Poor's, New York, said loan transfers to special servicers eased somewhat at the end of last year and fell 4%, while dollar volume dropped 19.5%. However, S&P also said it believes the large-balance retail loans that entered special servicing earlier in 2009 as a result of General Growth Properties' April 2009 bankruptcy filing may have skewed the comparison.
However, Fitch said large loans drove newly defaulted loans to 487 at an $8.43-billion volume in the first quarter.
"Large loans defaults will continue to escalate, with the majority coming from recent vintage CMBS," said Mary MacNeill, managing director at Fitch.
Upcoming maturities and other imminent or nonmonetary defaults -- rather than actual missed payments -- continued to account for nearly 60% of all transfer activity by loan count in the second half of 2009 to special servicing, S&P said.
Ms. MacNeill, however, said "Limited demand for office space brought on by high unemployment will lead to an uptick in defaults."
5.14.10: What’s Hot in Commercial Lending
Mortgage brokers should focus on key loan programs if they want to make money in the current credit environment. “I am regularly asked by mortgage brokers, borrowers and bankers to provide guidance on what type of loans can get closed in the current tight credit environment,” said Michael D. Sneden, Executive Vice President of ValueXpress. “In general, the loans that are getting done have some level of government support, so mortgage brokers should take advantage of the government sponsorship while it is being offered.”
Here is a list of the “hottest” loan programs and why deals are getting done in these programs. Let’s start with the “hottest.”
The SBA 7(a) program is the hottest loan program right now. The 7(a) program used to be the dumping ground for poor-quality loans, but no more. Since the Obama Administration waived the 3.0%-3.5% guaranty fee and increased the guaranty from 75% to 90%, this program has been on fire. Another positive influence is that the secondary market for the sale of the guaranty is very active, and premiums as high as 10% are being routinely achieved. With conventional balance sheet lenders (mainly community banks) pulling back on non-guaranteed originations, the SBA 7(a) program is finding less competition.
So what qualifies? Brokers should find owner-occupied real estate properties in which the owner’s business occupies at least 51% of the real estate. Investment properties do not qualify for the SBA 7(a) program. The loan amount cannot exceed $2 million so do not solicit loans for more. The program is geared toward purchases, but refinances that benefit the borrower are acceptable. All owner-occupied real estate qualifies, although more general-purpose buildings are desired. Underwriting is based on the tax returns for the business that occupies the real estate. The business must show a 1.20x DSCR. LTVs usually top out at 80%. Nearly all SBA 7(a) loans are floating rate.
If your owner-occupied loan is over $2 million, then look to the USDA Business and Industry (B&I) loan guaranty program. This program is similar to the SBA 7(a) program as the government provides a loan guarantee, typically 80% (but up to 90% under the Obama stimulus program, although funds for the 90% guarantee have currently run out). Loans up to $10 million or more are possible. The program charges a 2% loan guarantee fee that had been recently waived, but until this part of the stimulus program gets extended, the fee is in place. Before getting too excited, run the address of the property through the USDA website to determine if the location qualifies for the program. All owner-occupied real estate qualifies, as do income properties (although the project is “scored” and job creating/retaining projects generally get priority), although more general-purpose buildings are desired. Underwriting is based on the tax returns for the business that occupies the real estate. The business must show a 1.20x DSCR. LTVs usually top out at 80%. Most B&I loans are floating rate.
If your client needs multifamily financing, the HUD 223(f), Fannie Mae and Freddie Mac loan programs still provide up to 80%-85% financing on multifamily properties. The HUD 223(f) program’s generous terms of 85% LTV and 1.18x debt-service coverage are providing more proceeds than any other multifamily loan program. Current rates of 5.25% including the ongoing guaranty fee are very attractive. Plus the loans are 35-year self-amortizing, eliminating balloon refinance risk. Fannie Mae and Freddie Mac have fewer fees than the HUD 223(f) for borrowers who are fee conscious. Fannie and Freddie will provide up to 80% financing at rates well under 6%. But Fannie will not provide high LTV in the Pre-Review States of Ohio, Michigan, Indiana, Nevada and Florida. Pre-Review MSAs are New Orleans, Houston, Cincinnati, Phoenix, Atlanta and the Inland Empire of California (Riverside/San Bernardino Counties). Therefore, HUD 223(f) is a better fit in these geographic areas.
Beyond these options are SBA 504, conventional commercial loans and CMBS conduit loans. The common theme here is the first mortgage component of SBA 504 loans and all of the other options have no government support. Although lenders are active, LTV is generally limited to 65% (50% on SBA 504, but you can still achieve 90% overall leverage with the SBA 504 second mortgage in conjunction with the conventional first mortgage). So for these loan programs to be effective, you need a low-leverage borrower.
5.12.10: SBA 504 Lenders Now Able to Sell Participation Interests
Secondary Market Access (SMA) -- a consortium of CDCs and financial companies -- has begun operations to purchase SBA-504 first mortgages for sale into the secondary market. SBA-504 first mortgage lenders are now able to sell 85% participation interests of individual loans to pool originators through SMA. Spearheaded by CDC Direct Capital and Government Loan Solutions, SMA will source transactions, provide bids, package, underwrite and facilitate funding on behalf of the investment bank or pool originator.
"This new program offers banks multiple benefits, including premium income, servicing income, capital relief and improved credit quality,” said Jordan Blanchard of CDC Direct Capital. "In addition, as the loan servicer, banks will retain their relationship with their small business customers."
At NADCO's annual meeting, Ana Ma, chief of staff for SBA Administrator Karen Mills, announced that the first loan pools are expected to be ready for sale by July 15, 2010. To be eligible, the 504 debenture of each loan must have funded on or after February 17, 2009; however, the first mortgages that funded in 2007 or 2008 could still qualify.
When the SBA announced the creation of the secondary market program last year, SBA Administrator Karen Mills said, "This new program will stimulate activity in the secondary market, ensuring lenders have a place to sell first-mortgage loans on their books and in turn have liquidity to make more loans to small businesses. This is another tool in our Recovery toolbox that will expand access to the capital small businesses need to drive economic growth and create jobs."
The SMA consortium was organized to provide banks with easy access to the new program throughout the United States. “We are watching this very carefully,” said Michael D. Sneden of ValueXpress. “If this program is successful, it will provide another avenue for premium income and reduced balance sheet exposure for our banking partners, similar to the benefits of the SBA 7(a) program. As a small firm we and our partners can jump into this market right away if it is successful.”
5.7.10: Watch your Ps and Qs and SBA 1502s
Many lenders struggle with reporting their loans to SBA via the Fiscal Transfer Agent, Colson Services. Often, lenders with dedicated SBA departments can handle the responsibilities without much difficulty, but lenders that are only semi-active in SBA lending are sometimes not up to speed on SBA servicing requirements. “In order to be able to quickly collect on a guaranty purchase request, lenders need to be sure, among other considerations, that the lenders’ 1502 reports that have been submitted reconcile to the outstanding balance of the loan,” noted Jim Brett, an SBA servicing specialist at ValueXpress. “We use a web-based solution for our SBA bank partners in maintaining their SBA servicing files. Often, SBA loans are only a modest portion of their commercial origination business so as part of our bank partnerships that we have with community banks, we handle the SBA servicing reporting requirements and file maintenance so our partner does not have to staff up for SBA servicing.”
4.29.10: USDA Business and Industry (B&I) Loan Program Gains Popularity
The USDA B&I loan guaranty program, historically underfunded and a difficult program to actually close loans through, is gaining renewed popularity under President Obama’s American Recovery and Reinvestment Act of 2009 (“Recovery Act”). With Recovery Act funding, the USDA can guarantee up to 90% of a loan – 80% is normally the maximum guarantee. The one-time guarantee fee – normally 2% – is reduced to 1% and the annual renewal fee also is waived for loans made with Recovery Act funding. Most important, the program has guaranty capacity. Here’s a quick overview of the program:
Purpose and Benefits: The B&I program’s purpose is to create jobs while promoting private investment and economic development in rural areas. In the program, a private lender serves as the USDA’s “customer,” making the loan to the business. Lenders use their own documents, security instruments and commercial underwriting requirements on the loans. The USDA, in return, guarantees a large portion of the loan. This guarantee is equivalent to a federally-backed security and provides a strong incentive for lenders to make loans and provide better rates and terms to borrowers. The guarantee also means businesses have a better chance of getting the financing and terms they need.
Eligibility: Businesses must be located in areas of fewer than 50,000 people to meet rural eligibility requirements. Applicants can be individuals, partnerships, federally-recognized Indian Tribes, corporations, cooperative trusts or other legal entity. Individuals and a majority of the owners must be U.S. citizens or permanent legal U.S. residents.
Eligible Loan Purposes: Loan funds can be used for land, machinery and equipment purchases, pollution control and abatement, working capital, business and industrial acquisitions, construction, enlargement, or modernization and refinancing when necessary to save jobs. The program can support most legal businesses, but farms, golf courses and gambling establishments are not eligible.
Loan Limits and Guidelines: The maximum loan limit is $25 million for individual businesses and $40 million for cooperative organizations. USDA Rural Development’s state office can approve loans up to $10 million. Loans in excess of $10 million must be sent to Rural Development’s national office for approval.
“What is great about this program is the larger loan guarantee limits,” said Michael D. Sneden, Executive Vice President at ValueXpress. “The alternative government guarantee program, the SBA 7(a) program, has a guarantee limit of $1.5 million, so larger loans that need the support of a guarantee are often out of luck. But the B&I loan guarantee program can be a solution in rural areas. Furthermore, the definition of ‘rural’ is broader than you might think.”
On the USDA website you can input any zip code to determine eligibility.
“The other nice feature of the program,” noted Sneden, “is that income properties can be eligible.”
4.27.10: Any Parallels to CMBS with The Greatest Trade Ever and The Big Short?
Anyone who has originated a CMBS conduit loan owes it to himself to read The Big Short, by Michael Lewis and The Greatest Trade Ever, by Gregory Zuckerman. These two books chronicle the financial meltdown that occurred in 2008 resulting from the collapse of residential mortgage-backed securities filled with sub-prime home loans. The Big Short, is the more entertaining of the two books; it describes the structure of the securities in simple terms, using the floors of an office building as an analogy for the bond structure. For example, the basement and first floor are the first loss positions in the author’s analogy, and the top floors are the most senior positions. The Greatest Trade Ever is more technical; it spends time on the research John Paulson and his team performed (then took advantage of) on home loan markets and borrower characteristics that suggested an enormous waive of defaults was brewing.
“I read the books with CMBS in mind,” Michael Sneden said. “Although the results were not quite as bad, I found a parallel with ‘no doc’ home loans (often unkindly referred to as liar loans) and ‘option ARMs’ (where the borrower has a low ‘teaser’ start rate and negative amortization) to ‘pro forma loans’ and ‘interest only’ loans that were written in CMBS. CMBS is paying a price for this excess, but not nearly as high a price as being paid for the excesses that occurred in home lending. The books will fascinate those in our industry to a greater extent than the average reader.”
4.23.10: Morgan Stanley to Resume CMBS Lending
According to Commercial Mortgage Alert, Morgan Stanley is getting back in the game. The bank, which was the dominant bookrunner of commercial MBS transactions through much of the 2000s, disbanded its real estate origination group in 2008 after the market crashed. The buzz is that Morgan Stanley has allocated capital for originations, although it’s not known how much. The bank presumably would have to staff up the CMBS operation, which once numbered more than 200 but was cut to a skeleton crew. The return of Morgan Stanley is a further sign that Wall Street players think securitization is poised for a rebound. Morgan Stanley was the leading CMBS underwriter as the market took off over the last decade. It was the top global bookrunner of CMBS transactions in 1999-2007 in all but one year. The company established itself as the leading underwriter for lenders that didn’t have broker-dealer arms, such as insurance companies, and set up two leading CMBS brands for those clients: “IQ” and “TOP.” In addition, Morgan Stanley was itself a leading originator of CMBS loans. In 2007, it contributed $13.8 billion of commercial mortgages to U.S. securitizations, ranking fifth in the industry.
“We purchase a lot of ‘IQ’ and ‘TOP’ CMBS,” commented Michael Sneden. “Morgan Stanley underwrote higher quality, lower leveraged CMBS that recovered quickly when CMBS began to rally in 2009. Having Morgan back in the market is another milestone in the recovery for CMBS originations.”
4.16.10: CMBS Rally Accelerates
On April 15, spreads on senior CMBS fell 25-30 basis points (bp) as an ongoing rally in CMBS spreads and prices accelerated. CMBS prices (as measured by the GSMS 2007-GG10 super senior A4 bond class, which is considered the industry benchmark) tightened to 295 bp over swaps from 325 bp. The dollar price on the GG-10 A4 bond class, which once traded at a low of 50 cents on the dollar during the height of the credit crisis, is now trading at about 98 cents on the dollar. At that level, the GG-10 A4 bond provides a yield of 6.3%. Less than one month ago the GG-10 A4 bond was trading at more than 400 bp over swaps.
Undeniably, investors really, really like CMBS right now. It has been almost four weeks since the Term Asset-Backed Securities Loan Facility (TALF) financing program expired for existing CMBS. At the time, no one was expecting a CMBS sell-off, but many CMBS pros thought we might see a period of limited gains once TALF financing expired. Instead, the market has seen a powerful CMBS rally.
“The continued improvement in CMBS prices and corresponding reduction in CMBS yields bode well for recovery for new CMBS conduit loan originations,” said Michael D. Sneden, Executive Vice President of ValueXpress. “There is clearly demand for CMBS bonds and no supply, which is pushing up prices on existing CMBS and helped drive the success of the recent new issue CMBS by RBS,” Sneden said. “Eventually, all these positive factors will accelerate new CMBS conduit origination, but the pace to date for new CMBS conduit loan origination has been slow.”
4.14.10: SBA Fee Waiver Extended Once Again
U.S. Senator Mary L. Landrieu (D, LA), Chair of the Senate Committee on Small Business and Entrepreneurship, commented on the passage of the extension of several American Recovery and Reinvestment Act (ARRA) provisions that were set to expire on April 30, 2010. The extension provided $80 million to extend the higher guaranty for 7(a) loans and fee waivers for borrowers of 7(a) and 504 Small Business Administration loans. These measures complement recently enacted small business tax incentives included in the HIRE Act, such as the new hire payroll tax exemption and the extended Section 179 small business expensing provision. The U.S. Senate voted 59-38 to extend until May 31, 2010 provisions that eliminated borrower fees for small businesses looking to grow their companies.
Sen. Landrieu said, "The Recovery Act provisions extended tonight will continue to free up credit for small businesses looking to expand, hire new workers, or upgrade equipment. I applaud my colleagues in Congress for recognizing the success of these lending programs, and thank them for their continued support of small businesses across the country. Ranking Member Olympia Snowe has shown her commitment to true bi-partisanship for the good of small businesses still struggling to stay afloat. As we continue to support America's entrepreneurs, we must continue to look at a longer term extension of these provisions to continue this country's small business growth. The Small Business Committee has a package of proposals that have passed the Committee by wide bi-partisan margins, and we will continue to work on their inclusion in the next jobs bill debated by the Senate and urge their swift adoption."
The first multi-borrower commercial MBS offering since mid-2008 was priced on Friday, April 9, as spreads in the secondary market continued to tighten. The $309.7-million offering by RBS and Natixis priced at spreads that were in line with or tighter than initial price talk. The largest tranche -- the $221.1-million Class A-2, rated triple-A by Moody’s and Realpoint -- was being shopped in the area of swaps plus 90 bp. The buzz is that the 4.9-year class was 1.2 times oversubscribed, a level some observers considered disappointing. But traders said the spread might still tighten a bit. That would put it close to current pricing for 4.6-year bonds from the $400-million issue that Developers Diversified Realty completed via Goldman Sachs in November 2009. That triple-A paper, which originally priced with a 140-bp spread, is now changing hands in the secondary market at just under 85 bp. The four remaining classes -- all less than $30 million in size -- were oversubscribed several times over. They were being shopped at spreads in the area of 80 bp for a 2.5-year, triple-A class; in the area of 190 bp for a double-A class; in the area of 290 bp for a class with a split rating of Aa2/A from Moody’s and Realpoint; and in the area of 425 bp for a triple-B-minus class. The three junior tranches have five-year average lives. CMBS pros greeted the RBS issue with enthusiasm, saying it gave the market a much needed, if modest boost. It comes at a time when some green shoots are emerging on commercial real estate, but credit-quality woes continue to worsen. Several other dealers are working on multi-borrower transactions, but have found it difficult to amass collateral. There was hope that the completion of the RBS deal would help boost market sentiment.
4.1.10: ValueXpress Provides $2.5-Million Loan in Conjunction with DPO That Saves Borrower over $6 Million
In one of the most difficult transactions ever completed by the firm, ValueXpress was able to save its client more than $6 million by providing a $2.5-million loan to pay off $7.4 million in debt obligations secured by 8 KFC (Kentucky Fried Chicken) restaurants located in Ohio and Pennsylvania. “This transaction tested all the skills that I have learned in the commercial mortgage business over the last ten years,” said Gary Unkel, a senior loan originator who orchestrated the transaction. “It all started with a performing loan that provided about 1.0x DSCR held by a regional bank; the loan was constantly criticized by regulators and the bank commented that it would like to get rid of it,” according to Unkel. “I worked with the borrower over an extended period of time to convince the existing lender that there was no way the loan could be paid off in full. Finally, the lender agreed to release five restaurants, securing the loan for a pay-off of $2 million,” continued Unkel. Then the hard part began. Who was going to make a loan on five fast food restaurants on which the borrower was about to create a $6-million loss for a fellow lender? Despite this hurdle, ValueXpress tapped a long-time partner bank in the Midwest to make the loan. “Gary was amazing,” said Genesh Rao, owner of the restaurants. “I work all day at the restaurants, so I could only work with Gary at night on the loan underwriting. I would call him at 9:30 pm during the week and we would work on paperwork until midnight,” said Rao. “I don’t think anyone else would have done that.”
It was not a smooth process. The debt forgiveness was going to create a massive tax liability for Rao, and he would not have the funds to pay it. Unkel researched and found an obscure tax change in President Obama’s stimulus plan that allowed tax liability on debt forgiveness to be paid over many years, and an escrow was structured into the loan to provide for ongoing tax payments. Then another hurdle surfaced. After the loan was committed, a review of the KFC franchise agreement resulted in a discovery that the restaurants were not in compliance with new KFC brand standards. Rao did not have the money to comply and the deal was destined to die. Not one to give up, Unkel petitioned the new lender to create a renovation reserve and increase the loan to $2,500,000, with $500,000 set aside for renovation to comply with brand standards. Unkel collected renovation bids on behalf of Rao, and the loan increase was approved. But wait, there is more. Rao told Unkel that he owned three additional affiliated restaurants tangled in the same bank. Rao and Unkel developed a strategy and were successful in getting the remaining three restaurants released with no additional pay-off beyond the original $2 million!
“I think we will be able to use Ganesh as a reference in the future,” deadpanned Unkel at the closing of the transaction.
3.29.10: JP Morgan Closes CMBS Conduit Loan, While RBS Prepares Multi-Borrower CMBS Issue
Ramco-Gershenson Properties Trust announced that it has closed on a new $31.3-million CMBS loan with J.P. Morgan; the loan is secured by its West Oaks II shopping center in Novi, MI and its Spring Meadows Place shopping center in Holland, OH. The $31.3-million financing represents a loan-to-value of approximately 60% for the two properties and has a ten-year term with a fixed interest rate of 6.5%. Proceeds from the loan were used primarily to reduce borrowings on the company's revolving credit facilities, the company said in a statement. "This loan is one of the first CMBS transactions to be completed this year and highlights that long-term, attractively-priced capital is available for quality assets in strong markets," said Dennis Gershenson, president and CEO. "This new financing will improve our flexibility in executing our 2010 business plan."
Meanwhile, RBS is preparing a $309-million multi-borrower CMBS offering that is expected to price around April 8, 2010. The 5 class issue will contain all investment-grade bonds rated AAA through BBB-. The underlying real estate collateral consists of six five-year term loans containing 81 commercial real estate properties; 66% of the loans are secured by retail properties, 33% by office properties and 1% by industrial properties. The average loan-to-value for the portion of the loans included in the CMBS offering is about 55%. Some of the properties are secured by mezzanine debt, which will not be included in the CMBS issue, that increases the overall average to 65%. Average debt-service coverage approximates 2.40x on the portion of the loans included in the CMBS offering and about 1.80x on the entire loan amounts.
“The loans underlying this issue were underwritten very conservatively,” observed Michael D. Sneden, Executive Vice President of ValueXpress. “But it does not matter. I am excited because the industry needs something to go out the door. It appears that some of the loans were underwritten on an agency basis, so that the investment bank did not take any principal risk, but again, it does not matter. The winner is going to be the borrowers and CMBS investors. Borrowers have a real shot at sub-5% coupons and CMBS investors will get some great bonds,” Sneden said.
3.28.10: SBA 7(a) Stimulus Provisions Extended through April 30, 2010
U.S. Congress has extended breaks on U.S. Small Business Administration (SBA) loans for another month, making the loans less risky for lenders and more affordable for borrowers. Through April 30, the SBA will guarantee 90% of the amount of its flagship 7(a) loans, and reduce or eliminate fees on 7(a) loans and 504 loans. These breaks were initially funded by $375 million in the economic stimulus bill and now have been extended three times.
As a result, SBA lending is up significantly this fiscal year, which began October 1. Through March 26, the number of 7(a) loans is up 48% and the dollar amount of 7(a) lending is up 116% from a year ago. Use of the agency’s 504 loan program, which primarily finances owner-occupied real estate, also is up dramatically. “These programs have been successful in helping jump-start our economy,” said SBA Administrator Karen Mills.
Lenders and small businesses do have one complaint about the extensions: They would like the certainty of knowing the higher government guarantee and reduced fees will be available through the end of the year. Instead, the U.S. Congress has been renewing the breaks on a month-by-month basis this year, creating pressure on small businesses and lenders to complete their loans before the latest extension expires. These short deadlines “have been really disruptive” for borrowers and lenders alike, according to Greg Clarkson, a Dallas-based executive vice president and SBA division manager for BBVA Compass, the nation’s third-largest SBA lender in 2009.
“It’s causing the small businesses to be forced to adjust their time lines to meet these deadlines,” Clarkson said.
“Some small businesses may not be prepared to act so quickly to get a loan,” he said. “But if they don’t, they may not be able to get one. The 90% guarantee, up from the usual 75% on SBA loans, enables bankers to make loans they otherwise would reject. That’s important because many small businesses are still facing the same financial problems that caused banks to tighten their credit standards nearly two years ago. Even if business is beginning to pick up, it won’t show up as a positive trend on many borrowers’ financial statements until 2011,” Clarkson said.
President Obama wants the U.S. Congress to extend the breaks on SBA loans through the end of the year. “I look forward to working with my colleagues in Congress to ensure these programs receive a long-term extension,” said U.S. Sen. Mary Landrieu (D, LA), who chairs the U.S. Senate Small Business and Entrepreneurship Committee.
The Senate included funding to keep the 90% guarantee and reduced fees in place until the end of the year in legislation that passed March 10. The U.S. House also has voted to extend the breaks, but in separate legislation that included other provisions. A long-term extension won’t occur until the House and Senate both pass the same bill.
3.19.10: ValueXpress to Brokers: “Find HUD Loans in Pre-Review States.”
“I have been receiving an increasing number of inquiries from mortgage bankers and brokers asking how to make a living until the commercial mortgage lending markets improve to historical levels,” said Michael D. Sneden, Executive Vice President at ValueXpress. “My advice is to market a viable loan product in markets where there is little competition, and that is the HUD 223(f) multifamily refinance loan program in pre-review states and metropolitan statistical areas (MSAs) as determined by Fannie Mae.” For multifamily properties in need of refinancing, Fannie Mae, Freddie Mac and HUD 223(f) are basically the only competitive programs available. However, Fannie Mae has elected to reduce loan to values (LTVs) to 65% in certain states and MSAs and Freddie Mac is cautious in these areas as well. HUD has no such restrictions. “So, to generalize, there is no non-recourse competition whatsoever in these markets,” Sneden said.
Specifically, the Fannie Mae pre-review states are Ohio, Michigan, Indiana, Nevada and Florida. Pre-review MSAs are New Orleans, Houston, Cincinnati, Phoenix, Atlanta and the Inland Empire of California (Riverside/San Bernardino counties). “So my suggestion is to find good performing multifamily properties in these areas.” Sneden said. “You will have little or no competition except from other HUD lenders.”
“We are tracking multifamily maturities of CMBS conduit loans in pre-review states and MSAs,” said Sneden. “As an incentive (and to gauge whether anyone reads these notes) for any mortgage banker or broker in a pre-review state or MSA, we will provide one multifamily loan lead for a maturing CMBS conduit loan in your pre-review state or MSA if you are willing to sign a confidentiality and non-circumvention agreement.” Contact Michael Sneden at msneden@valuexpress.com for details.
3.12.10: RBS Assembling Loans for CMBS Deal
Commercial Real Estate Weekly reported that RBS is getting closer to bringing a genuine CMBS conduit transaction to market, the first in more than a year. The buzz is that the investment bank could launch a deal with some $500 million of recently originated fixed-rate mortgages, some contributed by Natixis, within a month or so. And it’s not expected to rely on the federal government’s Term Asset-Backed Securities Loan Facility, or TALF, program. With CMBS spreads tightening -- super-senior AAA spreads for generic bonds have fallen by more than half since June 2009 to roughly 435 basis points over swaps -- the market is becoming more hospitable for lenders to write loans for securitization. But the market remains quite volatile, and some lenders might view the rewards of originating loans for securitization as not worth the risks involved in the endeavor. Complicating things further is that demand from borrowers for low-leverage loans isn’t keen. Nonetheless, a number of lenders are said to be writing loans with the intent of securitizing them. “We are getting closer to a real CMBS issue that will be the turning point in the CMBS market,” said Jim Brett, who analyzes CMBS issues for ValueXpress’s CMBS investment program. “The first issue will be a blowout. Mark my words.”
3.11.10: Here We Go Again. SBA Stimulus to Expire March 28, 2010
For companies seeking a federally guaranteed Small Business Administration (SBA) loan that doesn't carry origination fees, the clock is ticking. Following the signing of a jobs bill this month, a program of providing guarantees to 90% of the loan and waiving fees is back in place -- but only until the end of March. Starting April 1, the guaranteed portion reverts to 75%-85% and loan guarantee fees will be charged.
But there is still hope for a longer extension. The SBA is currently working with the Obama Administration and U.S. Congress in hopes of expanding what the program offers and extending the current stimulus package through yearend. SBA Administrator Karen Mills is seeking to have the extension through the end of the year included in a bill expected to be passed the week of March 22, assuming the healthcare reform measure is passed the prior Sunday. Small business owners and lenders are keeping their fingers crossed.
3.5.10: Simon Property Group May Have to Raise Its Offer for General Growth Properties
On March 3, the bankruptcy court granted General Growth Properties a four-month extension to exclusivity, preventing suitors such as Simon Property Group from submitting bids directly to the court. After the four additional months, General Growth could apply for a second extension. We believe General Growth will use this time to pursue alternative avenues of maximizing value for its shareholders, as General Growth believes that Simon's initial bid offered too little for equity holders, though it would pay off unsecured creditors in full in cash.
Simon's initial offer to common shareholders comes to about $9 per share ($6 in cash and $3 in stock of General Growth's non-mall properties), relative to General Growth's $13.49 price at the March 3 market close. In contrast, Brookfield Asset Management, with the support of General Growth's management, has offered $15 per share for a large minority stake in General Growth. In response to the bankruptcy court's extension, Simon said it would begin its due diligence of General Growth. Other commercial real estate companies, including Vornado and Westfield Group (Australia), are reportedly looking over General Growth's finances as well, perhaps with the intention of bidding on all or parts of the firm.
3.4.10: FTN Financial’s Jim Vogel Predicts Moderate Rate Increases
At a client event in Short Hills, NJ, Jim Vogel, Executive Vice President of Capital Markets for FTN Financial, laid out an expected timeline for anticipated interest rate increases over the next few years. Vogel believes interest rate increases may be more moderate and more spread out than the market anticipates. Vogel believes that the Fed Funds rate will increase slowly throughout 2010, then at an increasing pace in 2011, ending 2011 at approximately 2.0% versus 0.75% today. As a result, 10-year Treasury rates should not increase at a severe and quick pace, but likely stay range bound between 3.65% and 4.80% in 2010 and 2011. “If Jim is correct, this will provide a good window for borrowers to refinance their properties without being concerned that the market will move away from them during the underwriting period,” Michael Sneden, Executive Vice President of ValueXpress said.
2.26.10:Senator Jim Bunning (R, KY) Says “Tough Sh**” to SBA, Then Reverses
On February 26, Jim Bunning, a Republican senator from Kentucky, single-handedly blocked U.S. Senate action needed to prevent an estimated 1.2 million U.S. workers from prematurely losing their unemployment benefits in March. The bill also included a provision to extend the SBA fee waiver and increased guaranty until the end of the year.
As Democratic senators asked again and again for unanimous consent for a vote on a 30-day extension Thursday night, Sen. Bunning refused to go along. And when Sen. Jeff Merkley (D, OR) begged him to drop his objection, Sen. Bunning replied, "Tough shit."
At one point during the debate, which dragged on until nearly midnight, Sen. Bunning complained of missing a basketball game. "I have missed the Kentucky-South Carolina game that started at 9:00," he said. "And it's the only redeeming chance we had to beat South Carolina since they're the only team that has beat Kentucky this year.”
His stance sparked a political tempest that has subjected Republicans to withering media coverage and cost the party politically. Sen. Bunning yielded his stance on March 2. As a result, the SBA fee waiver and increased guaranty have been extended until March 28, 2010.
2.18.10: SBA Guaranty Fee Waiver Set to Expire
The U.S. Small Business Administration (SBA) is finalizing plans for an orderly transition from SBA loans with temporary enhancements provided under the American Recovery and Reinvestment Act of 2009 (the "Recovery Act"). Recovery Act loans will no longer be available after expiration of the authority for the higher guaranty on 7(a) loans on February 28, 2010 and exhaustion of funds for the higher guaranty and for fee relief under the 7(a) and 504 programs. “This is disappointing news,” said Gary Unkel, Senior Loan Originator at ValueXpress. “All indications pointed to an extension of the fee waiver until the end of 2010. Recognizing that many of the new jobs being created in this country arise from small businesses, it is a shame that our leaders will let these benefits to small businesses expire.” Furthermore, should the guaranty fee waiver and increased guaranty amount expire on February 28, it makes it even more unlikely that the proposed increase to $5 million in SBA 7(a) loan amounts in addition to SBA 504 loan enhancements will ever be passed into law.
2.15.10: ValueXpress Adds Bank Partner in Mississippi to Originate SBA Loans
ValueXpress has entered into a second partnership with a community bank, located in Mississippi, to co-originate SBA 7(a) loans and SBA 504 loans, according to Jay Bhakta, who handles ValueXpress’s banking relationships in the Southeast and is the company’s southeastern U.S. loan producer. “We already co-originate SBA loans with a New York-based community bank, Country Bank, and we are now expanding our partnerships to other community banks across the country,” Bhakta said. “We have extraordinary knowledge and origination/underwriting capacity in addition to a strong credit mantra as it relates to SBA 504 and SBA 7(a) loan origination, underwriting and closing. We act as the back office and knowledge center for our partner banks. We originate the loans within their territory, underwrite them, get them approved by the SBA, and in the case of the SBA 7(a) program, arrange for the sale of the guaranteed portion of the loan at the highest price from our network of buyers. Our partners gain bottom-line premium income and ongoing servicing fees without the fixed costs of staffing up and learning the ropes.” ValueXpress is in discussions with additional banks in the Southeast to create similar partnerships to co-originate SBA 504 and 7(a) loans. These partnerships are expected to bolster ValueXpress’s existing nationwide platform for origination of SBA 7(a) and 504 loan originations.
2.10.10: Commercial Mortgage Alert Reports Slow Progress in Closing CMBS Conduit Loans
Commercial Mortgage Alert reported this week that although nine CMBS conduit lenders are actively seeking CMBS conduit loans for the first multi-borrower CMBS transaction since the CMBS market stalled in 2008, progress on accumulating loans for securitization has been slow. Informal discussions with the conduit lenders revealed that no lender has accumulated over $100 million of loans, well below the estimated $500 million needed to create an economical CMBS issue. As a result, a number of conduit lenders likely will team up to create a CMBS issue in excess of $500 million. Based on the slow pace of closings, a new multi-borrower CMBS issue may not be seen until at least the summer. However, once enough loans are gathered by a group of CMBS conduit lenders, it is expected that demand will be extremely strong for the CMBS. With no new CMBS issues since last year, CMBS is in short supply. CMBS prices continue to tighten based on the lack of new CMBS, economic recovery and low yields offered by alternative investments. “I think a new CMBS issue would be a ‘blowout’ to use a Wall Street term for a quickly sold issue,” said Michael D. Sneden, Executive Vice President of ValueXpress. “We have been trying to buy certain existing CMBS bonds and simply cannot find them for sale in the market. Plus, the loans included in new CMBS will be very conservatively underwritten, resulting in the best performing CMBS issues in the future.”
2.5.10: Fourth-Quarter 2009 Lending Market Review
Fourth-quarter 2009 saw an improved lending environment. Each of the following had a positive effect in the market that should lead to more commercial lending in 2010:
CMBS securities prices continued to climb on existing senior investment-grade CMBS, reducing investor yields. Prices for older vintage (pre-2005) senior investment-grade CMBS are now at or near 100, with yields of about 5%. In turn, CMBS origination shops are gearing to restart programs, offering 7% rates to borrowers, providing an attractive potential profit margin.
The U.S. government extended the 90% guaranty on SBA 7(a) loans and waiver of guaranty fees until February 28, 2010. A jobs bill is moving its way through the U.S. Senate that will extend the 90% guaranty on SBA 7(a) loans and waiver of guaranty fees until yearend 2010.
The FHA 223(f) program is filling a gap left by conduit lenders. The program’s generous terms of 85% LTV and 1.18x debt-service coverage are providing more proceeds than any other multifamily loan program. Current rates of 5.25% including the ongoing guaranty fee are very attractive.
Three new issues of CMBS securities were issued in the fourth quarter of 2009 and the bonds were snapped up by investors. These transactions will have a positive impact on single- and multiple-property CMBS transactions in 2010.
The SBA 7(a) program is helping small limited-service hotel owners refinance their maturing CMBS conduit loans as very few sources of hotel financing are available for this asset class, which took it on the chin during the current recession.
“The fourth quarter of 2009 saw a lot of positives for commercial lending. I think 2010 will be a recovery year, with growth in commercial lending occurring in 2011,” commented Michael Sneden, Executive Vice President at ValueXpress. “What is holding the recovery back is weak levels of capital in the community and regional banks, which are spending more time on problem loans that making new loans, and the relentless rise in commercial loan delinquencies. If delinquencies can peak in 2010, growth in lending will occur sooner rather than later,” Sneden believes.
2.1.10: FHA Changes to Multifamily Underwriting Draw Industry Concern
FHA multifamily lenders expressed concern after listening to HUD's proposed guidelines to tighten its underwriting. At the Mortgage Bankers Association's Commercial Real Estate Finance/Multifamily Housing Convention & Expo, Carol Galante, deputy assistant secretary for multifamily housing at HUD, said market-rate multifamily properties in the FHA's portfolio showed high vacancy rates in Texas, Nevada, Arizona, Georgia and the Carolinas.
Claim rates on risk-sharing loans doubled to 1.2% to $442 million in 2009 from $225 million in 2007. HUD forecasts $891 million in claim rates and partial payment claims in the pipeline for fiscal 2010. FHA multifamily volume increased more than 487% in the past 15 months, to $3.182 billion in demand from October 2008 through January 2010. With multifamily construction activity unable to convert or stabilize, Galant said HUD and the industry cannot continue to ignore the situation. “We are in a fundamentally different market environment today than we have ever been and [the industry] has got to wake up and realize that,” Galante said.
The proposed changes include a debt-service coverage increase for FHA's 221 (d)(4) product to 1.20x from 1.11x, increased escrows and reserves to four months of principal, interest and mortgage insurance premium and disclosure requirements on lender premiums. Galante said multifamily is at “the tip of the iceberg,” while single family is at "the end of its cycle."
“We don't move exactly at rapid speed here so I feel there is some time that [the industry] can get used to this before any of this can possibly go into effect,” Galante said. “It will take 60-90 days to get anything formalized and published.”
1.27.10: SBA 7(a) Program Helping Hoteliers Refinance Limited-Service Hotel Loans
The SBA 7(a) program is helping limited-service hotel owners refinance their maturing CMBS conduit loans. “I have seen an unbelievable surge in hotel loan requests from new and existing CMBS conduit loan clients,” comments a surprised Jay Bhakta, a ValueXpress loan originator. “Their CMBS loans are maturing, and nobody wants to refinance the properties. So I have taken it upon myself to help my clients by moving the smaller hotel loans into the SBA 7(a) loan program,” said Bhakta. “But the $2-million maximum loan amount is a problem as at least half of the clients have larger loans.” Bhakta hopes the U.S. government’s efforts to increase the maximum loan to $5 million is quickly successful as this would allow over 90% of Bhakta’s clients to utilize the program.
1.22.10: Discounted CMBS Pay-Offs Increasingly Part of Servicer Recovery Strategy
Special servicers of CMBS conduit loans are increasingly considering discounted pay-offs as a solution to problem CMBS conduit loans. “CMBS loan disposition and modification decisions for CMBS conduit loans have historically been in the hands of special servicers,” explained Michael Sneden, Executive Vice President of ValueXpress. “A special servicer is assigned to each CMBS issue, usually based on the fact that the special servicer either directly or indirectly invested in the first loss position in the CMBS issue in which it is special servicer,” said Sneden. “Once the loan becomes troubled (normally after 60 days of delinquency), the loan is transferred from the master servicer to the special servicer for workout.” Workout options are governed by a “Pooling and Servicing Agreement,” which is a very lengthy document that basically says the workout strategy must “maximize the net recovery to the trust that contains the pool of loans” (i.e., the particular CMBS issue in which the troubled loan is a part).
When property values were increasing, workout strategies leaned heavily toward foreclosure and property sale. Until 2007, net recoveries were relatively high, often 80%-100% of the unpaid principal balance of the loan. Beginning in 2008, net recoveries began to decrease as property values declined and financing disappeared. Now, net recoveries are falling dramatically. In its December 2009 CMBS Monitor, JPMorgan calculates that $370 million of CMBS conduit loans were liquidated in December 2009 with an average net recovery of 48% of unpaid principal balance of the loan.
ValueXpress is utilizing the FHA/HUD 223(f) multifamily loan refinance program to help its clients retire maturing CMBS conduit loans. The FHA/HUD 223(f) multifamily loan program is favored because it generates more loan proceeds that alternative multifamily loan programs. “Even then, sometimes we end up short on loan proceeds,” observed Jim Brett, a ValueXpress underwriter. “When that occurs, we have been successful in presenting the proposal to the special servicer and having it accept a discounted pay-off at, say, 70%-80% of the unpaid balance, as that amount maximizes the return to the loan pool versus the 50% recovery being obtained through other workout strategies.”
1.18.10: CMBS Conduit Loan Minimum Loan Size Reduced (Again)
ValueXpress is pleased to announce that the minimum loan size for its CMBS conduit program has been further reduced to $2 million nationwide. The program provides for 5-year fixed-rate, non-recourse loans secured by anchored shopping centers, urban/suburban office buildings and multi-tenant industrial properties. Amortization is based on a 30-year schedule. Properties should be high-quality assets located in primary or secondary markets. “When we announced a reduction in the minimum loan size from $10 million to $5 million in December 2009 we knew the lower loan amount would help build volume for the CMBS conduit loan program. Further reduction to $2 million will help even more,” said Gary Unkel, a ValueXpress loan originator.
1.15.10: Will SBA 7(a) Loan Limits Really Increase?
ValueXpress is not sure if or when the bill that includes an increase in loan limits for the SBA 7(a) program and 504 program will be passed. The bill, “The Small Business Job Creation and Access to Capital Act of 2009,” has four major components:
1. An increase in the SBA 7(a) loan limit from $2 million to $5 million;
2. An increase in the SBA 504 loan limit from $1.5 million to $5.5 million;
3. A provision to allow business owners to refinance their commercial property with the SBA 504 program; and
4. An extension of the 90% SBA guaranty for 7(a) loans and a continuation of the SBA fee waivers for 7(a) and 504 loans through the end of 2010. This is probably the most important piece of legislation in the bill since many banks and lenders do not feel comfortable with anything less than a 90% guaranty from the SBA.
Focus appears to be on the fourth component of the bill. Currently, the 90% SBA guaranty has been extended from December 19, 2009 through February 28, 2010, and a backlog of loans awaiting the guaranty extension was processed. The SBA plans to push for more funding to continue the stimulus measures. The U.S. House of Representatives passed a jobs bill late in 2009 that includes another $354 million to fund an extension of waived fees and increased guarantees through the end of 2010. The U.S. Senate will take up the bill when it returns from its winter recess. It is unclear whether the first three components of the bill are progressing.
“We hope that an increase in the loan limits (and corresponding increase in the guaranty) does not get lost in the focus to simply extend the 90% guaranty and the continuation of fee waivers,” commented Michael Sneden, Executive Vice President of ValueXpress. “While this is extremely important, the increase in the loan limits would greatly increase the universe of potential businesses that would be able to utilize SBA programs.”
1.8.10: FHA 223(f) Loan Program a Savior for Apartment Owners
The FHA 223(f) multifamily loan program is proving to be a savior for apartment owners facing loan maturities in 2010. The program is particularly suited for apartment properties that are slightly overleveraged based on today’s standards. “The 223(f) apartment loan program delivers 20% more loan proceeds than any other multifamily loan program available today,” explained Michael Sneden, Executive Vice President of ValueXpress. “We have a client with a $7.5-million multifamily loan written ten years ago with a 7.5% interest rate that is operating with a 1.10 debt-service coverage ratio who was offered no more than $6.5 million to refinance the loan. Using the FHA 223(f) multifamily refinance program, we easily achieved $7.75 million in proceeds under the program guidelines of 85% LTV and 1.18 debt-service coverage to repay the existing loan and finance all the transaction costs,” he said. “In addition, since the program features a 35-year term and amortization in combination with a interest rate of approximately 5.5%, the cash flow to the borrower increased by $150,000 per year.”
“The key to a successful 223(f) transaction is an early start,” Sneden said. “The processing time for a 223(f) is longer than for a traditional multifamily loan, often as long as 6 months start-to-close. Since we have access to data on all CMBS conduit multifamily loans that are maturing in 2010 and 2011, we are contacting those borrowers to get them started and processed now so they can close as soon as the loans are open to prepayment without penalty.”
1.5.10: SBA 7(a) Loan Guarantee Prices Holding Steady at 109-110
According to a survey of its broker-dealers, ValueXpress reports SBA 7(a) guarantee prices holding steady at 109-110 for 25-year SBA 7(a) loans secured by real estate and priced at the Wall Street Prime Rate plus 2.75%, adjusted quarterly. The sale price provides a 1% servicing fee to the seller. “After SBA 7(a) premiums for a P+2.75% loan disappeared completely during the height of the credit crisis in 2008, premiums have recovered to historical levels,” said Michael Sneden, Executive Vice President of ValueXpress. “Premiums returned to the benchmark of 110 in October/November 2009 and have been trading around those levels since. We continue to educate our partner banks and new partners considering the SBA 7(a) program on the benefits of this program.”
As a simple example, a $1-million loan originated by a bank utilizing the SBA 7(a) program secured by an owner-occupied building can be eligible for a 90% government guarantee. That means $900,000 of the loan is fully guaranteed by the U.S. government. The guarantee can be sold in the capital markets, and with more than 10 active broker-dealers, the guarantee for an originating bank can be sold, one at a time, immediately upon loan closing. A P+2.75% loan with a 90% guarantee sold at 110 will generate a $90,000 profit to the originating bank, plus a 1% ongoing servicing fee during the life of the loan. Only the $100,000 balance of the loan is counted on the bank’s books as a charge to its capital. Assuming a 10% capital requirement, the loan utilizes only $10,000 of the bank’s capital, but adds $90,000 in profit that flows to capital. So the beauty of the SBA 7(a) program is that it quickly grows profits and capital for the originating bank. “With the Obama Administration extending a waiver of borrower guarantee fees for the SBA 7(a) program, this product will be very attractive for commercial banks in 2010,” Sneden said.
12.26.09: Will 2010 Bring a Recovery in Lending?
“This year will likely be a turning point in the lending industry as the economic recovery takes hold,” believes Gary Unkel, a loan originator for ValueXpress. “The early part of 2010 will be led by government-sponsored lending programs, such as Fannie Mae and HUD for multifamily and the SBA 7(a) and SBA 504 programs for owner-occupied commercial loans. Bank lending and CMBS conduit lending will lag, as the private sector will want to see commercial real estate loan delinquencies peak before increasing commercial lending in a meaningful way. By mid- to late 2010, the market will see increased bank and CMBS conduit lending,” anticipates Unkel.
12.24.09: CMBS Prices Grind Tighter: 2010 Outlook
CMBS prices have slowly tightened in the latter part of December 2009 as buyers continue to purchase senior investment grade CMBS that are eligible for financing under the government’s Term Asset-Backed Securities Loan Facility (TALF), which allows CMBS investors to leverage their CMBS returns. In addition, CMBS buyers are purchasing non-TALF-eligible senior and junior investment grade CMBS to achieve the higher returns provided by these bonds. “We are watching the prices of TALF-eligible senior investment grade CMBS securities, primarily from 2005 CMBS issues and earlier, because we believe the prices and yields on these bonds reflect what investors will require in the new issue market for CMBS,” explained Michael Sneden, Executive Vice President of ValueXpress. “We can then forecast the direction of interest rates for new CMBS conduit loans for our clients as we advise them on their financing alternatives.” The tightening of CMBS spreads bodes well for further reduction in interest rates for CMBS conduit borrowers. “We believe CMBS conduit loan spreads will continue to decline in 2010, but we are concerned that the reduction in spreads will be offset by rising Treasury bond yields, thereby limiting the overall reduction in interest rates to CMBS conduit borrowers,” said Sneden. “However, we still believe there will be a net reduction in interest rates to CMBS conduit borrower through the first half of 2010."
In its 2010 CMBS Outlook, J.P. Morgan said it believes super senior CMBS (senior investment grade at issuance) spreads will compress further in 2010. J.P. Morgan thinks new-issue CMBS will be viewed in a different light versus existing CMBS securities due to tighter underwriting standards and lower overall leverage on the underlying loans that back the CMBS. J.P. Morgan said that newly issued 5-year senior investment grade CMBS (AAA-rated) should price inside of the 5-year swap rate plus 100 basis points. The all-in rate today based on the 5-year swap rate plus 100 basis points approximates 3.85%. This rate is very favorable as it relates to potentially attractive interest rates that can be offered to borrowers.
12.22.09: President Obama Signs Bill to Extend Higher Guarantee Level and Reduced Fees for SBA 504 and 7(a) Loan Programs
WASHINGTON -- President Obama signed the U.S. Department of Defense (DOD) appropriations bill on Saturday, which included $125 million to continue through February 28, 2010 the enhancements made possible through the American Recovery and Reinvestment Act (ARRA) to SBA's two largest loan programs {504 and 7(a)}. The SBA said the additional funding will support an estimated $4.5 billion in small business lending.
New approvals of loans with the higher guarantee and reduced fees made possible by ARRA are expected to begin by December 28, 2009. Loan applications from borrowers who chose to be placed in the SBA's Recovery Loan Queue will be funded first, followed by new loan approvals beginning on or before December 28, 2009.
"This Administration and Congress recognize that these key programs were successful in helping jump-start the economic recovery for America's small businesses," said SBA Administrator Karen Mills. "The increased guarantee and reduced fees on SBA loans helped put more than $16.5 billion in the hands of small business owners and brought more than 1,200 lenders back to SBA loan programs. The extension of these programs through February 2010 is important to continuing our path toward recovery and will mean thousands more small business owners have access to the credit they need.
"Just two weeks ago, President Obama laid out key aspects of his jobs plan, including significant ongoing support for small businesses. We will continue to work with Congress on moving those proposals forward, including extending these loan enhancements as the President has called for, to ensure that small business owners have the tools they need to drive economic growth and create jobs in communities all across the country."
As part of ARRA, SBA received $730 million, which included $375 million to increase the SBA guarantee on 7(a) loans to 90% and to waive borrower fees on most 7(a) and 504 loans. The funds for these programs were exhausted on November 23, 2009.
The extension included in the DOD bill authorizes the higher guarantee levels through February 28, 2010. The fee relief is authorized until this additional funding is exhausted or by the end of the fiscal 2010 year, whichever comes first. As was the case in November 2009, SBA will transition into a queue system as the funds start to wind down in order to ensure the maximum simulative effect of the programs and disbursement of funds.
12.14.09: Bridger Restarts
CMBS Conduit Loan Program
Bridger Commercial Funding announced it will resume originating new commercial real estate loans on income-producing properties. Loans made under Bridger’s new program will be underwritten to eligibility standards for securitization under the Federal Reserve’s Term Asset-Backed Securities Loan Facility, or TALF. Separately, Bridger also announced it has hired personnel from Whitegate Advisors, a New York-based real estate capital markets specialist firm, in order to support its new CMBS origination activity.
Bridger’s platform is set up to allow community banks and their commercial mortgage banking subsidiaries to originate CMBS conduit loans,” noted Gary Unkel, a senior loan originator at ValueXpress. “Independent brokers and principals cannot originate for the program.” The Bridger program will entertain CMBS conduit loans as low as $2 million. “We are going to make available the Bridger CMBS conduit program to our banking partners, such as Country Bank,” said Michael D. Sneden, Executive Vice President of ValueXpress. “Similar to the SBA 7(a) and 504 programs that we already operate on behalf of our partner banks, we will operate their CMBS conduit operations. “We act as the back-office and knowledge center for our partner banks, having originated over $1.2 billion of CMBS loans in over 400 transactions,” Sneden said.
“Recent activity in the CMBS market is signaling that the credit logjam plaguing commercial real estate lending for the past two years is starting to break,” said Bridger Executive Vice President Peter Grabell. “CMBS bond yields have fallen throughout the year, to the point where newly originated CMBS loans are becoming a viable financing option once again for borrowers.”
12.7.09: CMBS Conduit Loans: Minimum Loan Size Reduced
ValueXpress is pleased to announce that the minimum loan size for its CMBS conduit program has been reduced to $5 million in the Northeast and South to Virginia. The program provides for 5-year fixed-rate, non-recourse loans secured by anchored shopping centers, urban/suburban office buildings and multi-tenant industrial properties. The Northeast is preferred because the lender may elect to hold the loans in portfolio and is experienced in originating commercial loans in these markets. Properties should be high-quality assets located in primary or secondary markets. “When we rolled out our CMBS program in the beginning of November, I knew the $10-million minimum loan amount was going to exclude a lot of quality properties,” commented Michael Sneden, Executive Vice President of ValueXpress, “but I knew that eventually the minimum loan amount would be reduced. I am just surprised how quickly it happened.” He continued, “Back in 2007 and prior, we were originating conduit loans as small as $1 million, and I look forward to our $5-million program going nationwide, followed by more decreases in the minimum loan balance requirement, allowing even more properties obtain CMBS conduit loans in 2010.” Target borrowers for the program are existing conduit loan borrowers facing maturing loans and new borrowers seeking attractive non-recourse financing.
12.3.09: Three New CMBS Issues Kick-Start the CMBS Market
Three new issues of CMBS securities backed by newly originated commercial mortgages are making their way to eager investors. Commercial Mortgage Alert (CMA) reports that Goldman, Sachs & Co. priced a $400-million CMBS offering for Developers Diversified Realty (DDR), a shopping center REIT, on November 16, 2009 that was quickly snapped up at spreads tighter than original talk. According to CMA, the blended rate on the three classes of CMBS sold by GS&Co. was 4.2%. Factoring in transaction costs, it was estimated that the net interest rate to DDR was below 5.5% for the 28 properties securing the 5-year loans in the CMBS pool. The transaction was the first CMBS issue in 18 months. Subsequently, Bank of America priced a $460-million CMBS offering for Flagler Development on December 3, 2009. The blended rate on the four classes of CMBS was 5.8%. The bonds are backed by 7-year loans backed by mortgages on 44 office and industrial properties and other assets. Finally, on the same day, JPMorgan Securities launched a $500-million CMBS transaction that will provide financing for Inland Western Retail Real Estate Trust. The portfolio consists of 55 retail properties in 23 states in a joint venture owned by Inland Western and principals of The Inland Real Estate Group Inc. The portfolio contains 22 grocery-anchored centers. “We are watching all of these transactions for an impact on spreads for CMBS conduit loan originations,” commented Michael Sneden Executive Vice President of ValueXpress. “We have been buyers of CMBS securities earlier in the year, and we have been acutely aware of the spread compression in the senior investment grade (AAA-rated) classes of CMBS that has allowed these property owners access to the CMBS markets for portfolio execution. We believe these transactions will have a positive impact on single-property CMBS conduit loans going into 2010,” Sneden said.
11.21.09: ValueXpress Partners with Mississippi Bank to Originate SBA Loans
ValueXpress has entered into a partnership with a community bank located in Mississippi to co-originate SBA 7(a) loans and SBA 504 loans. “We are aggressively seeking SBA 7(a) and 504 loans in Mississippi, Alabama and Louisiana to satisfy the origination goals for this relationship," said Michael Sneden Executive Vice President of ValueXpress. “We already co-originate SBA loans with a New York-based community bank, Country Bank, and we are now expanding our partnerships to other community banks across the country. We have extraordinary knowledge and origination/underwriting capacity in addition to a strong credit mantra as it relates to SBA 504 and SBA 7(a) loan origination, underwriting and closing,” Sneden continued. “We act as the back office and knowledge center for our partner banks. We originate the loans within their territory, underwrite them, get them approved by the SBA, and in the case of the SBA 7(a) program, arrange for the sale of the guaranteed portion of the loan at the highest price from our network of buyers. Our partners gain bottom-line premium income and ongoing servicing fees without the fixed costs of staffing up and learning the ropes,” Sneden said. ValueXpress is in discussions with two additional banks in the Southeast to create similar partnerships to co-originate SBA 504 and 7(a) loans. These partnerships are expected to bolster ValueXpress’ existing nationwide platform for origination of SBA 7(a) and 504 loan originations.
11.7.09: CMBS Conduit Loans Are Back!
ValueXpress recently partnered with a global investment bank to originate CMBS conduit loans. “CMBS loans have always been a large portion of our loan originations, totaling over $1.2 billion prior to 2008,” explained Michael Sneden, Executive Vice President of ValueXpress. Sneden notes, “When the market for CMBS securities collapsed in 2008, we began purchasing senior investment grade CMBS securities for a client, which allowed us to keep a finger on the pulse of the CMBS securities market, knowing that if and when the prices of the securities improved, then new origination of CMBS conduit loans would become attractive again.” Prices for CMBS securities began to improve dramatically after the U.S. government announced in July 2009 that certain senior investment grade CMBS would qualify for financing under its TALF program. Senior investment grade CMBS securities are now yielding 5.5%-6.5% with high demand from buyers, which gives a simplified indication that new CMBS conduit loans can be profitably originated at 6.5%-7.0%.
Against this backdrop we have begun to originate CMBS conduit loans. Terms are relatively conservative, but are likely to become increasingly competitive as the economy recovers and more CMBS conduit originators return. “This is 1998 all over again, but much worse” Sneden said, referring to the Russian bond crisis and the troubles with Long Term Capital Management. “I have to remind my colleagues when CMBS originations restarted after that market shutdown, we wrote hotel loans at spreads of 350 basis points and coupons of 9%, so 7% is not that bad.”
ValueXpress is providing 5-year, fixed-rate non-recourse CMBS conduit loans in amounts $10 million and higher. Click here for a term sheet outlining our conduit loan programs.
10.28.09: SBA Creates Secondary Market GuaranteeProgram for 504 First Mortgage Loan Pools
Regulations published today by the U.S. Small Business Administration will create a secondary market guarantee program to provide greater liquidity for lenders and expand access to capital for small businesses. Funded through the American Recovery and Reinvestment Act, the new program would encourage sales into the secondary market of the “first mortgage” portion of small business financing made possible through the SBA’s 504 Certified Development Company (CDC) program. As a result of the economic recession and the disruption in the credit markets, there has been a significant decline in secondary market activity for 504 first mortgage loans. “This new program will stimulate activity in the secondary market, ensuring lenders have a place to sell first mortgage loans on their books and in turn have liquidity to make more loans to small businesses,” SBA Administrator Karen Mills said. “This is another tool in our Recovery toolbox that will expand access to the capital small businesses need to drive economic growth and create jobs.”
The 504 CDC program provides credit for the purchase of real estate and other fixed assets tied to a business’s expansion. Financing under the program includes three components: (1) a first mortgage or lien, which is made by a private commercial lender for 50% of the total project and does not come with a government guarantee, (2) a second mortgage or lien, which is made by a CDC for 40% of the total project and guaranteed fully by the SBA, and (3) borrower equity for the remaining 10% of the total project.
Under the new program, portions of eligible 504 first mortgages pooled by originators or broker dealers could be sold with an SBA guarantee to third-party investors in the secondary market. Lenders will retain at least 15% of each individual loan, pool originators will assume 5% of the risk, and the SBA will guarantee the remaining 80%. To be eligible to be included in a pool, the first mortgage must be associated with a 504 loan disbursed on or after February 17, 2009. The program will be in place until February 16, 2011, or until $3 billion in new pools are created, whichever occurs first.
SBA will begin accepting applications to become a pool originator from banks and broker dealers immediately, and expects to be operational for the settlement of pools in about 60 days. For more information, lenders or broker/dealers can contact James W. Hammersley, Deputy Assistant Administrator for Policy and Strategic Planning at james.hammersley@sba.gov.
10.21.09: President Obama Proposes to Raise SBA Loan Limit
The SBA issued the following statement by Administrator Karen Mills on the proposal by President Barack Obama to raise the maximum loan size for SBA-backed loans to small business: “America’s 29 million small businesses have been hard hit in this recession. Nine months ago, President Obama sent small businesses a life line: the American Recovery and Reinvestment Act. Since then, the SBA has supported more than 33,000 loans for a total of almost $13 billion in small business lending. This has helped save or create tens of thousands of jobs. “But there is much more work to be done, which is why President Obama pledged his support for legislation that would increase the maximum size of some SBA loans. Increasing maximum loan sizes will allow the SBA to ensure that more small business owners and entrepreneurs can get access to the credit they need to expand their operations and create jobs. “The President also announced additional support from the Treasury Department for smaller community lenders that are committed to increasing their lending to small businesses. Secretary Geithner and I will host a conference on small business lending with Members of Congress, regulators, lenders and the small business community. The conference will discuss additional efforts that can be taken to provide small businesses with access to credit. These steps, coupled with SBA’s ongoing efforts, will help small businesses grow and create jobs throughout America.”
Specifically, President Obama called for
• Increasing the size of SBA’s 7(a) loan from $2 million to $5 million,
• Increasing the size of SBA’s 504 loan from $2 million to $5 million for standard borrowers (supporting a total project of $12.5 million) and from $4 million to $5.5 million for manufacturers (supporting a total project of $13.75 million), and
• Increasing the size of SBA’s Microloan from $35,000 to $50,000.
ValueXpress has been very active in originating loans for both the SBA 504 and SBA 7(a) program and supports the efforts to increase the loan sizes to $5 million. Click here for a term sheet outlining our SBA 504 and 7(a) programs.
2.10.12: Report from the 2012 MBA CREF Convention
2.7.12: What’s Happening to Defaulted CMBS Loans?
1.31.12: SBA Administrator Karen Mills Elevated to Cabinet-Level Position
1.25.12: Fed Expected to Hold Rates Low Until 2014
1.23.12: $11 Billion in CMBS Pipeline Through April
1.18.12: SBA 504 Refinance Program to End in 2012
1.13.12: CMBS Prices Rise Again
1.6.12: Record Month for SBA 504 First Mortgage Lien Pool (FMLP) Program
1.3.12: CMBS Delinquency Rates Continue to Drop -- for Now
12.30.11: Top CMBS Issuers of 2011
12.28.11: Sears and Kmart Closings May Affect CMBS Loans
12.21.11: Mezzanine Loans Available for CMBS Originations
12.16.11: Commercial Lending Outlook for 2012
12.9.11: UBS and Citigroup Price CMBS Issue Amid Strong Demand
12.5.11: Country Bank Rises to 22nd Spot on Crain’s Top SBA Lenders
12.1.11: Leon Elliott Joins ValueXpress
11.25.11: Country Bank Expands SBA Lending Footprint
11.22.11: AAHOA Hotel Reservation Site “MyBestHotelRate.com” Now Live
11.17.11: ValueXpress Looking for Loan Originators
11.15.11: Country Bank Applies to Become 504 First Lien Pooler
11.7.11: SBA 7(a) Premiums Strengthening for Larger Guarantee Amounts
11.2.11: CMBS Conduit Deals Close Lightning Fast
11.1.11: RBS and Wells Fargo Price Successful CMBS Issue
11.1.11: Trepp and Fitch Report October CMBS Delinquency
10.21.11: CMBS Conduit Partner Needs $100M in Loans by Year-End
10.18.11: Spread Widening Provides Investment Opportunity in 2005 Class AJ CMBS
10.13.11: SBA Releases New 504 Refinancing Guidelines on Cash-Out
10.7.11: Uptick Seen in CMBS Conduit Multifamily Originations
10.3.11: Trepp and Fitch Report CMBS Delinquency for September
9.26.11: SBA Issues New Standard Operating Procedures for 7(a) and 504 Loans
9.23.11: Buyers Grab Super-Senior CMBS from Recent Offerings
9.19.11: FDIC Reclassification Troubling for Hoteliers
9.13.11: Rates on Fannie Mae Loans Continue to Decline
9.8.11: SBA 504 Loans Hit Record-Low Interest Rates for September
9.6.11: Freddie MAC to Step Up Multifamily Loans
9.1.11: CMBS Delinquency Rate Recedes Sharply in August
8.25.11: Spread Widening Slows CMBS Originations
8.22.11: M.P. Patel Wins IPAD 2 Drawing at Trade Show in New Orleans, LA
8.17.11: Strong Demand, Tight Supply Improve Demand for Apartments
8.12.11: CMBS Spread Continue to Widen
8.8.11: Markit to Introduce New Index to Hedge CMBS
8.4.11: SBA Aims to Avoid Shutdown as 7(a) Loans Approach Cap
7.29.11: CMBS Spreads Blow Out; Borrowers Repriced
7.28.11: S&P Suspends Ratings on New Issue CMBS 2.0 Deals
7.15.11: ValueXpress iPad Free Raffle at Upcoming Trade Show in New Orleans, LA
7.14.11: Soft Market Confronts CMBS Offerings
7.6.11: ValueXpress Seeks Large High Leverage Hotel Loans
6.30.11: Up-Front Costs Concern
Small Balance Conduit Borrowers
6.27.11: SBA Guarantee Premiums Remain Lofty
6.20.11: ValueXpress to Exhibit at
Leuva Patidar Samaj Trade Show
in New Orleans, LA
6.18.11: AAHOA Report: Debt Available for Hotel Owners
6.17.11: Subhash Shah Wins IPAD 2 Drawing at AAHOA
6.10.11: Tighter Spreads Expected on Upcoming Conduit Deal
6.2.11: CMBS Delinquencies Drop to 9.6% in May
5.31.11: Growing SBA 504 Secondary Market
5.27.11: S&P Identifies Troubling Trends in New CMBS
5.20.11: CMBS Pipeline: An Anticipated $17 Billion Through September 30, 2011
5.18.11: B-Piece Buyers Wait on Risk Retention's Final Act
5.11.11: SBA and Flood Insurance – Check Private Sources in Addition to NFIP
5.3.11: Commercial Mortgage Bonds: Largest Rally Since July
4.28.11: Killeen-Temple-Fort Hood, TX Claims Top Spot in 2010 Best Performing Cities
4.25.11: Moving the 504 Refinance Program Forward: SBA Removes Another Roadblock
4.22.11: ValueXpress to Exhibit at AAHOA Trade Show in Las Vegas, NV
4.19.11: Underwriting on CMBS Loans Loosens as Cautious Optimism Hits
4.15.11: SBA Requiring Reserves for Certain Lenders Selling Loans in the Secondary Market
4.7.11: ValueXpress Lowers CMBS Conduit Loan Minimum to $1 Million
4.1.11: CMBS Prices Recover from Disaster in Japan
3.29.11: SBA Opens 504 Refinancing to More Firms
3.24.11: Competition Heats Up for CMBS Conduit Loans
3.23.11: Goldman Sachs/Citigroup Price CMBS Deal at Wider Spreads
3.17.11: ValueXpress Helps New Borrower Complete 7(a) Process
3.4.11: Trepp: CMBS Buyers’ Faith Rewarded as U.S. Delinquency Numbers Level Off
2.28.11: S&P: Larger CMBS Deals to Market after Period of Stagnation
2.23.11: What Obama’s Budget Means for the SBA
2.18.11: SBA 504 Refinancing Is Official!
2.17.11: Morgan Stanley and CDC Direct Team Up
2.10.11: CMBS Conduit Loan Origination in 2011 & Beyond: Report from the MBA CREF Convention
2.4.11: SBA Removes Warranty Period for Loans Sold at a Premium in the Secondary Market
2.1.11: Trepp Reports Delinquency Rate Reaches Another Record High
1.27.11: Looking Under the Hood of the Goldman/CitiGroup CMBS Deal
1.26.11: Small-Business Loan Amounts Rise at the Jersey Shore
1.19.11: ValueXpress News & Recent Closings Biweekly Now on WordPress
1.13.11: SBA Guarantees: Should I Sell or Should I Hold
1.7.11: CMBS Prices Rally Yet Again
1.3.11: ValueXpress in Discussion for New SBA Relationship
12.31.10: 2010 Highlights in Commercial Lending
12.21.10: Will Refinancing of SBA 504 Loans Take Off?
12.17.10: ValueXpress Processes $15-Million in SBA 7(a) Loans Before Cutoff
12.16.10: Goldman Sachs and Citigroup Price $876.5-Million CMBS Offering
12.7.10: Self-Storage Presents an SBA Lending Opportunity
11.26.10: $35-Billion U.S. CMBS Issuance Forecast for 2011
11.22.10: Banks Can Use the SBA 7(a) Program to Reduce Portfolio Risk
11.16.10: CMBS Deal Flow Picks Up According to Recent MBA Survey
11.10.10: SBA Form 1086 Warranty Period Removal to End the Delay in Sale Treatment
11.5.10: Solutions Proposed to Split Large SBA 7(a) Loan Guarantees
11.2.10: Low Premiums on Larger SBA Loan Guarantees
10.29.10: SBA 7(a) Applications Brisk Until End of Year
10.26.10: ValueXpress and Lumbee Guaranty Bank Obtain SBA 7(a) Approval
10.20.10: ValueXpress CMBS Partner Seeks Multifamily Loans
10.15.10: CMBS Prices Continue to Rise
10.8.10: SBA to Accept Applications for Loans in Excess of $2 Million
10.6.10: Resurgent CMBS Market No Cure-All for Troubled Borrowers
10.1.10: JPMorgan Launches $1.1-Billion CMBS Conduit Offering
9.27.10: 60- to 120-Day Wait for Higher SBA Limits
9.23.10: Country Bank Ramps Up SBA Lending
9.17.10: U.S. Senate Passes Small Business Bill
9.13.10: JPMorgan Issues $485 Million in CMBS
9.8.10: CMBS Delinquencies Accelerate in August
9.3.10: SBA Loan Guarantee Premiums Soar in August
8.30.10: CMBS Prices Continue Climb, Class AM Bonds Reach 100
8.26.10: Use HUD 221(d)4 Program for Multi-Family Rehab Loans
8.13.10: Business Owners Struggle as Lending Bill Stalls
8.11.10: SBA 504 Loan Interest Rate Drops Below 5% for Small Business Borrowers
8.9.10: Demand Strong for Goldman’s CMBS Issue
8.2.09: Thomas Wallace, President of IDS Corporation, Reports on HR 5297
7.30.10: CMBS Prices Continue a Slow, Steady Climb
7.26.10: CMBS Conduit Loan Quotes Are Flowing
7.23.10: U.S. Senate Votes $30 Billion in Small-Business Aid
7.21.10: CMBS Market Rises from Ashes of Collapse
6.28.10: JP Morgan Closes CMBS Issue
6.24.10: New Loan Poolers Will Help Jump Start Secondary Market for 504 Loans
6.22.10: An Extender Bill for SBA Fee Funding Might Not Pass Anytime Soon
6.10.10: JPMorgan’s Upcoming CMBS Issue Gets High Marks from Rating Agencies
6.8.10: U.S. House Could Vote on Small-Business Package This Week
6.4.10: Risk-Retention Provision of Financial Reform Bill May Impact CMBS
5.31.10: SBA 7(a) Stimulus Money Runs Out Again
5.26.10: But the USDA B&I Program Has Stimulus Money -- for One Week Only!
5.21.10: CMBS Special Servicers Have Their Hands Full
5.14.10: What’s Hot in Commercial Lending
5.12.10: SBA 504 Lenders Now Able to Sell Participation Interests
5.7.10: Watch your Ps and Qs and SBA 1502s
4.29.10: USDA Business and Industry (B&I) Loan Program Gains Popularity
4.27.10: Any Parallels to CMBS with “The Greatest Trade Ever” and “The Big Short”?
4.23.10: Morgan Stanley to Resume CMBS Lending
4.16.10: CMBS Rally Accelerates
4.14.10: SBA Fee Waiver Extended Once Again
3.29.10: JP Morgan Closes CMBS Conduit Loan, While RBS Prepares Multi-borrower CMBS Issue
3.28.10: SBA 7(a) Stimulus Provisions Extended through April 30, 2010
3.19.10: ValueXpress to Brokers: “Find HUD Loans in Pre-Review States.”
3.12.10: RBS Assembling Loans for CMBS Deal
3.11.10: Here We Go Again. SBA Stimulus to Expire March 28, 2010
3.5.10: Simon Property Group May Have to Raise Its Offer for General Growth Properties
3.4.10: FTN Financial’s Jim Vogel Predicts Moderate Rate Increases
2.26.10: Senator Jim Bunning (R, KY) Says “Tough Sh**” to SBA, Then Reverses
2.18.10: SBA Guaranty Fee Waiver Set to Expire
2.15.10: ValueXpress Adds Bank Partner in Mississippi to Originate SBA Loans
2.10.10: Commercial Mortgage Alert Reports Slow Progress in Closing CMBS Conduit Loans
2.5.10: Fourth-Quarter 2009 Lending Market Review
2.1.10: FHA Changes to Multifamily Underwriting Draw Industry Concern
1.27.10: SBA 7(a) Program Helping Hoteliers Refinance Limited-Service Hotel Loans
1.22.10: Discounted CMBS Pay-Offs Increasingly Part of Servicer Recovery Strategy
1.18.10: CMBS Conduit Loan Minimum Loan Size Reduced (Again)
1.15.10: Will SBA 7(a) Loan Limits Really Increase?
1.8.10: FHA 223(f) Loan Program a Savior for Apartment Owners
1.5.10: SBA 7(a) Loan Guarantee Prices Holding Steady at 109-110
12.26.09: Will 2010 Bring a Recovery in Lending?
12.24.09: CMBS Prices Grind Tighter; 2010 CMBS Outlook
12.14.09: Bridger Restarts CMBS Conduit Loan Program
12.7.09: CMBS Conduit Loans: Minimum Loan Size Reduced
12.3.09: Three New CMBS Issues Kick-Start the CMBS Market
11.21.09: ValueXpress Partners with Mississippi Bank to Originate SBA Loans
11.7.09: CMBS Conduit Loans Are Back!
10.28.09: SBA Creates Secondary Market Guarantee Program for 504 First Mortgage Loan Pools