CMBS Conduit Loans

4.18.14: CMBS Conduit Loan Rates Fall

The combination of lower CMBS yields, competition and a declining swap rate is contributing to rapidly declining interest rates for CMBS conduit loan borrowers. As of Thursday, April 17, the 10-year Swap rate used to set CMBS loan interest rates had fallen to 2.75% from an April high of 2.93% on April 4. In addition, CMBS lenders are lowering spreads in tandem with lower CMBS yields on recent CMBS issues amid heavy competition for new loans. The result is borrower rates in the 4.65%-4.75% range for commercial loans and around 5.0% for hotel loans.

“What is also very appealing is the spread compression happening even on smaller balance loans, those in the $3-$5 million range,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “While it was not unusual to see tight spreads on higher balance loans over $10 million and lower leverage loans, competition is extending rate benefits to smaller balance deals.”

Furthermore, CMBS conduit loans are now pretty much even with Fannie Mae on multifamily loan rates, even on small balance loans. Spreads on 10-year Fannie Mae deals are in the Treasury plus 200 basis points (bp) range, while CMBS is in the Swaps plus 200 area. “10-year Swaps are 10 bp higher than the 10-year Treasury, which means that the typical CMBS conduit deal is still 10 bp higher in rate, but we have seen CMBS lenders go to Swaps plus 190 to match Fannie Mae offers to win deals,” commented Gary Unkel, Senior Loan Originator at ValueXpress. “We are seeing a much higher level of multifamily deal flow now versus the beginning of the year.”

New CMBS conduit loan rates are in the 4.65%-4.75% range for commercial properties based on spread quotes in the 190-200 range. Hotel spreads are 200-225 depending on franchise affiliation and location, with stronger brands in primary markets seeing better pricing.

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4.14.14: CCTG Graduates Gaining Traction in CMBS Originations

Graduates of the Commercial Capital Training Group (CCTG), a training program for individuals who want to enter or expand their reach in the commercial real estate finance business, are finding that CMBS conduit lending can be a lucrative product for their business.

“My associate Kevin Monahan began training CCTG graduates in 2012 about the CMBS conduit loan product,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “He thoroughly enjoyed sharing his knowledge with the students until his untimely death from pancreatic cancer in the fall of 2013.”

“At the recommendation of Kris Roglieri and Jon Cosentino, the founders of CCTG, I took over the reigns from Kevin and have been teaching 10-15 new students each month since November 2013 at the school in Albany, N.Y.” said Sneden. “The students are enthusiastic about CMBS conduit lending once they learn of its unrestricted cash out, non-recourse structure and nationwide footprint, in addition to generally high loan balances that generate large fees per transaction.”

“We act as the back office for the grads, gathering diligence, performing loan sizing, obtaining loan approvals and term sheets, completing diligence and closing loans,” commented Jim Brett, head of loan underwriting at ValueXpress. “As graduates become confident that they have a partner that will get the loan closed, more and more graduates are embracing the CMBS conduit loan product.”

Of the over 400 graduates, many have decided that CMBS conduit loans should be one of their primary focuses. As a result, ValueXpress is processing increasing amounts of CMBS conduit loans for CCTG graduates with a very high level of success.

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4.9.14: Fixed-Rate SBA 7(a) Loans Becoming More Prevalent

The attractive premium income achieved by selling the guaranteed portion of variable rate SBA 7(a) loans has kept fixed-rate 7(a) loans from becoming a significant portion of overall 7(a) loan origination. SBA lenders have been known to suggest to borrowers that fixed-rate 7(a) loans “don’t exist.”

Variable and fixed rates are available in the 7(a) program. Both are subject to a maximum rate set by the SBA (currently Prime + 2.75% for variable and 8.26% for fixed rates on long-term loans > $50,000 as of April 2014). Both the fixed and floating rate maximums are in excess of market rates.

With competition fierce for owner-occupied commercial loans with good credit characteristics, some SBA 7(a) lenders are adding the fixed-rate option to their 7(a) product line. Helping advance the market are 7(a) loan guarantee dealers that are making markets on the buying and pooling of fixed-rate 7(a) guarantees for sale to investors. One dealer is offering to buy 7(a) guaranteed loans with initial fixed-rate periods of 3 years and 5 years, followed by quarterly adjustments for the balance of the 25-year term. In addition, the dealer is offering a 25-year fixed for life purchase; however, the par price is a 6.25% rate.

Although fixed-rate premiums are significantly lower than floating rates, some borrowers simply will not close a floating rate deal. A banker recently told me that he closed a 5-year fixed-rate deal with a 25-year term at 5.25% for a good client, sold the guaranty for 103 and now services the loan for a 1% fee. While not a great execution, the banker did not want the client to close elsewhere and potentially lose the relationship.

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4.4.14: CMBS Origination Volume Slips in First Quarter

CMBS issuance in the first quarter fell 11% from a year earlier, according to Commercial Mortgage Alert. An estimated $20.4 billion of CMBS were issued in the first quarter of 2014, a decline from $22.9 billion a year ago. On an annualized basis, the pace of issuance is about $80 billion, less than 2013’s $86 billion and far short of the industry projection of roughly $100 billion for 2014. The pipeline for the second quarter of 2014 is roughly even with 2013 at $15 billion, so it looks like the second half of 2014 will need to be robust to hit the $100-billion mark.

“We are seeing declines in the origination pace in our target market, the small balance ($3-$20 million) borrower,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “We are struggling to compete on rate against community banks on 5- to 7-year fixed-rate refinance deals in which the sponsor is not concerned about recourse. A creditworthy sponsor can find rates of 3.5-3.75% or lower from any number of commercial banks in the New York metro area.”

“But we still have an advantage on large cash-out transactions and transactions in which non-recourse is required,” said Gary Unkel, Senior Loan Originator at ValueXpress. “In addition, we are able to work transactions in which the sponsor has some credit issues that the community bank does not want to see.”

“I think we will continue to close a steady volume of cash-out transactions in 2014,” said Sneden. “Whether we can beat last year’s number may require a dip in rates, even if only for a short while, this summer or fall, so we can add some rate-sensitive transactions on top of the steady cash-out refinance business already in place.”

4.1.14: Trepp Reports Further Decline in Delinquency

The CMBS delinquency rate continued its impressive decline in March, marking the tenth consecutive month the rate has fallen, according to Trepp.

The rate dropped 24 basis points (bp) over the course of the month, bringing the delinquency rate for U.S. commercial real estate loans in CMBS to 6.54%. The Trepp delinquency rate is 228 bp lower than a year ago and 380 bp lower than the all-time high reached during the summer of 2012.

U.S. CMBS Delinquency Rate:

Period % 30 Days
or More Delinquent
Mar-14 6.54%
Feb-14 6.78%
Jan-14 7.25%
   
3 Months Ago 7.43%
6 Months Ago 8.14%
12 Months Ago 9.50%

Driven by ongoing CWCapital distressed asset sales, the forecasted drop in delinquencies that accelerated in February extended into March with a large block of distressed asset resolutions. Over $2.1 billion in previously delinquent loans were resolved with losses over the course of the month. This level was down from $2.6 billion in February, but was still above the normal monthly average over the last two years. By removing these delinquent loans from the numerator, the rate improved 40 bp.

3.26.14: Apartment Rents Climb as Vacancies Drop

Apartment landlords continued to push through hefty rent increases at the start of the year, although the pace of the rises was slightly weaker, according to the Wall Street Journal. Rental rates increased 0.6% during the first quarter, according to data from 79 U.S. metro areas that was released on March 25 by Reis Inc., a real estate research firm. While that was a little slower than the 0.8% rise in last year's fourth quarter, rents were up a hefty 3.2% from a year earlier and have risen 13% since rents began their upward trajectory in 2009.

And with vacancy levels falling, rents appear poised for further growth, according to Reis, which said the rental vacancy rate fell to 4% in the first quarter from 4.2% in the fourth quarter of 2013 and half the level in 2009.

Rents are at a higher base and still growing," said Ryan Severino, an economist at Reis. "They will likely keep growing for the next few years."

Rental pressure has been building for years, as rising demand has run into an undersupply of apartments. With employment rising slowly but steadily, more young people are forming households, usually by leaving their parents' residences or breaking off from groups of roommates.

The burden of rising rents has fallen hard on young workers, who are more likely to be renting or, in many cases, looking to get their own place after years of underemployment.

Young people have seen their job growth pick up of late, but they still are below where they were before the recession. About three-quarters of 25- to 34-year-olds had jobs in February, down from a prerecession high of 80% in 2007.

3.21.14: AAHOA Trade Show Featuring “Deal Central” an Enormous Success

The ValueXpress booth was bustling with activity on March 20-21, 2014 at the annual Asian American Hotel Owners Association (AAHOA) Trade Show in Philadelphia, Pennsylvania. Over 3,000 attendees visited the trade show held at the Pennsylvania Convention Center. “Again this year as last year, the top loan product sought by hoteliers was CMBS conduit loans. With hotel performance improving at a rapid pace, and CMBS conduit loans the only realistic program with unrestricted cash out, interest was very high,” said Michael D. Sneden, Executive Vice President at ValueXpress. “We were sizing loans on the spot and issuing term sheets from our booth and during Deal Central. Borrowers were amazed at the potential cash proceeds in their pocket after paying off existing debt.”

ValueXpress was one of a few select sponsors invited to participate in Deal Central, an evening of intense deal making in a casual setting that featured excellent food and cocktails.

“My clients were impressed by the competitive rates for CMBS conduit loans,” noted Jay Bhakta, a Senior Loan Originator with ValueXpress who covers the southeast U.S. market that includes Texas. “With rates in the 5.0%-5.5% area, my clients can take cash out and yet have the same payment because of the lower interest rate and longer 25-year amortization schedule.”

Most clients use the cash-out proceeds to grow their businesses by building or buying other hotel assets. “One of my clients was able to obtain a construction loan from a bank requiring 50% equity by using the cash-out proceeds from a CMBS conduit loan as the equity contribution for a new hotel project,” Bhakta said.

3.17.14: CMBS Prices Remain Firm; Market Stable

CMBS prices remained in a tight range during the last 30 days in which four CMBS deals priced. The benchmark long-term, super-senior bonds from the first issue, a $1-billion offering by Citigroup, Goldman Sachs, MC-Five Mile and Cantor Fitzgerald, priced on February 28 at 93 basis points (bp) over swaps, within the range of 87-95 bp of issues since the beginning of 2014. Further down the capital stack, Class AS CMBS priced at 125 bp over swaps, and the Class Bs from the deal priced at 170 bp over swaps.

Next up, Deutsche Bank, UBS, Key Bank and Cantor priced the long-term super-senior bonds from a $1.2-billion offering on March 4 at 92 bp over swaps. The Class AM and B priced at 115 and 165 bp over swaps, respectively. Soon after, Wells Fargo, RBS, Liberty Island and Basis Investment priced the senior bonds from a $1.1-billion offering at 89 bp over swaps. The Class AM and B priced at 105 and 150 bp over swaps, respectively.

The most recent issue, a $927-million offering by Ladder Capital, Deutsche Bank and Natixis, priced the long-term super-senior bonds on March 14 at 92 bp over swaps, and Class AM CMBS priced at 110 bp over swaps, while the Class Bs from the deal priced at 150 bp over swaps.

“CMBS issuers and traders thrive in a stable market like we have seen so far in 2014,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “The stability is allowing CMBS conduit lenders to lower their spreads despite CMBS prices being range-bound, as some volatility risk is removed from their spreads. Plus the trend for the mezzanine AAA/AA- CMBS is tighter, which is helping shrink borrower spreads as well.

"We are seeing spreads in the 210-225 bp area for full-leverage small-balance commercial assets and 250 bp area for hotels," commented Gary Unkel, Senior Loan Originator at ValueXpress. "With the 10-year Swap Rate (Swap) Index hovering around 2.80%, all-in rates to borrowers are falling below 5%. Low leverage deals and/or higher loan balances can be well under 5%."

3.12.14: SBA Approves Borrower-Friendly Rule Changes for 504 Loan Program

The Small Business Administration (SBA) has issued a rule that will eliminate the section of the SBA guide which limits project expenses eligible for 504 Loan Program financing to those incurred within nine months prior to receipt by SBA of a completed loan application. This change will permit financings of expenses toward a project regardless of when they were incurred as long as they are directly attributable to the project.

“This does not sound like a big deal, but we have two 504 projects that are applicable; one closed and the rule change was too late to help the sponsor, and the second project is only moving forward based on the rule change, which is an example of its significance,” noted Michael D. Sneden, Executive Vice President at ValueXpress.

In the first deal, the sponsor spent $750,000 to demolish an existing structure on the project site, and thereafter completed a lengthy rezoning and approval process that took 12 months. Because the project proceeded after the 9-month window had expired, the demolition costs were not eligible 504 project costs.

The second deal was impacted even more by the rule. The sponsor was to construct a new franchised limited-service hotel in New York City. In order to secure a tax abatement, the sponsor had to complete site demolition, clearing excavation and a foundation, which it did at a cost of nearly $2 million out of an overall project cost of $10 million. Approvals took 14 months. Once the sponsor learned that the site preparation and foundation were not 504-eligible expenses, the sponsor turned to other alternatives; with the rule now in place, the 504 project can proceed with the full $10 million as eligible 504 costs.

3.7.14: More on CMBS Loan Quality

Investors in CMBS tend to focus on the top 10 loans in CMBS pools, as these loans tend to comprise in excess of 50% of the principal balance of a CMBS issue, and therefore, they would have the largest impact in the event of default. In general, though, the top 10 loans are higher quality and better underwritten relative to the rest of the pool.

CMBS investors should consider looking deeper into the next 10 largest loans (which combined with the top 10 loans typically represent 75%-80% of the total loans in a CMBS issue), according to a recent report from the rating agency Kroll. The report suggests the credit quality of the next 10 is slipping more rapidly than the bigger loans that tend to get all the attention.

The report notes gradual deterioration over the past year in underwriting standards for the 20 largest loans in Kroll-rated transactions. And it finds that the trend is more pronounced at the lower end of that range, which has always tended to be of lesser quality than collateral in the first tier. The agency says careful scrutiny of the 10 biggest loans “can mask credit creep” among mortgages ranked 11th to 20th by initial balance.

“When we evaluate CMBS issues for possible acquisition to add to Country Bank’s CMBS portfolio, we look at the top 20 loans as well as a sample of the balance of the loans,” commented Jim Brett, head of CMBS analytics at ValueXpress. “We clearly see the loans below the top 10 as poorer quality and more aggressively underwritten. The balance of the loans below the top 20, typically $3-million to $10-million loans are even worse.”

“We factor these results into our loss analysis,” noted Michael D. Sneden, Executive Vice President at ValueXpress. “In 2010, we were projecting bond losses of about 3%, but now we are more in the 5%-6% range. We require 200% cushion, which means the CMBS subordination levels must be 12% or more for us to recommend that Country Bank buy bonds from the issue.”

3.3.14: NADCO Sees SBA 504 Refinances on Horizon

As it relates to the on-again/off-again SBA 504 refinance program, Claire O’Rourke, Director of Government Relations at the National Association of Development Companies (NADCO), indicated that lenders need to lobby their representatives. In a recent interview with Bob Coleman, editor of the Coleman Report, O’Rourke said, “Don’t assume congressmen/congresswomen and their staff know what you talking about as you launch into your talking points."

The 504 refinance program has the potential to save, in some cases, tens of thousands of dollars each month in interest from refinancing high-cost debt using the 504 program. The U.S. economy can benefit from these savings when small businesses reinvest these savings into their businesses. O’Rourke noted that the cost of re-implementing the 504 refinance program is budget neutral and has a high probability of being implemented because “everyone (in Congress) loves small business.”

NADCO, the trade association of SBA Certified Development Companies (CDCs), is the industry’s primary voice in Washington D.C. for the SBA program. O’Rourke recently joined NADCO after working for the Senate Committee on Small Business and Entrepreneurship with Senator Mary Landrieu (D., LA).

2.26.14: Takeaways from CW Capital’s $3.2-Billion Troubled Loan Auction

The results of CW Capital’s $3.2-billion bulk sale of seriously troubled CMBS conduit loans began to filter through servicer reports, according to a research piece written by Jeffries. As of the February servicer reports, 77 loans from 12 fixed-rate CMBS conduit transactions had a current balance at disposition of $2.15 billion. Only 2 of the 77 loans were liquidated at no loss. Of the 75 other loans, the average loss severity was 54%. One property, Pheasant Run Resort, experienced a loss of 100%; the sales proceeds of $5.65 million were insufficient to pay accrued interest and costs. In terms of dollars, the highest loss severity was incurred by the Hyatt Regency – Jacksonville, Florida, which sustained a loss of $118 million on a loan that carried a principal balance excluding accrued interest of $150 million.

Despite these seemingly depressing results, 40 of the sold loans resulted in proceeds that were in excess of their most recent appraised values, Jeffries noted. The fact that 40 of these sales reaped higher proceeds than recent appraisals underscores the recovery that continues in the commercial properties markets, assisted in large part by the depth of the current bid for distressed loans and assets and plentiful/cheap sources of debt.

Based on the overall positive results of the sale, additional sales may hit the market, as sentiment is that selling distressed assets today may be more feasible than waiting for further increases in value given the substantial costs to carry distressed assets.

2.21.14: AAHOA Members: Bring P&L and STAR Report to Philly

ValueXpress will offer “on the spot” loan proposals to Asian American Hotel Owners Association (AAHOA) members attending the “Deal Connection” event and Trade Show at the AAHOA Annual Convention in Philadelphia on March 19-21, 2014. “Just bring your 2013 property income and expense statement and your December monthly STAR report, and we will run your numbers through our loan models and provide a loan proposal in just a few minutes,” said Jim Brett, head of underwriting at ValueXpress. “You can even bring reports on your phone email and forward them to me at my “Deal Central” desk or our booth in the Trade Show.”

As previously posted, as 1 of only 20 “by invitation” sponsors, ValueXpress has committed be a part of AAHOA’s inaugural “Deal Connection.” The event – Turning Silver into Gold – will occur during the AAHOA Annual Convention on Thursday, March 20, 2014 6-9 p.m. in the Terrace Ballroom in the Convention Center. ValueXpress will be represented by Michael D. Sneden, Executive Vice President; Jay Bhakta, Senior Loan Originator; and Jim Brett, Head of Underwriting.

In addition, on Thursday and Friday, March 20-21, 2014 ValueXpress will be exhibiting at the Trade Show. ValueXpress will be located in Booth 865 at the Convention Center noon-6:00 p.m. on both Thursday, March 20 and Friday, March 21. You can bring your property income and expense statement and December monthly STAR report, and we will provide you a loan quote at our booth or at “Deal Central.”

2.18.14: More Thoughts on the Future of Retail

I’m a (typical?) guy who hates to shop, which is why my wife is both amazed and puzzled by my newfound shopping sprees. No, I’m not talking about buying the latest fashion like “I gotta have that new Michael Kors jacket at Macy’s,” but something different. Every day I come home from work to newly delivered boxes, lots of boxes, and shifty wife eyes. “What did you buy now?” she asks me.

See it’s not that I hate shopping. It’s that I hate getting in my car. I hate driving. I hate having my time consumed by walking around in stores, and I hate going to different stores to find the best price, which means more driving in my car (Get it? Vicious circle.). But now I don’t have to shop in bricks-and-mortar stores for “commodities.” In every case when I know what I want, I buy it on the internet at the best possible price. Plus I can buy obscure stuff that’s hard to find. (Can you say 13-year-old fan motor for our bathroom? Done, thanks to mrsupply.com).

I consider myself pretty typical. So if I extrapolate, a lot of people are migrating to internet shopping and not as many people are shopping in bricks-and-mortar stores. This is not a revelation. It’s been written about a lot in the press, but I am my own best example.

This trend makes underwriting retail CMBS conduit loans tricky. Malls used to grow net operating income (NOI) like clockwork, rolling over to bigger loan amounts at each refinancing, but NOI growth has stopped. Many malls and shopping centers are struggling. Whenever I need a dose of retail reality I head to deadmalls.com and deadanddyingretail.com. It’s fascinating stuff – if you’re in the lending business!

2.13.14: Wells Research Supports Weaker Underwriting Metrics in CMBS Loans

Jim Brett, head of CMBS analytics at ValueXpress, was recently lamenting, “Mike, I feel like the CMBS deals are more aggressive than last year. The underwriting and asset quality just doesn’t feel as good, except for a deal here and there. If I looked at the trailing credit metrics, I wonder what I would see?”

Wells Fargo recently issued a CMBS and Commercial Real Estate Research report that supports Jim’s lament: Underwriting standards for CMBS conduit loans are deteriorating. The report notes that the recent COMM 2014-CCRE15 transaction had a net cash flow (NCF) DSCR of 1.43x, which was the second-lowest NCF DSCR of any multi-borrower transaction issued since 2010.

In the report Wells took a look at key credit metrics for 2012, 2013 and year-to-date 2014 and found decreasing results in each category. NCF DSCR declined, LTV increased, loans with LTV above 70% increased, debt yield decreased, and interest-only payment periods increased. “While these trends are great for the loan origination side of our business, we have to tread carefully as we add additional CMBS exposure on the Country Bank side of our business, where we manage its $75-million CMBS portfolio and selectively add new purchases,” commented Michael D. Sneden, Executive Vice President of ValueXpress.

The table below is a quick summary of Wells Fargo’s findings*:

Vintage NCF
DSCR
LTV LTV >
70%
Debt
Yield
DY <
9%
2012 1.71x 63.5% 22.8% 10.5% 18.0%
2013 1.89x 63.1% 27.3% 10.9% 26.1%
YTD 2014 1.69x 64.3% 33.4% 10.3% 34.1%

*All figures based on original issue date.

2.7.14: Report from the 2014 MBA CREF Convention

Participants at the 2014 MBA Commercial Real Estate Finance Convention (CREF) held in Orlando, Florida, agreed the CMBS conduit loan machine is cranking full tilt: Should rates remain at close to current levels, this year's CREF panelists suggested volume of $100 billion in CMBS originations should be easily achieved. But the panel was concerned about deteriorating underwriting standards and competition compressing profit margins.

On the panel "CMBS Market Forecast," John Burke, Managing Director at RBS, Dennis Schuh, Managing Director at J.P. Morgan and Matt Salem, Managing Director at Rialto Capital shared their opinions on what is expected in 2014 in the CMBS loan origination market:

Regarding credit quality, Burke did not expect to see a decline in credit quality, while Salem countered that it's already happening. "Of the loans, 50% have LTV more than 70% in current CMBS issues, while prior to 2013 only 20% were above 70%," commented Salem, who seemed to have a good grasp statistically on the credit metrics for CMBS. Schuh chimed in, agreeing that standards are declining "but underwriting standards are still good because they are declining from a very conservative level."

All the panelists joked about the Commercial Mortgage Alert dropped at their hotel room doors: It reported 37 active conduits and the effect of the competition on their paychecks. But in seriousness, the panel worried about spread compression decreasing profit levels and the challenge to grow their originations in 2014 versus 2013 amid additional competition. Without a major market hiccup, the panelists felt there would not be much consolidation, if any, in 2014.

2.5.14: Ladder Capital Goes Public - Cantor Commercial Real Estate Next?

Ladder Capital Corp announced the pricing of its initial public offering (IPO) of 13,250,000 shares of its Class A common stock at a price to the public of $17.00 per share on Wednesday, February 5. Ladder is a major contributor of loans to CMBS issues with $2.2 billion in loan contributions to CMBS issues in 2013, according to Commercial Mortgage Alert (CMA). This ranks the company 12th among the 29 firms that contributed loans to CMBS issues in 2013.

Ladder's trading debut followed the news that another commercial lender active in CMBS conduit loan origination, Cantor Commercial Real Estate, is planning an IPO. The Cantor Fitzgerald affiliate has hired Deutsche Bank to lead the effort, according to The Wall Street Journal. Cantor Commercial Real Estate contributed $5.3 billion of commercial loans to CMBS issues, according to CMA, ranking the firm 5th among the 29 firms that contributed loans to CMBS issues in 2013.

Early investors in Cantor Commercial, including CIM Group, are looking to sell some of their ownership stakes in the business, according to the Journal. CIM Group invested $350 million and owns 55% of the business, according to a Standard & Poor's report cited by the Journal. Cantor Fitzgerald owns 11%.

1.29.14: Commercial/Multifamily Mortgage Debt Posts Largest Increase Since 2008

Commercial/multifamily mortgage debt outstanding increased by $25.2 billion in the third quarter, as all four investor groups increased their holdings, according to the Mortgage Bankers Association (MBA). In its MBA Commercial Real Estate/Multifamily Finance Mortgage Debt Outstanding - Q3 report, the MBA reports total commercial/multifamily debt outstanding stood at $2.47 trillion in the third quarter, a 1% increase from the second quarter. Multifamily mortgage debt outstanding rose to $887 billion, up $10.8 billion, or 1.2%, from the second quarter.

"Commercial and multifamily mortgage debt outstanding grew by the largest amount since 2008," said Jamie Woodwell, MBA Vice President of commercial real estate research. "The third quarter also marked the largest increase in the outstanding balance of loans in commercial mortgage-backed securities (CMBS) since 2007. There were increases in the holdings of every major investor group."

Commercial banks continue to hold the largest share of commercial/multifamily mortgages at $870 billion, or 35%. CMBS, CDO and other ABS issuers are the second-largest holders with $563 billion, or 23%. Agency/government sponsored enterprise (GSE) portfolios and mortgage-backed securities (MBS) hold $391 billion, or 16%, while life insurance companies hold $333 billion, or 14%.

1.24.14: ValueXpress to Participate in AAHOA’s Inaugural “Deal Connection”

As 1 of only 20 “by invitation” sponsors, ValueXpress has committed be a part of the Asian American Hotel Owners Association (AAHOA) inaugural “Deal Connection.” The event – Turning Silver into Gold – will occur during the 2014 AAHOA Annual Convention, which begins in Philadelphia on Wednesday, March 19, 2013.

“Having completed over 100 financing transactions in excess of $500 million with AAHOA members, we are grateful to the AAHOA Board for including ValueXpress in this exciting new program. And we look forward to providing the financing needed by members to continue to grow their business,” commented Michael D. Sneden, Executive Vice President of ValueXpress.

At the “Deal Connection,” Turning Silver into Gold, on Thursday, March 20, 2014 6:00–9:00 p.m., the ValueXpress Team will connect with many of the thousands of hoteliers in attendance who are ready to jump start their portfolios. With three hours of face-to-face conversations in a comfortable, dedicated meeting space, ValueXpress is sure to generate a significant amount of financing transactions.

“I look forward to having all my hotel clients in one place,” noted Jay Bhakta, Senior Loan Originator at ValueXpress. “I travel quite a lot throughout the southeastern United States to work on their loan transactions, but I can’t see all of my clients on these trips; this event allows me one-on-one opportunities to meet and offer assistance in providing for their financing needs.”

1.21.14: ValueXpress to Assist in Marketing Program for CCTG

Due to an overwhelming request for marketing support by graduates of the Commercial Capital Training Group (CCTG) program, ValueXpress will develop marketing material for graduates to use when pitching CMBS conduit loans to their clients. In collaboration with Jon Cosentino and Kris Roglieri, principals in CCTG, ValueXpress will create a “trademarked” print program for all interested CCTG grads and their firms.

“We are pleased to be able to assist CCTG grads by supplying marketing materials and support,” said Michael D. Sneden, Executive Vice President of ValueXpress.

As part of this new support for CCTG grads, materials will be geared toward website, trade show and print programs. They will include the grad’s company name and logo as well as “a CCTG partner company” designation. In addition, a scalable national .pdf piece will be included that can be used for handouts, blast emails and print ads.

“Marketing will be directed toward the key benefits of CMBS conduit loans right now, namely “unrestricted cash out,” non-recourse, and longer term/amortization as superior to competing products,” commented Sneden.

1.15.14: J.C. Penney to Close 33 Stores

J.C. Penney said it will close 33 underperforming stores and lay off 2,000 employees as the venerable but troubled retailer continues a sweeping turnaround effort. Penney said the closings are part of its turnaround, which began in April when Myron (Mike) Ullman returned to lead the company. He's largely undoing the strategies implemented by former CEO Ron Johnson, who was pushed out after an overhaul that included eliminating sales and promotions in favor of everyday low prices caused revenue to plunge.

Trepp reports that nine of the closing stores are part of CMBS. In eight cases, the J.C. Penney store is part of the collateral for the loan. Given that J.C Penney is part of 189 CMBS loans, the impact of these store closings is relatively small for CMBS investors.

1.10.14: Meet Me at the MBA in Orlando, FL

Michael D. Sneden, Executive Vice President of ValueXpress, will be representing the firm at the Mortgage Bankers Association Commercial Real Estate Finance (CREF)/Multifamily Housing Convention and Expo at the Hyatt Regency in Orlando, Florida February 2-5, 2014. The convention is expected to attract over 2,500 commercial and multifamily professionals who will be networking with industry leaders and listening to professionals as they share their views on the direction of the industry.

"I have been attending CREF for over 15 years, and it is by far the best opportunity to meet my colleagues to share our past, current and future views on the commercial real estate lending markets," said Sneden. "This year, with the continued post-crash growth in CMBS conduit lending, I am looking to meet with my contemporaries who want to participate in the rewards of CMBS conduit lending; I want to see if there is a way we can work together."

"According to CMBS pros, the CMBS lending market is projected to climb to $105 billion in 2014 from $86 billion in 2013," notes Sneden. "ValueXpress has been tracking the market increases and expects to increase originations by 25% in 2014, and we would like to work with more colleagues as we reach our goal."

Mike will be in Orlando from Sunday, February 2 through Wednesday, February 5. If you want to get together for a drink or chat between session presentations, please email Mike at msneden@valuexpress.com.

1.9.13: Buyers Grab CMBS from Year's First Issue

CMBS buyers returned to the market in early 2014 to gobble up the year's first issue, a $1.4-billion offering by Deutsche Bank, Nataxis, Cantor Fitzgerald and Liberty Island. The long-term, super-senior bonds priced at 87 basis points (bp) over swaps, down 3 bp from initial price guidance and 8 bp lower than the level achieved on the equivalent bonds from the previous issue. Further down the capital stack, Class AM CMBS priced at 115 bp over swaps and the Class Bs from the deal priced at 165 bp over swaps. The classes were well oversubscribed.

"The DB/Nataxis transaction featured excellent underwriting characteristics and high collateral quality," noted Jim Brett, head of CMBS analytics at ValueXpress. "Some investors thought that the high quality of the issue may have contributed to the tight spreads on the deal and may not be indicative of market levels. We will have to wait for the next CMBS deal for confirmation, but the secondary market has tightened if this deal sets the new market levels."

"Based on the results of CMBS spread tightening, we are seeing spreads to borrowers tighten another 10-15 bp to the 220 bp area for full-leverage commercial assets and 250 bp area for hotels," commented Michael D. Sneden, Executive Vice President at ValueXpress. "With the 10-year Swap Rate (Swap) Index hovering around 2.95%, all-in rates to borrowers are falling toward the low 5% area right now. Low leverage deals can be under 5%."

12.31.13: Conduit Loan Maturities in 2014 Present an Opportunity

Following the maturity of approximately $375 billion of commercial loans in 2013 held by CMBS trusts, banks, insurance companies and other financial institutions, Berkadia and Trepp estimate another $350 billion is coming due in 2014 and roughly $1.4 trillion in 2014-2017. The large amount of maturing loans will keep all lending sources busy during the period.

CMBS conduit loans constitute approximately $400 billion of the 2014-2017 total, and with over two dozen firms currently contributing conduit loans to CMBS issues, the industry is poised to increase market share, to perhaps the $500-billion level.

"We are already seeing significant numbers of loans in CMBS pools that are refinancings of existing CMBS loans," noted Michael D. Sneden, Executive Vice President at ValueXpress. "In the most recent $1.4-billion CMBS offering by Deutsche Bank, Nataxis, Cantor Fitzgerald and Liberty Island, $763.7 million (55.5%) of the loan balance was properties refinanced from prior CMBS securitizations, an impressive amount."

"We are continuing to utilize our Trepp database to contact borrowers with maturing CMBS conduit loans as we expect refinancing of existing conduit loans into new conduit loans to be a significant portion of our business in the 2014-2017 period," said Gary Unkel, senior loan originator at ValueXpress.

12.27.13: Transaction Highlights for 2013

ValueXpress completed 30 CMBS conduit loan transactions in 2013 with a principal balance of over $200 million. Average loan size approximated $7 million. Hospitality loans were most prevalent, but transactions were completed for every CMBS conduit loan asset class -- multifamily, retail, office, self-storage and hospitality.

"2013 was a fairly typical year for ValueXpress," commented Michael D. Sneden, Executive Vice President of ValueXpress. "In periods of market stability, our originations are typically in the $200-million area, with average loan size of about $5 million, closing three to four loans a month. We continue to successfully focus on the small balance ($3-$15 million) market to lend our expertise to borrowers and intermediaries who are not terribly experienced in the CMBS conduit loan origination process."

"We expect 2014 to be more of the same: $200-million plus in originations, mostly refinancing of maturing loans or cash-out refinancing of existing loans," noted Gary Unkel, Senior Originator at ValueXpress. "The large pool of maturing CMBS conduit loans in 2014 will provide an opportunity to refinance those loans into another CMBS conduit loan."

"In 2014, we also expect to increase CMBS conduit loan originations from the graduates of Commercial Capital Training Group (CCTG), in which ValueXpress is the preferred CMBS conduit loan partner," commented Sneden, an educator at the school. "The school graduated over 100 professionals in 2013 who are now pounding the pavement for CMBS conduit loans for ValueXpress to process."

12.23.13: ValueXpress Advises on $71 Million in CMBS Purchases in 2013

ValueXpress advised its affiliate, Country Bank, on the purchase of $71 million of CMBS securities in 2013 that included 19 separate transactions from 18 CMBS issues. Each of the 18 issues was analyzed in detail by ValueXpress under the direction of Jim Brett, head of CMBS analytics.

"At the pool level we study asset quality, Debt Yield, Net Cash Flow, DSCR, LTV and sponsorship," explained Brett. "In addition, we model the cash flows for the top ten loans in the pool, which typically exceed 50% of the overall loan balance in the issue. The results must exceed our hurdles before we recommend for Country Bank to purchase CMBS from a particular issue.”

"Approximately 75% of the purchased CMBS were Class B bonds, while the balance was Class AS bonds," said Michael D. Sneden, Executive Vice President of ValueXpress. "Careful analytics are very important, as these classes are not the most senior bonds, and although the yield is juicier, subordination levels (the point at which the bonds can take principal losses from defaults on the underlying loans) are lower than senior CMBS. The average subordination level on our Class B bonds in 15%, the point at which principal losses would occur. However, we project that the losses on the loans supporting our purchased CMBS will never exceed 5%, providing a strong cushion against any principal losses.”

The CMBS investment program, started in 2008, has been very successful for Country Bank, allowing it to profit from rising CMBS values in 2009-2010 through a divestiture program during the period, and providing relatively high yields on bonds purchased in 2012-2013 that are now being held to maturity.

12.19.13: Will CMBS Conduit Loans for "Micro Apartments" Be the Next Rage?

In recent years, officials in many of the nation's most expensive housing markets have embraced "micro apartments" as a way to provide less-expensive housing for young renters. They are betting that the tiny apartments -- generally the size of a hotel room for about half the rent of a full-size apartment -- will attract young professionals and recent college graduates, helping to revitalize city centers.

Micro apartments are about 300 square feet or smaller, though some developers and cities define them as large as 500 square feet. They sometimes lack a separate kitchen or bedroom. Developers believe that single people in their 20s and 30s will accept less space in exchange for lower rent, even in cities where rent levels aren't especially lofty. Nationwide, rents have soared as the supply of apartments hasn't kept pace with demand.

"It may take a while, but CMBS conduit loans will be perfect for these projects," commented Michael D. Sneden, Executive Vice President of ValueXpress. "Fannie Mae is not fond of small unit properties, preferring a mix of studios, 1-bedroom and 2-bedroom layouts. They also have rent/square foot (sf) and value/unit criteria that "micro apartments" may violate. Rents of $1,200 per month for a 300 sf unit in New York City ($4.00/sf) will be common, which is higher than Fannie Mae standards."

CMBS conduit lending does not have similar restrictions on unit size, unit mix, rent/sf or value/unit; therefore, these loans will become very attractive for "micro apartment" buildings as they are developed and stabilized.

12.13.13: CMBS Spreads Hold Steady Amid Flurry of Offerings

CMBS prices are holding firm as dealers shop three CMBS deals totaling $3.22 billion, each with distinct loan underwriting characteristics and collateral quality. The three conduit offerings are a $1.1-billion deal by Deutsche Bank, Cantor Fitzgerald, KeyBank and Liberty Island (COMM 2013-CCRE13); a $1-billion issue by Wells Fargo, RBS, Liberty Island, Basis Real Estate Capital, National Cooperative Bank, UBS and C-III Commercial Mortgage (WFRBS 2013-C18); and a $1.1-billion transaction by JPMorgan, Barclays, GE Capital, Redwood Trust and RAIT Financial (JPMBB 2013-C17).

The Wells-RBS transaction has arguably the best underwriting characteristics and high collateral quality. The loan pool consists of 67 loans secured by 73 properties with a weighted average loan-to-value (LTV) of 54.4% and a weighted average Net Cash Flow Debt Service Coverage (NCF DSCR) of 2.48x. The loan pool NCF Debt Yield is 13.8%.

The Deutsche Bank-Cantor deal also provides good loan metrics. The loan pool consists of 53 loans secured by 73 properties with a weighted average LTV of 60.8% and a weighted average NCF DSCR of 2.10x. The loan pool NCF Debt Yield is 12.7%.

"We look for NCF DSCR of more than 2.0x and NCF Debt Yield of more than 12.0% when sourcing CMBS for our portfolio," noted Jim Brett, head of CMBS analytics at ValueXpress. "Both of these deals hit the mark."

The JPMorgan deal was more aggressively underwritten than the Wells-RBS and Deutsche Bank-Cantor deals. The JPMorgan pool consists of 64 loans secured by 72 properties with a weighted average LTV of 66.3% and a weighted average NCF DSCR of 1.49x. The loan pool NCF Debt Yield is 10.3%.

The Deutsche Bank-Cantor deal priced the deal's long-term, super-senior bonds on Friday with a spread of 93 basis points (bp) over swaps, in line with recent offerings. The RBS-Wells and JPMorgan bonds were being marketed at the same levels; market participants were finding very strong demand for the RBS-Wells deal.

12.10.13: CMBS Conduit Shops Offering Tight Spreads for Low Leverage Deals

Multiple CMBS conduit loan originators have recently announced lower spreads for low leverage transactions on higher balance loan amounts, generally greater than $10 million. A typical announcement we just received from one of our partners:

As an additional programmatic expansion to our lending platform of fixed and floating rate CMBS loans, we are actively originating low leverage (approximately 50% LTV) fixed-rate non-recourse conduit loans on quality real estate (retail, office, multifamily, industrial) in the following interest rate ranges:

5-year fixed rate loans: 3.50%,
7-year fixed rate loans: 4.00%, and
10-year fixed rate loans: 4.50%

As a valued partner, I look forward to providing custom-tailored financing solutions for ValueXpress clients from any of our product offerings including our attractively priced low leverage loan program.

"An additional benefit for ValueXpress clients is since we have completed over $100 million in CMBS conduit loans with this investor, it has agreed to provide this special pricing on low leverage loan as small as $5 million," said Michael D. Sneden, Executive Vice President at ValueXpress LLC. "Since our average loan size is $7-$8 million, this is an added bonus for our clients."

12.6.13: Fiscal 2014 SBA Loan Volume Struggles to Gain Traction

This week SBA published its regular "Lending Statistics for Major Programs" as of December 6. This report provides rolling performance statistics periodically for the 7(a) and 504/CDC loan programs, broken down by the respective categories of minority participation and policy-targeted penetration.

Overall, the 7(a) program continues a sluggish start into fiscal 2014, which began on October 1, 2013 with year-to-date total volume of $2.58 billion, down 11% from the same period a year ago (as of December 6, 2012). A slower start into fiscal 2014 was expected due to the federal government shutdown that lasted 17 days in October.

The number of 7(a) loan increased to 7,162 through December 6, 2013, nearly 9% fewer that the fiscal year-to-date 2013 figure and lagging about 2.6% behind the same period in fiscal 2012. Another metric tracked by many pundits is the average 7(a) loan size, which is currently $359,848, down a modest 2.2% year to date from fiscal 2013, but still 14% over fiscal 2012. Expect that number to grow as the year progresses.

Meanwhile, in SBA 504/CDC lending, the total volume of loans lagged at $680 million year to date through December 6, 2013, down 29% from fiscal year-to-date 2013 and almost 14% lower volume than the opening of fiscal year-to-date 2012 results.

The total number of 504/CDC loans decreased to 1,004 fiscal 2014 year to date (through December 6, 2013) after totaling 1,465 at this point in fiscal 2013. This level of loans marks a 31% decrease from 2013 and more than an 18% decrease from fiscal year-to-date 2012 lending.

11.29.13: CMBS Conduit Loans Work in Fannie “Pre-Review” Markets

CMBS conduit loans secured by multifamily properties compete directly with similar loans offered by Fannie Mae through 24 Delegated Underwriting and Servicing (DUS) lenders. Typically, DUS lenders are authorized to approve and close loans without Fannie Mae approval. Both loan products allow cash-out, are non-recourse, have long (10-year) fixed-rate loan terms and similar maximum LTVs (75% for cash-out, 80% for purchases).

But Fannie Mae has some competitive advantages. Fannie Mae rates are typically 0.25%-0.50% lower than CMBS conduit loan rates and transaction costs are lower. Therefore, in many markets, a Fannie Mae multifamily loan on a well-performing apartment complex with a financially strong and experienced sponsor is a better option than a CMBS conduit loan. However, Fannie Mae has determined certain markets as "a market with weak economic conditions deemed to present increased credit risk." Those are known as "Pre-Review" markets, where LTV is typically limited to 65% LTV and all loans must be approved by Fannie Mae. CMBS conduit loans do not have "Pre-Review" markets, and therefore, all markets are eligible for 75%-80% financing, thereby presenting an opportunity to originate CMBS conduit loans in those markets.

Current Fannie Mae “Pre-Review” Markets
Indiana Jacksonville MSA
Michigan Las Vegas MSA
North Dakota Lafayette, LA MSA
Ohio (except for Columbus MSA) Midland, TX MSA
Abilene, TX New Orleans MSA
Albuquerque, NM Phoenix MSA
Atlanta MSA Tyler, Victoria and Odessa MSA
Auburn, AL Tucson MSA
Bakersfield, CA Shreveport MSA
Houston MSA Fairfield, CA MSA


"Typically we will originate a Fannie Mae loan in non-Pre-Review markets for deals with no credit or performance issues, and CMBS conduit loans in Pre-Review markets," commented Michael D. Sneden, Executive Vice President at ValueXpress.

11.23.13: CMBS Volume Expected to Blow Away Estimates

An active pipeline of commercial MBS deals over the next several weeks will push annual issuance close to $90 billion, well above the $65-billion average prediction by a panel of CMBS professionals polled at the beginning of the year.

According to Commercial Mortgage Alert, 15 more transactions totaling $15 billion are scheduled to price by yearend. Added to the $72 billion of offerings already completed, full-year volume would climb to $87 billion, up 80% from 2012.

Although CMBS loan originators report strong loan demand, some headwinds are apparent moving into 2014. Rates have moved up since the summer, when Fed Chairman Ben Bernanke told Congress that the Central Bank's bond purchases may be reduced if the U.S. employment outlook shows sustained improvement. In June, Bernanke said the Fed could begin phasing out bond buying later this year and halt purchases around mid-2014 as long as the economy meets its forecast. As a result, rates moved up approximately 100 basis points, resulting in CMBS loan rates moving from the low 4% area to the low 5% area, slowing demand.

On the other hand, maturing CMBS loans will continue to be refinanced into new CMBS loans, and with Fannie Mae and Freddie Mac cutting back on originations, multifamily lending in CMBS may rise next year. In addition, the scare of higher rates next year will likely pressure some borrowers to refinance early next year to avoid the risk of higher rates later.

"We will start to see some CMBS volume estimates for next year in the upcoming weeks, likely in the $75-$100-billion range. I hope I am wrong, but I see 2014 at the lower end of the range," noted Michael D. Sneden, Executive Vice President at ValueXpress.

11.18.13: N.Y. Metro Community Bank Rates Competitive for Recourse Commercial Deals

Originators that focus on small balance CMBS loans (roughly $3-$20 million) in the N.Y. metropolitan area are having a tough time competing with community bank portfolio lenders on interest rates when the sponsor is indifferent to recourse. While CMBS conduit loan rates are currently in the low 5% area for 10-year fixed-rate terms and in the high 4% area for 5- and 7-year terms, N.Y. metro community banks are offering rates in the high 3% area for 5-year terms and low 4% rates for 7- and 10-year deals.  In addition, transaction costs for a community bank commercial loan are typically much lower than a CMBS conduit loan. However, nearly all community banks require personal recourse, so the lower rates are only effective when the sponsor is willing to personally guarantee the loan.

"I can get six quotes in a couple of hours for a 5-year loan on a commercial property in both New York and New Jersey at 3.75% fixed," commented Gary Unkel, senior loan originator for ValueXpress. "I even saw a 2.99% 3-year fixed-rate deal recently and a 5-year multifamily offer at 3.5%."

"When we get a deal with no cash-out and the sponsor does not require non-recourse, we rarely get that deal as the borrower usually accepts the better community bank deal over CMBS," commented Michael D. Sneden, Executive Vice President at ValueXpress. "But if the sponsor requires non-recourse and/or a significant cash-out, the community bank usually drops out, putting CMBS in the catbird seat."

11.15.13: Steve Lombardi Joins ValueXpress

Steve Lombardi, a 20-year veteran in commercial real estate lending, private equity and capital markets, joined ValueXpress effective November 15. Steve is primarily responsible for commercial loan originations focused on CMBS conduit loans in New England. Steve is based in Melrose, Massachusetts, just north of downtown Boston.

"Steve brings an outstanding breadth of experience to the ValueXpress team from his history in commercial property sales, development and site selection, where he assisted companies find and develop real estate assets. More recently, Steve was involved in private equity investment, identifying companies in growing industries requiring access to capital to make acquisitions or fund internal growth plans. “Many of these clients are family-owned and lack the expertise in structuring capital investment to grow their businesses, and Steve brought that expertise to the table," commented Michael D. Sneden, Executive Vice President at ValueXpress.

"I am very excited to be working with Mike, Jim and the rest of the ValueXpress team," said Steve. "ValueXpress has an excellent reputation in the market for service. My prior work with less-sophisticated real estate and business owners demands hand holding to achieve a good borrower experience. And ValueXpress is known for that kind of personal touch."

"I am particularly energized to originate CMBS conduit loans, given the resurgence of the product since 2010 and the ability to provide unrestricted cash out to owners of underleveraged properties or those in which the sponsor created value through leasing or rehabilitation," said Steve. "I will be hitting the Boston MSA to kick off, then work the balance of Massachusetts and the surrounding states."

Steve can be reached at slombardi@valuexpress.com or at 888-805-1390.

11.11.13: What's Hot in CMBS Conduit Loan Origination

"As I look back on the CMBS conduit loans we closed in 2012 and 2013 to date a clear pattern has emerged on what motivates small balance sponsors (loans in the $3-million to $20-million range) to close CMBS conduit loans as opposed to competing commercial loan products," commented Jim Brett, head of underwriting at ValueXpress. "The overwhelming motivation has been the ability for sponsors to extract large cash-out loan proceeds from refinancing into a CMBS conduit loan."

Looking at the data, of the $350 million in loans closed by ValueXpress, all but one was a refinance! From the set of refinanced loans by dollar amount, 80% provided cash-out proceeds to the sponsor in amounts ranging from $250,000 to $7.5 million. Of the remaining 20% of the loans, the primary driver for a CMBS conduit loan execution was some level of sponsor (but not property) distress. Approximately $50 million of loans refinanced borrowing entities out of a defensive bankruptcy. Typically, the prior lender had failed, and the note was sold to an investor that immediately called a non-monetary default and moved to foreclose. The borrower then filed for bankruptcy to protect ownership of the asset. The CMBS conduit loan refinanced the property out of bankruptcy.

"Our data suggest that intermediaries who want to successfully originate CMBS conduit loans in volume need to focus on the refinancing of low-leverage, income-producing commercial real estate in which the sponsor has identified a need to extract cash from the asset, typically for another investment," notes Michael D. Sneden, Executive Vice President at ValueXpress. "These transactions are successful because our primary competitors in the small balance market -- community banks -- hate cash out and the cash-out proceeds help mask the higher costs to close a CMBS conduit loan and the negative perception of the prepayment burden as well.”

11.6.13: CMBS Prices See-Saw

The CMBS market is having trouble finding direction subsequent to the pricing of the CMBS offering from RBS and Wells Fargo on Monday, November 4 in which the benchmark super-senior class of the offering was priced at a spread of 93 basis points (bp) over swaps (down from 105 bp on the previous Cantor Fitzgerald issue from late September).

Two additional CMBS transactions priced on Friday, November 8: a $1.13-billion deal from J.P. Morgan and a $1.08-billion deal from Goldman Sachs. For the Morgan deal the benchmark super-senior class priced at 96 bp over swaps, a little softer than the RBS/Wells issue, but still significantly tighter than the 105 bp from the Cantor deal.

The Goldman deal did not fare well. The benchmark super-senior class priced at 108 bp over swaps, far worse than prior deals, including the Cantor deal. There was no consensus among traders why the Goldman deal fared worse, but given both deals priced the same day, it is likely that collateral or loan underwriting metrics accounted for the difference.

"It is interesting to note that pieces of the Miracle Mall Shops in Las Vegas have shown up in the Cantor deal and the Goldman deal, both of which priced wider than other deals that priced around the same time," said Jim Brett, head of CMBS analytics at ValueXpress. "We thought that loan was aggressively underwritten and we have not bought any bonds from issues that contain the split pieces of that loan."

In any event, the inconsistency in new issue CMBS pricing is making it harder for loan originators to set pricing on new loan applications. But the good news for borrowers is that, for now, most CMBS origination shops are leaving pricing unchanged as competition is fierce and many firms believe spread increases will cause them to lose business.

11.1.13: Mike Sneden to Present at Commercial Capital Training Group

Michael D. Sneden, Executive Vice President at ValueXpress, will be presenting CMBS conduit loan origination techniques to the November 2013 class of the Commercial Capital Training Group (CCTG) in Albany, N.Y. on Wednesday, November 20. CCTG is a one-of-a-kind training company that provides a one-week, comprehensive commercial training and education program tailored for new and experienced commercial loan and mortgage brokers. Sneden will be sharing with participants his selling skills, which he has honed from originating $1.5 billion of CMBS conduit loans over a 20-year span. Sneden will be instructing future classes monthly for the foreseeable future, continuing the legacy of Kevin Monahan, who presented at the school on behalf of ValueXpress until his death from cancer in early October.

“I want the CCTG professionals to learn the CMBS conduit loan product, its benefits, its structure and how to sell the product to their clients,” said Sneden. “Then, I want them to lean on ValueXpress to produce positive underwriting and closing experiences that clients will share with other owners to drive more business to CCTG grads, earning them substantial fees in the process.”

“I am responsible for underwriting and closing CMBS conduit loans at ValueXpress,” notes Jim Brett, head of underwriting. “Ongoing, Mike and I will help CCTG grads with qualifying transactions, loan sizing, sponsor education on CMBS loan structure, property/sponsor underwriting and loan closing.”

For more information on Commercial Capital Training Group and how to enroll in the training program, please visit http://www.commercialcapitaltraining.com.

10.30.13: CMBS Conduit Loan Rates Fall

New CMBS loan applications should see a 15-basis-point (bp) decrease in spread based on the results of the most recent CMBS offering from RBS and Wells Fargo that is expected to price on Friday, November 1. The benchmark super-senior class of the offering was being marketed at a spread of 95 bp over swaps. That is down from 105 bp on the equivalent long-term, super-senior tranche of the previous conduit issue, a $1.2-billion transaction that priced on October 24 (COMM 2013-CCRE12). Dealers were reporting strong demand across all of the deal classes.

“We like the asset quality and underwriting characteristics of the RBS-Wells issue and own bonds from four prior RBS-Wells deals,” commented Jim Brett, head of CMBS analytics at ValueXpress. “The RBS-Wells offerings typically have high-quality assets and above-average pool debt yield, which is attractive.”

New CMBS conduit loan spreads should fall about 15 bp in the next few days into a range of 225-250 bp for commercial properties and 250-275 bp for hospitality. A general rule is that borrower spreads move bp for bp with changes in the benchmark super-senior spread from the most recent CMBS issue; however, loan spreads are falling disproportionately to the most recent benchmark super-senior class as CMBS loan originators are cutting their profit margins to compete for additional volume in a slower market.

With the 10-year Swap Index used to set CMBS loan rates at 2.65%, expect to see CMBS conduit loan rates to borrowers for larger commercial properties fall to the 5% area.

10.23.13: ValueXpress Enters New Relationship to Originate SBA 504 Loans on Hotels

ValueXpress recently entered a relationship with a private equity fund to originate SBA 504 loans utilized for the purchase of owner-occupied real estate properties. The investor will pool the 504 first liens and issue securities in the capital markets backed by the loans. ValueXpress will primarily use the program as an alternative to its existing national co-origination platform with a West Coast lender as that relationship will not accept hotels, prefers small balance loans and has very strict underwriting criteria. In addition, the new relationship is aggressive on larger SBA 504 transactions (more than $3.0 million) and has less-rigorous underwriting criteria.

“We have been very active in hospitality lending, but less so recently in the SBA 504 program because our national co-originator left the hotel market in 2009 based on regulatory pressures, and we were unable to find a suitable alternative,” said Michael D. Sneden, Executive Vice President at ValueXpress. “This new national hotel platform will allow us to get back in the market for SBA 504 hospitality loans and larger SBA 504 loans for other owner-occupied properties.”

10.18.13: Kevin Monahan, 1960-2013

On Friday, October 11th, we lost a dear friend and colleague, Kevin Monahan, to pancreatic cancer. I met Kevin in 2005 when he worked at Business Loan Express (BLX) as a Business Development Officer (BDO). We worked together on a construction loan for a Country Inn & Suites hotel in Ithaca, N.Y. for one of my clients. The transaction was very difficult, but Kevin persevered and got the loan approved. Today the hotel is one of the best performing in the Country Inn franchise system.

Kevin was passionate about his work and loved the hospitality industry.  Kevin taught me everything I know about SBA 7(a) lending. He was always willing to share his knowledge with me.

I remember one call from Kevin who was beaming with news, “Mike, I have been named BDO of the year at BLX.” I was not surprised, as his work ethic, patience with borrowers/referral sources and his production levels all pointed to him being a top performer. The recognition was well deserved.

In the spring of 2009, we received word that a tumor had been discovered in Kevin’s pancreas. We were able to follow his journey through a blog written by his wife Phuong (http://mohny.blogspot.com). After his tumor was surgically removed, Kevin began intensive medical treatments that were very fatiguing. In 2010, Kevin asked if he could refer some loan transactions to us. By doing so, it would allow Kevin and ValueXpress to interact, stimulating his mind and distracting himself from his illness. We at ValueXpress agreed wholeheartedly.

Kevin had a passion for sharing his knowledge of commercial lending with others, and he became an instructor at Commercial Capital Training Group, teaching budding mortgage brokers the ins and outs of mortgage origination once a month in Albany, N.Y. Watch a clip of Kevin in action here.

At Kevin’s memorial service, I learned that despite his incredible work ethic, his wife and his three wonderful kids came first with him. There was a slide show at his memorial, and in every picture he had his arms around his wife or kids, always in a hug, which said it all.

Kevin, may you rest in peace.
- Mike Sneden

10.14.13: Spreads and Rates Stable After Morgan Stanley Prices CMBS Issue

On October 10, Morgan Stanley and Bank of America (BoA) priced a $1.3-billion CMBS issue that allowed CMBS loan originators to breathe a sigh of relief as the transaction’s spreads were more in line with those of three multi-borrower CMBS offerings that priced last month compared with those of a deal that Cantor Fitzgerald and Deutsche Bank priced the prior week. The result supported the view that the unexpectedly wide spreads on the Cantor-Deutsche issue weren’t reflective of the broader market.

In fact, some subordinate investment-grade classes in the Morgan Stanley-BoA transaction even priced 10-25 basis points (bp) tighter than comparable bonds in the three September deals. And the spreads were as much as 45 bp tighter than on comparable classes in the Cantor-Deutsche deal.

“We looked at buying some of the Class AM and Class B CMBS from the Cantor-Deutsche deal, but we were surprised by the aggressive underwriting of the top two loans, representing 20% of the issue, both of which were underwritten to the bare minimum Net Cash Flow (NCF) DSCR of 1.25x,” said Michael D. Sneden, Executive Vice President at ValueXpress. “Typically, the top loans are underwritten in the 1.50-1.75x NCF DSCR range, providing assurance that the top loans have plenty of cash flow cushion to absorb any temporary cash flow declines, but not in this case. In addition, the third-largest loan, representing 7% of the issue, is secured by a hotel in Mexico, and that was enough for us to easily pass on the deal,” said Sneden.

“In contrast, in the Morgan Stanley-BoA CMBS issue, the top five loans were underwritten with an average NCF DSCR of more than 1.50x, more typical of recent CMBS transactions,” said Jim Brett, head of CMBS analytics at ValueXpress.

As a result of the better Morgan Stanley-BoA execution, loan spreads to borrowers remained stable in the Swaps plus 250-290 range for a 10-year loan depending on asset type and leverage. With the 10-year Swap in the 280 bp area, interest rates to borrowers remain in the 5.25%-5.75% range.

10.9.13: ValueXpress Enters New Relationship for Small Balance CMBS Loans

ValueXpress recently cemented a relationship with a CMBS lender to originate CMBS loans as small as $2 million. The program features the typical terms of larger CMBS loans and is eligible for all the asset classes covered by larger loans, including multifamily, office, retail, industrial, self-storage and hospitality. In addition, transaction fees are lower than on larger loans, but not quite at the $12,000-$15,000 level that was prevalent in the CMBS conduit loan market prior to the CMBS market collapse in 2008.

“We have been very active in CMBS loans of more than $3 million, but this new lower threshold will allow an additional segment of the market to access CMBS conduit loans,” said Michael D. Sneden, Executive Vice President at ValueXpress. “We had a former partner that allowed CMBS conduit loans to $1 million, but the underwriting standards were tougher than $5-million CMBS conduit loans, so volume was low. This relationship should prove to be much more effective,” said Sneden.

“We are also working with another potential partner on a small-balance securitized loan product that will allow for relaxed prepayment penalties and less structure than CMBS loans, in exchange for a higher interest rate,” said Jim Brett, head of loan underwriting at ValueXpress. “We hope to report more details on this program in the near future.”

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10.4.13: SBA Sidelined by Government Shutdown

It’s October 1 and through failure of Congress to enact a fiscal budget or a continuing resolution to authorize federal spending, all parts of the federal government not deemed “essential” halted operations effective midnight last night.

According to Bloomberg BusinessWeek’s account regarding the first federal government shutdown in 17 years, about 800,000 government workers are being furloughed. In addition, funding is suspended for a wide array of services, including contracts that government agencies award to small business owners.

This means that financing for small businesses will be significantly impaired. The Small Business Administration (SBA), which guarantees tens of billions in loans for tens of thousands of entrepreneurs annually, has furloughed about 62% of its 3,500 workers, according to its response to the threatened shutdown posted on the SBA website last week.

SBA lenders have been here before, but this situation is not nearly as disruptive as the annual 7(a) subsidy fights that Congress went through prior to 2004, which shut down the entire loan program three times in 1995 alone.

“The SBA shutdown is definitely a bummer for us as we have a $5-million SBA 7(a) loan closing in process with our affiliate, Country Bank and we are not sure if we can close the loan because we need the SBA to sign off on the Environmental Site Assessment (ESA) for the project,” commented Jim Brett, the ValueXpress underwriter on the project.

10.1.13: U.S. CMBS Delinquency Report: Rate Declines Sharply in September, Continuing Year-Long Trend

According to Trepp, the CMBS delinquency rate continued its impressive decline in September, marking the fourth consecutive month the rate has fallen. In doing so, the commercial real estate markets shrugged off worries about Syria, the debt ceiling, and the potential impact of tapering bond purchases by the Federal Reserve.

The rate dropped 24 basis points (bp) over the course of the month, bringing the delinquency rate for U.S. commercial real estate loans in CMBS to 8.14%. The Trepp delinquency rate has now fallen 220 bp since the summer of 2012 when the rate peaked at 10.34%. The September rate is the lowest reading since July 2010.

There were about $1.7 billion in newly delinquent loans in September, a sharp reduction from the $2.5 billion in August. These loans put upward pressure of 31 bp on the delinquency rate. Offsetting these new delinquencies were $1.9 billion of loans that cured. This put 35 bp of downward pressure on the delinquent loan reading.

In addition, loan resolutions totaled just under $873 million in September. This represents one of the lowest monthly levels of resolved loans in recent months. Removing these distressed loans from the pool of delinquent assets created 16 bp of downward pressure on the delinquency number last month.

One aspect of the market that merits surveillance over the next few months is the situation with J.C. Penney. The stock's deep decline, along with worries that store closings may be on the horizon, could weigh on the CMBS and CRE markets in the near term.

9.24.13: SBA Releases SOP 50 10 5(F) Lending Guidelines

On September 24, SBA released SOP 50 10 5(F) to the SBA lending community. This SOP (Standard Operating Procedure), effective on January 1, 2014, contains several significant changes to SBA’s requirements in connection with its loan programs. Many of the revisions reflect a continuation of SBA’s stated goals to streamline, standardize and simplify its loan program requirements and alter many long-standing program requirements. A brief summary of the more significant changes follows:

9.20.13: CMBS Spreads Tighten Slightly as Swap Rate Falls

Spreads on new CMBS issues narrowed only slightly as financial markets rallied in response to the Federal Reserve’s surprise announcement that it would keep its massive bond-buying program running full-tilt. However, CMBS conduit loan borrowers still caught a break as the 10-year Swap Index used to set CMBS loan rates fell to 2.89% from 3.04% on Thursday.

New CMBS loan applications should see a 5-basis-point (bp) decrease in spread based on the results of five CMBS offerings during the week of September 16 totaling $3.8 billion. The most recent deal, a $1.1-billion offering by Ladder Capital, Deutsche Bank and Natixis, is expected to price on Monday. Its long-term, super-senior bonds were being marketed with a projected spread of 103 bp over swaps. Equivalent benchmark bonds in a $1.1-billion offering led by Citigroup and Goldman Sachs priced at the same level on Wednesday, just before the Fed announcement. Comparable bonds in a $1-billion deal led by Wells Fargo and RBS priced Monday at 105 bp. That matched the previous conduit issue, which priced August 14 (GSMS 2013-GCJ14).

Investors generally cheered the Fed’s decision to postpone any tapering of its long-running effort to hold down interest rates by scooping up $85 billion per month of Treasury and mortgage-backed bonds. Yet there was little movement in new-issue spreads. That’s partly due to lingering buy-side concerns about taking on long-term risk, since the Fed might still change course by yearend, possibly causing interest rates to rise.

“On one hand, I am glad the market was able to absorb all the new supply and spreads narrowed a bit, good news for new CMBS loan origination,” said Michael D. Sneden, Executive Vice President of ValueXpress. “But on the other hand, we received only $4.2-million from a $5.0-million CMBS order for bonds from the RBS deal as the AS Class that we purchased was 1.25x oversubscribed.”

9.17.13: For Hotels, Is the Party Over?

Two pervasive messages of the Lodging Conference held at the Arizona Biltmore on Tuesday were more qualitative than quantitative, despite the general mindset of commercial real estate investors to focus on numbers.

The key takeaways? The hotel sector’s good times may soon be over -- though that suggestion was, of course, challenged by those who remain cautiously optimistic:

“This year we surpassed the previous peak for hotel values, which was reached in 2006,” said Stephen Rushmore, Jr., president and chief executive officer (CEO) of HVS. “Expect continued growth, in the double digits (on a percentage basis) through 2016, and then proceed with caution.”

Added Mike Patel, principal, NewcrestImage and 2013 chairman of Asian American Hotel Owners’ Association, “The upside potential for hotels is strong, putting pressure on cap rates to go down even as interest rates go up.”

Others in the industry suggest more of a ‘don’t worry, be happy’ outlook. They said, “When things are good, there’s always a trend for people to say ‘things are going to get worse.’ We think it’s our job to predict the next bad time, but none of us are that smart, so just enjoy it.”

Asserted Bernard Siegel, principal, KSL Capital Partners, “The pace of growth won’t be as strong as the last five years, but real rate growth has yet to occur, so there could be some tailwinds.”

Noted David Kong, president and CEO, Best Western International, “Supply is growing at a healthy pace and outstripping demand. I think we have reached our peak, so we need to be cautious and have plans for what’s to come. The strategy has to be growing market share.”

9.10.13: Decline of Enclosed Mall Appears Permanent

The demise of many big-box and department-store retailers has led to a decline in large enclosed malls that won’t reverse itself any time soon -- if ever – according to panelists of the International Council of Shopping Center’s (ICSC) Western Division Conference in San Diego, CA yesterday. Speakers opined that the days of the department store-anchored mall are gone, but many retail models are emerging to replace it.

One of those trends is outlet centers, according to Speaker Michael Marino, executive vice president and division manager for Wells Fargo Bank; he said his firm has financed two or three, even during recent difficult financial times. Another trend is Hispanic grocery-anchored local centers; Mark Schurgin, president of the Festival Cos., said his firm is currently developing eight. And speaking of grocery stores, trends in this area abound, from Internet-ordered groceries via Amazon.com, according to Terry Evans, vice president of the Kroger Co., to retailers like Target adding grocery aisles to their floor plans.

“The Internet use of grocery is one of the biggest trends we’re seeing,” said Evans. “It’s a trend we’re studying and continuing to look at.” The trend is a concern to grocery retailers like Kroger, who don’t want to see their market share eaten up by former non-grocery retailers.

Also growing is the size and number of grocery stores, according to Evans. Kroger’s stores now range from 75,000 square feet to 125,000 square feet, and Evans expects to add 150-175 new major projects over the next three years. He also said that consolidation is not over in the grocery business, and we will hear about other deals taking place over the next couple of years.

9.6.13: 10-Year Swap Rate (Swap) Index Breaks 3%; Treasury Not Far Behind

Although 10-year Swaps and Treasury rates fell Friday after a softer-than-expected U.S. jobs report quelled market expectations that the Federal Reserve will imminently roll back its monetary stimulus, the Swap Index used to set CMBS loan rates broke the 3% mark on August 19; it has traded in a range of 2.95%-3.15% since, hitting the top of that range on September 5. The 10-year Treasury closed at 2.98% on that day, two ticks from 3%.

The unrelenting rise in loan rates is depressing CMBS borrowers as CMBS loan spreads are not declining in tandem with the increase in the Swap Index, leading to higher-than-expected rates on loans under application. Furthermore, borrowers considering a CMBS refinance to secure an attractive long-term fixed rate are backing away now that rates are in the 5.5-6.0% range. On purchase transactions, borrowers are recognizing that purchase cap rates no longer make sense with debt costs up 100 basis points and they are going back to sellers to renegotiate contract prices, delaying deals.

“We are still active in CMBS refinancings in which there is a large cash equity return to the borrower that helps absorb the higher rate, opportunistic refinances (i.e., discounted payoffs, or pay offs of debt acquired by a third party) and loans refinanced at maturity,” commented Michael D. Sneden, Executive Vice President of ValueXpress, “but the discretionary borrower looking for a rock-bottom rate is gone. That borrower is often opting for a community bank loan; those institutions are slow to adjust their loan rates to current market conditions, providing banks a current competitive advantage over CMBS in terms of rate.”

9.3.13: Time to Get Creative with Earnouts

ValueXpress recently originated two CMBS loans on unstabilized properties in which the sponsors would not have received adequate loan proceeds based on the property’s limited historical operating statements. Working with a long-time CMBS lending partner with an aggressive entrepreneurial focus (yes, some of the CMBS shops are very creative), the transactions were structured with earnouts, whereby the entire amount of desired proceeds were rate-locked and funded at closing, but a portion of the funds above a pre-determined Debt Yield were placed in escrow. The sponsor, over a pre-determined period (6 months on one deal and 12 months on the second deal), submitted updated trailing 12-month cash flow statements monthly that would include a current, high performing month of cash flow and drop off a worse performing month from the prior year; the result was higher underwritten Net Cash Flow and higher loan proceeds at the pre-determined Debt Yield. After a number of months, the Net Cash Flow reached levels such that the entire earnout was released to the borrower as the Net Cash Flow on a trailing 12-month basis supported the entire loan amount, including the earnout at the predetermined Debt Yield.

“These transactions would have never closed in the absence of the earnout structure,” commented Michael D. Sneden, Executive Vice President of ValueXpress. “In the end, one deal hit its Debt Yield target in three months and the second transaction is expected to hit its target in six.”

8.29.13: Off Track: Subway Franchisees Decry Deep Discounts

“Since we have provided numerous SBA loans to Subway sandwich shop owners and as a subscriber to the $5.00 foot-long bargain myself, I found this New York Post article written by Josh Kosman intriguing and thought I would share parts of it with our readers,” commented Michael D. Sneden, Executive Vice President of ValueXpress.

This summer wasn’t the best time for Subway sandwich shops — the world’s largest restaurant chain — to stumble. Founder and Owner Fred DeLuca, the driving force and vision behind the Milford, CT, chain’s growth into a 40,000-unit chain, is in a Connecticut hospital being treated for leukemia, and he has told associates he is awaiting a bone marrow transplant. The hands-on owner is still in daily contact with regional managers trying to find new ways to reverse a sales decline, a Subway development agent told The Post.

Same-store sales at the closely held company dipped 2% last month and are down over the last several months, the first declines in recent memory, sources close to the company tell The Post. In June DeLuca launched a $4 lunch special — a six-inch sub, beverage and chips — and plans the re-introduction next month of the company’s popular $5 foot-long campaign. But the plans are not going down well with many of the company’s franchisees. At that price, franchisees complain, they just barely cover their costs.

“There are not any Subway owners who like it,” a franchisee who owns three stores told The Post. “Everybody is pissed off.” Margins at a typical store, where revenues are about $400,000 a year, are now between 8% and 10% because of the price cuts, the franchisee said. Just a few years ago, margins were 12%, according to the franchisee.

8.23.13: Changes Around the Corner for Environmental Site Assessments

Nearly all CMBS lenders obtain a Phase I Environmental Site Assessment report as part of the property diligence process. EMG, an industry leader in delivering Phase I Environmental Assessments and a member of the ASTM E50 Committee, reports that the committee is currently finalizing changes to the E1527 "Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process," with an expected release date this fall.

EMG anticipates three key changes.

1. Key Definitions:
* The definitions of Recognized and Historic Recognized Environmental Conditions (REC and HREC, respectively) will be simplified.
* A new definition of "Controlled Recognized Environmental Conditions" (CREC) will be introduced to identify RECs that have been conditionally closed.

2. File Reviews:
* Where applicable, Environmental Professionals will have a duty to consider the significance of available regulatory agency files and provide a rationale if these files are not reviewed. This could result in slightly more File Review recommendations and yield a greater degree of certainty in conclusions.

3. Vapor Encroachment:
* Though Vapor Encroachment and Vapor Intrusion studies will not be required by the standard, Environmental Professionals will be required to consider soil vapor as a potential pathway for the migration of contaminants.

8.19.13: In Bustling Houston, It's a Case of “Build, Baby, Build!”

HOUSTON/NEW YORK (Reuters): With Texas one of the few bright spots in the U.S. economy, the skyline of swaggering Houston is where the action is as builders and global oil companies, from Phillips 66 to Exxon Mobil Corp, look past previous busts and spend billions on gleaming new buildings.

The U.S. shale oil and gas revolution -- which has already changed industries from railroads to pipelines and refineries -- is helping drive the voracious appetite for office space needed for the expanding work force in the world's energy capital.

Demand is so hot that Houston is one of the few places where banks -- including Wells Fargo & Co., which is seen as one of the more conservative big banks -- will loan money for a new building without demanding developers first have a tenant.

"Houston is booming and bar none the strongest market in the United States of America," said Joseph Sitt, chief executive of Thor Equities, which has two projects under way in Houston.

There are some 56 office buildings totaling at least 11 million square feet under construction in and around Houston, according to real estate services firm CBRE Group Inc. That space is equivalent to 190 football fields.

In the forested suburbs, Exxon has what it calls "one of the largest commercial construction projects under way in North America." The nearly 400-acre campus with 20 buildings will have enough room for 10,000 employees.

8.14.13: SBA Compliance Review -- Critical Issues

Lenders need to monitor some missteps that could mean a possible impairment to the SBA guaranty and should be taken seriously when making, closing, and servicing an SBA loan portfolio should the lender be audited by the SBA.

Examples of critical issues that are common in a loan review are as follows:

1. Form 1050 and disbursement documentation:
SBA requires that the lender disburse the loan proceeds in accordance with the uses of proceeds stated in the Loan Authorization. In order for a lender to demonstrate its adherence to this requirement, it must control disbursement by use of joint payee checks or other means of limiting payment, and it must document its files to show that the loan funds were used for the intended purposes (e.g., pay a vendor directly from loan proceeds based on an invoice in file showing the purchase of an item authorized for payment under the Loan Authorization). Lenders must document each disbursement on an SBA loan. The lender and borrower must complete and sign Form 1050 at the time of first disbursement. If there are subsequent disbursements, the lender must document each disbursement and attach the documentation to the original Form 1050.

2. Equity:
Inadequate equity documentation effectively compromises the full viability of the guaranty. This is a significant issue when the loan becomes an early default. SBA has provided better guidance on how to properly document a loan file for the borrower's equity contribution; it now defines the process in three areas (equity evidence, equity source, and equity use). It is important to document the equity exactly as it is depicted in the SBA loan authorization.

3. Verification of financial information:
SBA requires that lenders obtain and review IRS tax transcripts to verify borrowers' financial information. Also, when loan proceeds will be used to purchase an existing business and prior income is being used to support the selling price, the lender must verify the sellers' financial information by obtaining IRS tax transcripts. The lender should document that any issues found in the verification process should be explained and resolved before loan disbursement. If the issues are not resolved, the lender should not disburse until SBA approval has been provided.

8.9.13: Market Swallows Flood of CMBS Issues at Tighter Spreads

CMBS buyers returned to the market to gobble up the latest wave of multi-borrower offerings – four deals totaling more than $4 billion. Furthermore, prices generally tightened on each issuance. Now, new-issue prices on benchmark paper from commercial MBS offerings have retraced almost half of their recent decline.

This week, the long-term, super-senior bonds from a fifth offering, a $1.24-billion offering by Goldman Sachs, Jeffries, Five Mile Capital, Citigroup and Starwood (GSMS 2013-GCJ14), is being shopped at 98-100 basis points (bp) over swaps, slightly tighter than the comparable bonds from a $1-billion offering by Cantor Fitzgerald, Deutsche Bank, KeyBank and UBS (COMM 2013-CCRE10) that priced August 1 at 100 bp over swaps, the tightest spread seen since early June. Those benchmark bonds had been shopped with price guidance of 105-110 bp. Equivalent paper from the previous two conduit issues priced July 17 at 115 bp (GSMS 2013-GC13) and 120 bp (WFCM 2013-LC12).

Also on August 1, the benchmark bonds in an $856.3-million offering by Bank of America, Morgan Stanley and CIBC (MSBAM 2013-C11) priced at 105 bp, which was 5 bp tighter than talk.

Further down the capital stack, Class B CMBS tightened in tandem with the long-term, super-senior bonds, as the Class Bs from the Goldman deal are being shopped at 175 bp, down from 215 bp on the Wells Fargo deal and 190 bp on the most recent Cantor deal.

“Based on the results of CMBS spread tightening, we are seeing spreads to borrowers tighten another 10-15 bp to the 235 bp area for commercial assets and 260 bp area for hotels," commented Michael D. Sneden, Executive Vice President at ValueXpress. "With the 10-year Swap Rate (Swap) Index hovering around 2.80%, all-in rates to borrowers are falling toward the 5% area right now."

8.7.13: Blackstone Is Expected to Sell Hilton in IPO

As private equity firms rush to cash in on their investments, the Blackstone Group is moving to sell one of the biggest companies to go private in recent years. Hilton Worldwide, the hotel giant that Blackstone bought six years ago, has begun preparations for an initial public offering (IPO), people briefed on the matter said on Wednesday. That includes hiring four banks – Deutsche Bank, Goldman Sachs, Bank of America Merrill Lynch and Morgan Stanley – to start the process. An offering for Hilton, whose more than 4,000 properties are as diverse as Hampton Hotels and the Waldorf-Astoria in Midtown Manhattan, would probably be in the first half of next year, one of these people said.

Private equity firms have been eager to sell their companies, either outright or through an IPO, to take advantage of booming stock markets and generate realized profits for themselves and their limited partners.

Blackstone, the world’s largest buyout firm, also is working on an IPO for its La Quinta hotel chain, a person with knowledge of the matter said earlier this week. Blackstone hired JPMorgan Chase & Co. and Morgan Stanley to explore a sale or IPO of La Quinta, the person said.

7.30.13: SBA Chief Karen Mills Leaving with No Replacement Named

When Karen Mills announced in February that she would not stay on for a second term as head of the U.S. Small Business Administration (SBA), she still planned to remain in her post until the government agency named a replacement. But those plans apparently changed as Mills told the SBA staff on a conference call Wednesday that she will be leaving her post at the end of August.

In September 2010, the SBA selected ten economic "clusters" as part of a pilot program to aid regional businesses. Each cluster is a collaboration of businesses, non-profits and academic institutions to advance a specific sector, ranging from nuclear energy to agriculture. The idea, according to SBA Chief Mills, is to support small business participation in regional clusters, "which are enhancing the ability to create jobs locally and compete on a national and global scale."

Mills will continue work on economic issues surrounding entrepreneurship at both Harvard Business School and Harvard’s Kennedy School starting this fall, according to a statement from Emily Cain, press secretary for the SBA. In addition, Mills will “pursue business opportunities,” Cain says. Specifics were not provided.

7.26.13: Small Balance, Higher Leverage CMBS Loans Available

Higher leverage CMBS conduit loans are now available for small balance (greater than $5 million) transactions utilizing a first mortgage and mezzanine loan combination that is seamless to the borrower. Leverage can be up to 75% for hospitality properties and 80% for commercial/multifamily properties.

"Historically first mortgage and mezzanine loan combinations in CMBS were only available on loans of $20 million and up, and the conduit lender needed to team with a mezzanine lender, creating an inefficient and costly execution," said Michael D. Sneden, Executive Vice President at ValueXpress. "This program allows for smaller balance transactions as low as $5 million, and the mezzanine portion of the loan is handled in-house. The borrower receives one blended interest rate and makes one payment. The underwriting process is efficient and less costly."

The loan product is available for all asset classes that qualify for standalone CMBS conduit first mortgage loans -- commercial, multifamily/MHC, self-storage and hospitality. There are caveats, however; no cash-out (and preferably some cash in), no credit issues with the sponsor, newer assets and strong markets are required.

"This product is exceptional for situations in which the existing loan balance on a maturing loan cannot be cleared through a 70%-75% standalone CMBS conduit first mortgage loan," said Gary Unkel, Senior Originator at ValueXpress. "A client was 15% short on loan proceeds to clear a refinance of existing debt and was unwilling to fund all the shortfall. In the end, the borrower agreed to fund about 5% of the shortfall including closing costs, and the 10% additional leverage provided by the first mortgage and mezzanine loan combination covered the balance. Furthermore, the blended single rate was not that much higher than a standalone CMBS conduit first mortgage loan rate."

To obtain a quote for a CMBS conduit loan scenario requiring additional leverage, contact your ValueXpress representative.

7.24.13: CMBS Prices Rise Before Next Wave of Offerings

Commercial MBS values continued to slowly move upward during the week of July 22 as issuers began marketing or prepared to roll out four offerings totaling more than $2.5 billion, according to Commercial Mortgage Alert.

On Friday, Bank of America, Morgan Stanley and CIBC launched an $856-million multi-borrower offering, while an additional two deals close to being launched are also multi-borrower transactions. One is a $1.1-billion offering by RBS, Wells Fargo, National Cooperative Bank, Liberty Island, C-III Commercial Mortgage and Basis Real Estate Capital. The other, led by Deutsche Bank and UBS, is expected to be at least that large.

With the prevailing spread on long-term, super-senior bonds from the latest generation of conduit issues tightening by about 5 basis points (bp) over the past week in the secondary market, these levels will likely be reflected in price guidance on these new issues.

Yesterday, Wall Street dealers were willing to buy such bonds at a spread of roughly 105 bp over swaps and sell them at 100 bp. The bid-ask was about 110-105 bp a week ago, after comparable super-senior bonds from two recent conduit offerings priced July 17 with spreads of 115 bp (GSMS 2013-GC13) and 120 bp (WFCM 2013-LC12).

"Based on the results of CMBS spread tightening, we are seeing spreads to borrowers tighten 15-20 bp to the 250 bp area for commercial assets," commented Michael D. Sneden, Executive Vice President at ValueXpress. "The new spread levels are providing some relief to borrowers who were shocked at the rapid rate increases that occurred after Ben Bernanke spoke at a press conference on June 19. With the 10-year Swap Rate (Swap) Index hovering around 2.80%, all-in rates to borrowers are in the 5.30% area right now."

7.17.13: SBA 7(a) Premiums Recovering After Rough June

Secondary market premiums on the sale of SBA 7(a) loan guarantees are recovering from declines experienced in June after Ben Bernanke spoke at a June 19th press conference and fixed-income markets roiled in reaction based on perception that the Fed could begin phasing out bond buying later this year and halt purchases around mid-2014 as long as the economy meets its forecast. After premiums held at record levels of 118.75 since February 2013, pricing fell to 117.50 by the end of June. However, indications are pricing has recovered to the 118 level as of mid-July.  The market tone is improving along with other fixed-income products as now analysts believe markets overreacted to Bernanke's comments.

2013 Premium*
Jun 117.50
May 118.75
Apr 118.75
Mar 118.75
Feb 118.75
Jan 117.50
2012 Premium*
Dec 117.50
Nov 117.00
Oct 117.00
Sep 116.00
Aug 116.00
Jul 115.50
*Based on Prime + 2.75%, Quarterly Reset, 25-year loan term.

"We continue to pursue SBA 7(a) loans in the five-state footprint surrounding New York City for our affiliated bank, Country Bank," said Michael D. Sneden, Executive Vice President at ValueXpress. "We are working on a $5-million SBA 7(a) loan right now, and at 118, that would be a net profit of $525,000 on the $3,750,000 guarantee sale after the split with the government, a nice day's work! Plus Country Bank will receive $37,500 annually in servicing fees during the life of the loan."

7.12.13: CMBS Delinquency Plummets

In June, according to Trepp, the CMBS delinquency rate posted its lowest reading in almost three years. The 42-basis-point (bp) drop in the delinquency rate was the biggest one-month improvement since Trepp began publishing a monthly rate in fall 2009. Four of the five major property types saw their delinquency rates fall in June. The delinquency rate for U.S. commercial real estate loans in CMBS was 8.65% in June. This was the first time the rate has dropped below 9% since November 2010 and the lowest percentage since the October 2010 rate of 8.57%.

The resolution of distressed CMBS loans has been a major factor in driving the delinquency rate lower this year, as was the case in June. Loan resolutions totaled $1.25 billion in June, up sharply from May's about $858 million. The removal of these distressed loans from the delinquent assets bucket last month created 23 bp of downward pressure on the delinquency number. At the same time, about $1.25 billion in newly delinquent loans was recorded in June, approximately half of May’s total. This put upward pressure of 23 bp on the delinquency rate, negating June's high level of loan resolutions.

Despite the huge improvement in the delinquency rate, investors ended the month of June asking themselves if the latest salad days for the CMBS market are about to end. The huge wave of new CMBS issuance, refinancing of older loans, new property sales, and higher prices and velocity of selling distressed properties were driven by five-year lows in CMBS spreads and microscopic Treasury yields. Since May 1, however, the yield on the 10-year Treasury is almost 100 bp higher and CMBS AAA spreads 30-40 bp higher. This means significantly higher borrowing costs for property owners, a potential hindrance for many factors driving delinquencies lower.

7.9.13: Swap Rates and Loan Spreads Stabilize...for Now

After the 10-year Swap Rate (Swap) Index used to set CMBS conduit rates jumped from 2.37% to 2.60% on June 19 while Federal Reserve Chairman Bernanke spoke at a press conference and further spiked to 2.86% on Monday, June 24, the index has settled into a range of 2.80%-2.90%. Since the July 4th U.S. holiday, the index has traded within this band, and traders are seeing stabilization of the Swap at these levels. Federal Reserve Chairman Bernanke gave markets some respite this week when he signaled in the release of the June Fed meeting notes that his signature bond buying program could continue to mid-2014.

Similarly, CMBS traders are seeing stabilization of spreads from recent CMBS deals. For example, benchmark bonds from recent CMBS issues were changing hands in the secondary market at spreads of 120-125 basis points (bp) yesterday -- roughly the same as early last week, when the previous conduit issue priced. “The spreads are pretty similar. If anything, they’re 2-3 bp tighter now,” one trader said.

“The stabilization of the indexes that set borrower interest rates is resulting in consistency in new loan quotes to borrowers,” commented Michael D. Sneden, Executive Vice President of ValueXpress. “We are seeing spreads to borrowers in the swaps-plus-275 range for a full-leverage small balance (< $10 million) conduit loan with a 10-year term, resulting in interest rates in the area of 5.5%.”

“We are recommending, however, that our clients negotiate lower interest-rate floor levels in their loan applications as market pros believe that Swap rate and/or CMBS prices will trend downward and a lower floor will allow borrowers to capture potentially lower rates,” said Sneden.

7.3.13: New SBA Change-of-Ownership Rules

On July 1, 2013, the Small Business Association (SBA) released a revision to SOP 50 10 5(E) that revised and clarified the SBA’s requirements for financing change-of-ownership transactions with SBA-guaranteed loans. Prior to this revision, the SBA had restricted SBA financing for change-of-ownership transactions that were structured as stock purchases where the stock (or ownership interest) of the selling shareholder(s) was being purchased by an individual or individuals. The new rules lift this restriction and greatly simplify the requirements governing change-of-ownership transactions for SBA lenders.

The new guidelines allow for a change of ownership to be achieved through an asset purchase, a stock purchase, or a stock redemption. The revised language of the SOP provides for two basic scenarios in which a change of ownership can occur: (1) a change of ownership between existing owners and (2) a change of ownership that results in a “new” owner.

A change of ownership between existing owners may be accomplished either through a stock purchase or a stock redemption. Whether structured as a purchase or redemption, the remaining owners must own 100% of the stock at the completion of the transaction. If structured as a purchase, the individuals acquiring the stock and the company whose stock is being acquired must be co-borrowers on the loan. If structured as a redemption, the business whose stock is being redeemed must be the borrower and the remaining owners may be either co-borrowers or guarantors.

A change of ownership resulting in a new owner may be structured as either a stock purchase or an asset purchase. If structured as a stock purchase, 100% of the stock may be purchased either by an entity or an individual who is not an existing owner of the business. If the purchaser of the stock is an individual, then the individual and the target must be co-borrowers on the loan. If the purchaser of the stock is an entity or if the transaction is structured as an asset purchase, then the business being acquired may be a co-borrower on the loan.

6.30.13: Bob Taylor Joins ValueXpress

Bob Taylor, a 15-year veteran in commercial real estate lending, has joined ValueXpress effective July 1. Bob will be primarily responsible for commercial loan originations in the western portion of the United States. Bob will be based in Salt Lake City, Utah.

“Bob brings an outstanding breadth of experience to the ValueXpress team from his stints at Johnson Capital, Greystone, Arbor Commercial Mortgage and Madison Capital,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “Bob produced primarily HUD 223f and 221d4 multifamily loans at these shops and is excited to broaden his menu to include Fannie/Freddie and CMBS multifamily loan products.” In addition, Bob will be originating CMBS conduit loans secured by commercial properties from his extensive contacts with developers, investors, commercial bankers and other intermediaries.

“I am very excited to be working with Mike and his team,” said Bob. “ValueXpress has an excellent reputation in the market for service. They get it done, but the firm is not as well known in the West. My job will be the get the word out and markedly increase the volume of originations west of the Mississippi.”

“I am particularly energized to originate CMBS conduit loans, given the resurgence of the product since 2010 and the ability to fund loans is all 50 states,” said Bob. “I will be hitting the primary markets in my region to kick off – Salt Lake, Denver, Albuquerque, Phoenix and Las Vegas.” Bob can be reached at btaylor@valuexpress.com or at 801-499-0213.

6.26.13: Prudential’s Lillard Says Buy CMBS as Bonds Overreacted

Prudential Financial Inc.’s Michael Lillard said investors should buy commercial mortgage-backed securities and other bonds that fell on concerns the U.S. Federal Reserve will slow its pace of debt purchases.

The increase in yield provided by CMBS, emerging-market debt, high-yield bonds and bank debt makes those assets particularly attractive, according to Lillard, the chief investment officer at Prudential Fixed Income. Newark, New Jersey-based Prudential, the second-largest U.S. life insurer, has more than $1 trillion under management.

“You’ve seen a big overreaction to the Federal Reserve,” Lillard said at a June 26th event in New York. “We really think it’s a situation where commercial real estate is pretty solid.”

Fixed-income assets have fallen since May 22 when Fed Chairman Ben S. Bernanke told Congress that the Central Bank’s bond purchases may be reduced if the U.S. employment outlook shows sustained improvement. Bernanke said on June 19 that the Fed could begin phasing out bond buying later this year and halt purchases around mid-2014 as long as the economy meets its forecast.

“Yields have overreacted here and they’re too high,” Lillard said. “In our portfolios right now, we’re actually somewhat long duration, and we expect yields to retrace.”

Lillard said he recommends the highest-quality CMBS issues. Investors are demanding 1.2 percentage points more than the benchmark swap rate to buy new CMBS tied to shopping malls, skyscrapers, hotels and apartment buildings, according to data compiled by Bloomberg. That’s up from 72 basis points in February, the narrowest spread since sales revived in 2009. A basis point is 0.01 percentage point.

6.24.13: CMBS Borrowers Shell Shocked over Rapid Rise in Rates

Borrowers are struggling to come to grips with what happened to CMBS loan rates over just a few days since Ben Bernanke spoke at a press conference on Wednesday, June 19. The 10-year Swap Rate (Swap) Index used to set CMBS conduit rates was at 2.37% that day, already reflecting an increase from just a few weeks earlier. But what happened during the time Bernanke spoke was stunning. The Swap increased dramatically, reaching 2.60% by the close of the day and spiking further to 2.86% on Monday, June 24. Over a span of just three full business days, the Swap blew out 50 basis points (bp)!

To make matters worse, investors in CMBS securities fled the market, unwilling to invest in 10-year CMBS securities with markets volatile and the value of existing CMBS securities falling. This week, J.P. Morgan was shopping the benchmark 10-year triple-A class of a $961.2-million offering at 125-bp area over swaps. That was 5 bp wider than the comparable long-term, super-seniors from an offering that priced Monday, June 24 and a whopping 22 bp higher than the equivalent tranche of a June 14th deal and an amazing 40-plus bp higher than four weeks ago.

Generally, a 1 bp increase approximates a 1 bp increase in loan spread for a CMBS shop to maintain the same profit margin. So between 50 bp in Swap increase and 40 bp increase in loan spread, borrower quotes are now 90 bp higher than prior to June 19.

“It’s hard to explain this to borrowers because it’s so dramatic,” said Michael D. Sneden, Executive Vice President at ValueXpress. “Borrowers think CMBS issuers are not being truthful or are trying to pad their profits or something else to the disadvantage of the borrower, since they have no power over pricing. I send them this 10-Year Swap chart and send them the pricing from recent CMBS deals so they can see what’s happening in black and white.”

“Thankfully, many experts believe the market has overacted (see previous article),” commented Jim Brett, head of CMBS analytics at ValueXpress. “I hope this is the case as otherwise we could be facing a slow summer in terms of CMBS conduit loan originations.”

6.14.13: CMBS Shops Challenged to Hold Spreads in Tough Market

CMBS conduit loan interest rates, typically set at closing, are based on two numbers added together: the 10-year Swap Rate (Swap) Index and the “Spread” (an amount added to the Swap based on current CMBS bond prices and a profit margin). CMBS conduit loan borrowers are facing a double hit on interest rates as the Swap continues to rise; it reached a 2013 high of 2.43% on Tuesday, June 11 before retreating slightly at the end of the week.  This is an increase of 60 basis points (bp) from 1.82% recorded five weeks ago.  An excellent chart showing the history of the Swap can be found here.

While a 60 bp increase in the Swap is painful enough for CMBS conduit borrowers, trouble is brewing on the CMBS bond side of the equation as well: Bond spreads are widening.  We had a conversation with one of our lending partners about the situation:

Mike and Jim: As I am sure you are aware and noted below, price guidance for AAA CMBS bonds for the JP Morgan deal that is currently in the market is S+103 (previously S+80, so 23 bp wider than 2 weeks ago).  Bond classes all the way down the capital stack are also significantly wider.  Please note that the JP Morgan deal has still NOT priced at these levels as JP has limited bids for its bonds, and thus, the market believes the AAA spreads will be gapping out to S+115 (35 bp wider than 2 weeks ago).

Lending Partner: I am not planning to widen any quotes or loans that are currently under application at this time.  My view is that if the market calms down, credit spreads will tighten back into the S+80 range and there would be no need to change quoted levels.  If that market does not tighten and the Borrower has chosen NOT to rate lock, I may have to widen pricing on a case-by-case basis, but will communicate this to you and the client in advance of closing.

6.11.13: 8th Annual SAHOA Golf Tournament and Trade Show Big Success

On Wednesday, May 29, 2013 ValueXpress was among the sponsors for the 8th Annual San Antonio Hotel Owners Association Golf Tournament at the Hyatt Hill Country Golf Club in San Antonio, TX.

 

130 golfers took to the links under threatening skies (but thankfully the rain held off) to compete in two- and four-man scramble competitions, following longest drive and closest to the pin competitions.  The golf course was in excellent condition and greens played fast.

 

In the evening, awards were handed out and a Texas Hold‘em tournament commenced. “I am embarrassed to admit that I never played Texas Hold’em before,” said Michael D. Sneden, Executive Vice President of ValueXpress.  “But my colleague Jay Bhakta is a seasoned gambler and helped me through.  At one point I was up a few thousand dollars, but I lost it all on a bold but losing ‘all-in’ bet,” said Sneden.  “It was great fun, and all the money goes to charity.”

The next day featured the Texas Hotel Owners Association/Asian American Hotel Owners Association (AAHOA) Joint Industry Trade Show. “We had tremendous traffic at our trade show booth. We signed up $40 million of new business,” commented Jay Bhakta, Senior Loan Originator at ValueXpress for the southern region of the United States.  “Texas remains a great market for us, as the energy boom is really boosting hotel performance in Texas and surrounding states.”

6.4.13: CMBS Lenders Offering Bridge Loans for Construction/Renovation/Repositioning

CMBS shops are using all their know-how in structuring fixed-rate CMBS conduit loans and applying this to bridge loans to capture attractive short-term investment yields and secure an opportunity to provide a fixed-rate CMBS conduit loan once the construction/renovation/repositioning period is complete.

“I have not pursued short-term lending opportunities historically as I struggled to understand the types of transactions that are suitable for bridge financing; the risk profile is so much greater than for a stabilized property,” said Kevin Monahan, Senior Loan Originator at ValueXpress for the eastern region of the United States.  “But recently one of our investment bankers made it easy for me to understand. He said, ‘Kevin, any transaction greater than $10 million that would result in a fixed-rate CMBS loan after the business plan is executed that clears the bridge loan would be what we are after.’ ”

“Okay, I get that.  I know what qualifies for fixed-rate CMBS financing since we do that all day long. Immediately what comes to mind is renovation and lease up of well-located commercial and retail properties, reflagging and PIP renovations for tired hotels in good locations, and ground-up construction for pre-leased or partially leased properties. I think I will simply begin with these opportunities,” said Monahan.

Not everyone qualifies for bridge financing despite having an opportunity that would result in a qualified fixed-rate CMBS loan.  The project must be located in a strong, primary market and the sponsor must have substantial experience with similar projects.  In addition, equity investment on the order of 30%-35% plus additional liquidity is required.

5.31.13: Swaps Widen Based on Bernanke Comments

The 10-year Swap Rate (Swap), the index used to set the interest rate for CMBS conduit loans, recently widened and is now above its 2013 range. For most of 2013 to date, the Swap has traded within a range of 1.80%-2.10%, but the Swap closed at 2.17% on May 27, the highest level so far this year.

Industry pros are suggesting that the trend of rising rates relates to concerns regarding comments made by Federal Reserve Chairman Ben Bernanke; he said that the central bank could begin tapering its bond-buying program in the next few meetings if there are signs of sustained gains in the economy. New York Federal Reserve Bank President William Dudley said on Wednesday, May 22, that Fed officials could reach a decision on quantitative easing in the next three or four months. Earlier this month, the “Wall Street Journal” reported Fed officials were discussing the winding down of the $85-billion monthly bond-buying program, though the timing was still being debated.

“Historically, the government has not tended to phase in policy changes over very long periods of time, and as a result, markets have been dislocated,” said Michael D. Sneden, Executive Vice President at ValueXpress. “Does anyone remember the Tax Reform Act of 1986, which wiped away tax advantages from depreciation? Real estate values plummeted 30% overnight and the Savings & Loan banking crisis of 1989 was a result,” said Sneden. “Had the government phased in the changes over a 5- or 10-year period, the crisis could have been averted.”

Now the government is a bit smarter, but with the ability to transmit information at a moment’s notice through the internet and the ability for markets to immediately trade on the slightest information, even if the Federal Reserve tapers its bond buying by $1, watch out.

5.27.13: Single-Borrower CMBS Transactions in Vogue Despite Rating Agency Disagreement

Issuance of single-borrower CMBS deals so far this year has reached $12.1 billion, more than the $10.1 billion issued in all of 2012, according to data from Commercial Mortgage Alert. Assisting in the rise of the single-loan asset securitization market, say investors and analysts, is a tweak in how some commercial-mortgage deals are evaluated by credit-rating firm Standard & Poor's. Since the N.Y. company changed its standards for single-borrower bonds last September, the volume of such offerings has more than doubled. S&P's rating market share in single-loan bonds has surged. The trend of single-asset deals is "disturbing" to industry pros as most believe investors would be better served if these loans were bundled into multi-borrower transactions with meaningful diversity.

Meanwhile, rating agencies Moody’s and Fitch are in disagreement on the use of “pro forma” underwriting when calculating cash flow levels in order to determine property values and, ultimately, subordination levels for deals they rate. Pro forma underwriting is widely recognized as one of the factors that caused high delinquency rates for loans originated in 2006-2007, when the use of pro forma cash flows was prevalent. The issue came to a head based on each agency’s view of the $1-billion single-asset CMBS financing of the Seagram Building in Midtown Manhattan. Using pro forma occupancy and rents, Moody’s gave an investment-grade rating to $670 million of the loan, while Fitch, using in-place rents and occupancy, said only $510 million of the loan was worthy of an investment-grade rating.

“We are not a fan of single-borrower CMBS transactions and have never bought CMBS from one, preferring the diversity provided by multi-borrower CMBS deals,” commented Jim Brett, head of CMBS analytics at ValueXpress. “For sure, we would never buy bonds from a single-asset deal with pro forma underwriting.”

5.22.13: Fannie Mae and Conduit Rates Converging for Multifamily

With Fannie Mae’s recent 10-basis-point increase in fees it charges lenders to guarantee loans and the continued decline in CMBS conduit rates, the rate gap between the two multifamily products is diminishing, particularly for smaller balance (under $10 million) loans on “B” quality multifamily properties. In addition, CMBS loans with cash-out are now readily available at 75% LTV, competitive with Fannie Mae’s 75% LTV cash-out product.

“Prior to the 2007-2008 crash of the CMBS market, CMBS loans went head to head with Fannie Mae in terms of rate and proceeds,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “But with more underwriting flexibility (i.e., no requirement that the property be 90% occupied for 90 days prior to loan funding), CMBS took its fair share or more of the multifamily market.”

“The collapse of the CMBS market allowed Fannie Mae (and Freddie Mac) to take control of the market, and it has been a challenge to win those clients back,” commented Gary Unkel, Senior Loan Originator at ValueXpress. “But now with rates and proceeds on similar footing, those clients are coming back to CMBS due to more flexible underwriting and faster processing speeds.”

“We recently had a deal under application with Fannie Mae,” said Jim Brett, Senior Loan Underwriter at ValueXpress. “The transaction is a portfolio of six apartment buildings, so the deal is complex. Since the properties are located in a flood area, Fannie required additional reserves beyond the FEMA limits and Fannie also reduced the LTV from 70% to 60%. We switched the loan to CMBS and expect to close at 70% LTV within 30 days at a rate that is only slightly higher than Fannie’s offer,” said Brett.

5.17.13: A ValueXpress Trademark – The Weekly Conference Call

A signature of ValueXpress CMBS conduit deals is the weekly conference call. At the beginning of each transaction, a working party list including borrower and borrower’s counsel and lender’s counsel and lender’s underwriting team is distributed and a set weekly conference call is scheduled. The initial kickoff call is usually one to two days after the borrower’s application is received with the transaction deposit.

“What is great about these weekly calls is they get all parties on the same page in terms of the closing time frame, which at 35-45 days is extremely quick,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “Lender’s counsel lays out the closing checklist items and provides borrower’s counsel with their marching orders, while Jim Brett, Senior Underwriter at ValueXpress, is usually way out in front on the property diligence.”

“The call is really a head’s up for borrower’s counsel not to let the schedule slip,” commented Jim. “Often the property diligence side of the transaction is completed in advance of legal work, and the weekly call keeps borrower’s counsel on their toes, as they really do not want to be embarrassed on a weekly call by not showing any progress on the legal side of the transaction with their client on the phone,” notes Jim.

“We really only started this process with the restart of CMBS in 2010, and as I look at my pipeline, we are closing deals 10-15 days faster than pre-2007 CMBS deals, which is a benefit to our borrowers with tight closing time frames,” said Sneden.

5.13.13: ValueXpress to Sponsor Volleyball Tournament in Houston, TX

On Saturday and Sunday, May 25-26, 2013 ValueXpress will be sponsoring a Volleyball Tournament at Spike Sports Club on Gessner Road in Houston, TX. The tournament features 350 players, primarily Asian-American hoteliers from Texas, Louisiana and Mississippi, on 32 teams.

This event – run in a round-robin format with two divisions: 35 years and older and under 35 – will use all eight of Spike’s courts. Jay Bhakta, Senior Loan Originator for the southern region of the United States for ValueXpress and 15-year volleyballer, will be participating both as a player and a referee.

“The ability to play volleyball at a high level is not a job requirement, but since Jay has played on numerous successful teams over the years, we will take it,” said Michael D. Sneden, Executive Vice President at ValueXpress.

“We are doing so much business in Texas, I told Mike we need to take advantage of every opportunity to stay in front of potential borrowers,” said Jay. “When we were approached by an existing client, one whom we recently provided financing for, to sponsor this event, we immediately said yes. Clearly, all of my referee calls will be in favor of those who have done business with ValueXpress!” declared Jay.

5.9.13: A River Runs Through It

One the amazing things about commercial mortgage lending is how something totally out of left field can crop up to delay or derail a financing. Sure, there is the old saying “time kills deals,” in which the passage of time causes a deal to die, perhaps due to increases in rates, a buyer comes along and puts the asset under contract, the market collapses (can you say CMBS and 2008), or the borrower simply changes his mind, possibly due to deal fatigue.

But I am not talking about these instances. I am talking about a transaction flying along at a 35- to 40-day closing pace and then 5 days before closing: wham! The left hook puts you down for an 8-count or worse, a KO.

We recently had two of the latter situations. We were trucking down the freeway, but at the 11th hour it turned out the franchise agreement had never been properly transferred to the sponsor many years ago (frankly, the franchisor knew nothing about it). With not much time left on the agreement, the sponsor needed a brand-new ten-year license. Ouch! Time-out for 30 days, then we completed the transaction. Only one 8-count on that one.

The next situation is even more bizarre. The drive was right down the fairway and bouncing to a stop about 275 yards out when the ball hit a rock and bounced into the water. Only on this deal the water (actually, it was a stream) had long ago been filled in by the State of New Jersey. And then our sponsor built a hotel on top in 2001. But it seems like the State of New Jersey still owns the “stream” that runs under the hotel (about 9% of the total land area). Since our sponsor does not own all of the land, the sponsor cannot get title insurance. No title insurance? No deal. So we have an 8-count while the sponsor goes back to the State of New Jersey to acquire title to the land . . . and we keep our fingers crossed that we can avoid a KO.

5.4.13: CMBS Delinquency Plummets

In April, the Trepp CMBS delinquency rate posted its lowest reading in more than two years: The 47-basis-point (bp) drop was the biggest one-month gain since Trepp began publishing the number in the fall of 2009. All major property types saw their delinquency rates fall in April. Hotel and apartment loans led the pack, each with more than 100 bp in improvement. The delinquency rate for U.S. commercial real estate loans in CMBS was 9.03% in April, the lowest reading since November 2010’s 8.92%.

The resolution of distressed CMBS loans was a major driver that lowered the delinquency rate in April. Over $1.6 billion in loans were resolved with losses during the month. The removal of these loans from the ledger of delinquent assets created 30 bp of downward pressure on the delinquency number.

Additionally, over $800 million in loans delinquent in March managed to pay off without a loss in April. The removal of these loans from the delinquent category added 15 bp of downward pressure to the rate. Loans that cured put an additional 35 bp of downward pressure on the delinquency rate.

As for the downside, that too managed to see significant improvement in April. The $1.6 billion in newly delinquent loans in April put about 30 bp of upward pressure on the delinquency rate. This was well below the average of $2.7 billion in new delinquencies in February and March.

4.29.13: ValueXpress to Sponsor Golf Tournament in San Antonio, TX

On Wednesday, May 29, 2013 ValueXpress will be a Gold Sponsor for the 8th Annual San Antonio Hotel Owners Association Golf Tournament at the Hyatt Hill Country Golf Club in San Antonio, TX. This 130-person event kicks off the Texas Hotel Owners Association/Asian American Hotel Owners Association (AAHOA) Joint Industry Trade Show on Thursday, May 30th at the adjacent Hyatt Regency Hill Country Resort and Spa.

ValueXpress will be exhibiting at the trade show, and Michael D. Sneden, Executive Vice President at ValueXpress, and Jay Bhakta, Senior Loan Originator for the southern region of the United States, will be speaking at the trade show.

“We are providing a significant amount of hotel financing in Texas right now with over $100 million closed in the last 12 months,” commented Michael Sneden. “We thought it important to get the word out to other hoteliers in Texas that the lending window is wide open at great rates, and we felt sponsoring the golf event would be a great opportunity for hotel owners to meet personally with us to learn how we can assist them with their financing needs.”

“We are active in Houston, San Antonio, Austin, Dallas and all the surrounding communities,” said Jay Bhakta. “The reason is hotels in Texas are highly performing right now, and that’s what the CMBS conduit loan market wants. The high performance is allowing for unrestricted cash-out refinances at rock bottom interest rates. When Pratik Patel, the Vice Chairman of AAHOA, offered us the chance to sponsor this event, we jumped on it.”

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.

4.24.13: Office Vacancy Struggling to Get Traction in New Jersey

According to the N.J.-based Star-Ledger, economists gauging the recovery in New Jersey can look to commercial real estate as an indicator. What they’ll find is a market that has been stagnant and struggling to get traction since the mid-2000s. And until jobs return, most sectors of commercial real estate remain on hold.

“Commercial real estate is in lockstep with jobs,” said Matt McDonough, managing director at Transwestern, a company specializing in commercial real estate services with offices in Parsippany, N.J. “When you see 20% office vacancy rates, you know jobs are down.”

He described a healthy office rental market as having about 10% vacancy. Since 2002, though, the vacancy rate has floated between 17% and 19% in Central and North Jersey. Some counties have done better. According to data from Cushman & Wakefield, vacancy rates in Hudson County are at 12%, but Morris County is at 26% and Monmouth County at 29%.

“Real estate grows based on the expansion of the economy,” said Paul Profeta, president and owner of Paul V. Profeta and Associates and a member of Rutgers Business School’s Board of Advisers. “When you have 3%, 4%, 5% GDP growth you have expansion. Companies are taking more space; they’re hiring more people. We don’t have that today. We’re really muddling along at 1.5%-2.0% growth. We’re basically treading water.”

Asked how long will it take New Jersey to recover, he said, “We seem to be muddling along. I don’t see anything on the horizon that is going to shake us out of that rut in the near future.”

4.19.13: This Is What It’s All About

ValueXpress recently closed a $17-million hotel portfolio secured by three hotels located in metropolitan New Orleans, LA. The sponsor was facing a $66,000 penalty if the transaction did not close by April 18. Here is what he had to say:

“Mike and Jim:
I'm sure you know already, but we made the closing deadline, and the wire was sent by the lender just in time so we'll make the critical SBA payoff deadline in the morning. I appreciate you guys working with us on this deal. It was very impressive to see how you went about working this deal from start to finish. I had a chance to shop around with other firms before we committed to your deal, and your firm certainly stands out from the rest of the pack. Your firm has a methodology in place that's more detailed, yet efficient when it comes to valuating, pricing and handling the deal from start to finish.”

What warms my heart about this sponsor’s comments is the reference to our process here at ValueXpress. Often, a sponsor who hasn’t worked with us before will say, "Oh, you just take my loan package, send it to a few lenders, I pick one and you collect a fee at closing." That is so far removed from what actually happens when ValueXpress works with sponsors. We have a process -- a good one -- that requires a lot of work and dedication from our staff to successfully manage sponsors quickly and efficiently through the loan process. But don't take my word for it. Take a sponsor’s word.

4.16.13: CMBS Spreads Do an About Face

After spreads widened on a recent UBS-Barclays CMBS transaction that priced on April 11, commercial MBS buyers snatched up three multi-borrower offerings totaling $3.4 billion this week, pushing spreads tighter with the pricing of each transaction, according to Commercial Mortgage Alert. Long-term super-senior bonds from the most recent issue, an $876.7-million offering led by Wells Fargo and RBS, saw very strong demand, pricing at 81 basis points (bp) over swaps. That was down 2-4 bp from price guidance.

"We initially were thinking an order for $5 million of Class B in the 150 bp area after just buying $4 million of Class B from the UBS-Barclays offering at 160 bp last week," commented Jim Brett, who performs CMBS analytics among his myriad of other duties at ValueXpress. "But as we began our work, we got the call the class was oversubscribed three days earlier than expected and that pricing was being tightened to 135 bps, below our hurdle rate."

"I was really bummed that we were unable to get bonds from the Wells-RBS issue as the quality of the collateral and the underwriting metrics were strong," commented Michael D. Sneden, Executive Vice President at ValueXpress.

The tighter spreads took some of the pressure off potential spread increases to borrowers. While CMBS spreads were pushing marginally higher, originators were generally holding spreads to borrowers steady, as competition remains strong for good deals. This was squeezing profit margins close to a point where lenders were going to be forced to increase spreads to maintain profitability levels. With tighter CMBS spreads, lenders can leave spreads alone for now.

4.10.13: Jay Bhakta Heads Back to Texas

After returning to home base in Jackson, MS to regroup for a week, Jay Bhakta, a Senior Loan Originator at ValueXpress for over 15 years, headed back to Texas to follow up on a substantial amount of pending business in Houston, San Antonio, Corpus Christi and Dallas.

Jay is one of the largest producers for ValueXpress, having closed over $500 million in commercial loans at ValueXpress, the majority of which are hospitality loans. Jay is highly respected in the Asian-American community and within the Asian-American Hotel Owners Association, having been a former hotelier himself.

"With rates at these levels I have to get clients educated and moving quickly," said Jay. "That means one-on-one, face-to-face to get them to focus. I spend the time with them to explain all the structural parts of CMBS loans and answer all their questions and give them comfort that we will deliver their loan in a timely manner."

"But I would not be able to make the promises I do without the support I get from the back office in New York. They get it done for me," said Jay. "I must admit it's ironic at the end of a deal when the client calls and says, ‘Well Jay you were okay, but who is that guy Jim who did all the work?’ referring to Jim Brett, Senior Underwriter at ValueXpress based in New York.”

4.5.13: AAHOA Show an Enormous Success

The ValueXpress booth was bustling with activity on March 28-29, 2013 at the annual Asian American Hotel Owners (AAHOA) Trade Show in Houston, TX. Over 3,000 attendees visited the trade show at the George R. Brown Convention Center.

“This year, the product of the day was CMBS conduit loans. With hotel performance improving at a rapid pace, and CMBS conduit loans the only realistic program with unrestricted cash out, interest was very high,” said Michael D. Sneden, Executive Vice President at ValueXpress. “We were sizing loans on the spot, and potential borrowers were amazed at the possible cash proceeds in their pocket after paying off existing debt.”

“My clients were also impressed by the very low interest rates for CMBS conduit loans,” noted Jay Bhatka, a Senior Loan Originator covering the southeast U.S. market that includes Texas. “With rates in the 4.5%-4.75% area, my clients can take cash out and yet have the same payment because of the lower interest rate and longer 25-year amortization schedule.”

Most of the clients use the cash out proceeds to grow their businesses by building or buying other hotel assets. One of my clients was able to obtain a construction loan from a bank requiring 50% equity by using the cash-out proceeds from a CMBS conduit loan as the equity contribution for a new hotel project,” Bhatka said.

3.29.13: Raj Patel Wins Authentic 24-K Gold-Plated $100 Bill at AAHOA Show

Hotel owner Raj Patel won a 24-karat gold-plated $100 bill at the ValueXpress booth at the Asian-American Hotel Owners (AAHOA) Convention and Trade Show in Houston, TX last week. Over 500 cards were submitted for the ValueXpress drawing, which we consider a big success.


Raj Patel and his 24 karat award.

The award was hand crafted in India by one of India’s renowned jewelers. Jay Bhakta hand carried the plaque from India for this very special giveaway for the Asian-American community. The 99.99 pure 24-k gold foil bill is a sight to behold!

When we first called Mr. Patel and told him he’d won the $100 bill, he was amazed. “I never win anything,” he said, “but my life is blessed anyway!”

Raj is the owner of the Super 8 motel located at Hobby Airport 2 miles from I-45 in southeast Houston, TX. Raj came to the United States in 1986 and worked in hospitality for ten years before building the 40-room hotel. Raj recalls with pride the construction effort, which commenced in early 1995; the hotel opened in 1996. Raj noted that business has been good year-in and year-out, and the property has won the “Pride of Super 8” award many times. His hotel enjoys glowing reviews on TripAdvisor and other review sites.

“We were thrilled that Raj 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 Raj and congratulate him on winning.”

3.26.13: CMBS Issuance Soars in 2013’s First Quarter

From January through March 2013, $22.9 billion of commercial mortgage-backed securities were issued, up almost fourfold from a year earlier, according to Commercial Mortgage Alert. That puts volume on pace to surpass $90 billion for the year, well above the $65-billion average prediction by a panel of CMBS professionals.

The first-quarter volume was the largest for any quarter since 2007’s fourth quarter and exceeded the previous post-crash high of $17.5 billion in 2012’s fourth quarter. There were 32 U.S. transactions from January to March, surpassing quarterly totals during the boom years. The number of issues reflects the unusually high number of single-borrower transactions, which inflated the total. Indeed, the 16 single-borrower offerings exceeded the 10 multi-borrower deals (the remaining six transactions fell into different categories). In contrast, there were only six single-borrower deals in all of 2006 and just two in 2007.

“We are tracking the overall market in terms of originations,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “We are going to finish the first quarter just shy of $100 million of production, giving us an annual run-rate of $300-$400 million, typical of what we saw in the 2005-2007 period. The difference is we are better equipped to handle the volume, keeping loan closings tightly bound in a 40- to 50-day range to make sure our clients grab these great rates.”

3.22.13: I Can’t Believe It’s Been 10 Years!

ValueXpress was very active in CMBS originations in 2003; after the shock of the events of September 11, 2001 began to lift from the commercial real estate markets 2002 and 2003 began a strong period of growth in CMBS originations: $52 billion in 2002 and $78 billion in 2003. In 2003, ValueXpress originated approximately $158 million of CMBS loans in about 40 transactions.

While many of the properties securing the CMBS loans we did in 2003 were sold, paid off early, or refinanced into a different loan product, ValueXpress has been fortunate to redo a fair amount CMBS loans it closed in 2003.

“I recently received a call from a 2003 borrower who said, ‘Mike, I can’t believe it’s been 10 years!’ Sure enough, this $3-million self-storage loan in Westchester County, NY was due,” said Michael D. Sneden, Executive Vice President of ValueXpress. “What’s nice is that loan rates back then were in the mid-6s; the loan has paid down to $2.5 million, and we are replacing it with a $3.5-million loan at about 4.75%. Best of all, the borrower gets a $1-million cash out and the new payment will be lower than the old one.”

“Same story here,” noted Gary Unkel, Senior Originator at ValueXpress. “I have a client with whom I did two CMBS apartment loans 10 years ago; we just added another small apartment complex to the mix and will be providing a cash-out CMBS refinance that will not increase the loan payment much at all.”

3.14.13: Dave Wood of Residential Home Funding Wins Nook Tablet at Regional Conference of MBAs Convention & Trade Show

Mortgage Banker Dave Wood won a new Nook HD 8 GM Tablet e-reader at the ValueXpress booth at the Regional Conference of MBAs Convention & Trade Show. Held March 10-14 at the Trump Taj Mahal Casino Resort in Atlantic City, NJ, “the trade show was very well attended by exhibitors and visitors, and it was highly successful for us,” commented Kevin Monahan, a regional loan originator for ValueXpress; Kevin covers the northeastern United States. “I’ve received numerous calls from many mortgage professionals who visited our booth and I’ve already begun working on several transactions.”

ValueXpress Nook winner Dave Wood is a Vice President of Residential Home Funding (RHF), an FHA and conventional home loan lender, based in Parsippany, NJ. When asked to sum up his business, Dave said, “RHF is a one-stop shop for anyone seeking either a home or business loan. My staff and I can help the first-time home buyer purchase their dream home, assist business owners to obtain much-needed working capital, and assist commercial property owners to refinance their investment or owner-user properties. Sometimes we’re doing a little of both – refinancing a client’s home and business property.”

3.11.13: Rising Property Values, Low Rates Spur Increase in Defeasance

More borrowers are using defeasance to release properties from securitized mortgages so they can take advantage of improving market conditions to sell or refinance the assets, according to Commercial Mortgage Alert.

Some $5.9 billion of U.S. loans in commercial MBS collateral pools were defeased last year, up 21% from $4.9 billion in 2011, according to a draft of an annual Moody’s report to be released March 25. Defeasance volume is likely to keep rising at roughly the same rate this year, according to Sandra Ruffin, a vice president at the rating agency.

The tactic has steadily grown in popularity over the last three years as property values have recovered, credit has become more available and interest rates have remained historically low. For property owners, the ability to refinance at a low rate or sell at a good price can outweigh the cost of defeasance.

3.8.13: CMBS Spreads Continue to Widen Amid Heavy Supply

Spreads on CMBS widened on mezzanine bonds from recent CMBS offerings floated by J.P. Morgan/CIBC and Wells Fargo/RBS this week. The junior triple-A bonds in the J.P. Morgan/CIBC deal priced at 110 basis points (bp), and comparable notes in the Wells/RBS issue widened further to 120 bp. Equivalent paper issued in recent transactions prior to these deals had held steady at 100 bp.

The widening was attributed to weakening demand in the fixed-income market overall coupled with the flood of fixed-income offerings, including heavy CMBS issuance. Apart from the heavy flow of CMBS offerings, market pros attributed the higher new-issue spreads to investor nervousness about the economy and U.S. budget woes. “The market was pretty choppy when the J.P. Morgan deal was out there,” said one group head at a rival CMBS shop.

“Based on the results of these CMBS issues, we are seeing spreads to borrowers widen 15-20 bp,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “The new spread levels are not affecting deal flow yet, but if loans spreads continue to widen and the swap rate also moves out, we may see borrowers hesitate in moving forward with new CMBS loan applications.”

3.4.13: ValueXpress Exhibiting at AAHOA Trade Show in Houston, TX

On March 28-29, 2013 ValueXpress will be exhibiting at the annual Asian American Hotel Owners (AAHOA) Trade Show in Houston, TX. ValueXpress will be located in Booth 736 at the George R. Brown Convention Center noon-6:00 p.m. on both Thursday, March 28 and Friday, March 29.

“ValueXpress is an Allied Member of AAHOA and has been exhibiting at the AAHOA Trade Show for over 15 years,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “We have completed over 100 hotel 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, hoteliers have more options than ever to secure financing for their hotels.”

“Having just returned from India, I have some surprise giveaways from our home country,” noted Jay. “Please stop by our booth to find out what treat I have in store for you.”

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.

3.1.13: ValueXpress to Exhibit at 2013 Regional Conference of MBAs

On Tuesday, March 12 and Wednesday, March 13, ValueXpress will be exhibiting at the Regional Conference of MBAs Convention and Trade Show in Atlantic City, N.J. at the Trump Taj Mahal Casino Resort. Stop by Booth 5 at the Taj Mahal Exhibit Hall to see us on Tuesday, March 12, noon-3:00 p.m. during the commercial show or at Booth 515 7-9 p.m. during the residential show. ValueXpress will also be at Booth 515 at the conclusion of the residential show on Wednesday, March 13, noon-5:00 p.m.

The Regional Conference of MBAs annually brings together commercial and residential mortgage professionals located and affiliated with the Mortgage Bankers Association in the eastern portion of the United States (NJ, NY, PA, DC, CT, NH, MA, RI, MD, DE). Each state Mortgage Bankers Association is dedicated to promoting growth and good business practices in the real estate finance industry and is a resource that provides communication and networking opportunities for its members.

“ValueXpress is pleased to have this opportunity to meet with mortgage brokers at this Regional Conference to explain in detail its SBA 7(a), SBA 504, USDA B&I, CMBS conduit and conventional commercial loans for owner-occupied and investment properties,” said Michael D. Sneden, Executive Vice President of ValueXpress. “We will be jointly representing our affiliated company, Country Bank, at the trade show. The timing of the show is perfect for us as we provide information on Country Bank’s expanded SBA footprint into the six-state region surrounding New York City.”

ValueXpress will also be marketing its CMBS conduit program. “The CMBS conduit market is on fire right now, and we want to share the benefits of long-term, fixed-rate, non-recourse commercial loans for larger balance (more than $5 million) transactions,” said Jim Brett, head of underwriting at ValueXpress.

Need a little incentive to visit us at the show? ValueXpress will be giving away a Nook Tablet e-reader from a drawing of business cards collected at our booth during the show. The drawing will be at 4:00 p.m. on Wednesday, March 13th; the winner need not be present at the drawing. Would you like a personal appointment with a ValueXpress representative during the show? Call now and book an appointment with Kevin Monahan (973) 579-6061 or Mike Sneden (212) 883-6447.

2.26.13: CMBS Spreads Widen; Borrower Spreads Increase

Amid a flood of issuance (see the article below) long-term super-senior CMBS spreads have widened from the levels experienced in early February. Long-term super-senior CMBS with an initial 9.5- to 10-year life had seen spreads steady at 72 basis points (bp) since the beginning of 2013. However, the $629-million long-term super seniors from the UBS/Barclays CMBS issue that priced on February 15th widened to 80 bp. Furthermore, the $398-million long-term super seniors from the Deutsche Bank/Cantor Fitzgerald CMBS issue that priced on February 26 widened to 85 bp.

Meanwhile, the junior investment-grade classes continue to hold steady. The junior investment-grade AA-minus rated class B from both the UBS/Barclays and the Deutsche Bank/Cantor Fitzgerald deal priced at 125 bp, while the A-minus rated class C from both deals priced at 175 bp.

RBS and Wells Fargo are in the market with a CMBS deal that is expected to price the week of February 25. Price guidance is at the levels seen from the Deutsche Bank/Cantor Fitzgerald deal and demand for the issue is good, possibly resulting in price firming at these new levels.

"After a consistent period of loan spread compression for borrowers, lenders have increased their pricing by about 10 bps to compensate for the higher spreads on CMBS classes; since the long-term super-senior CMBS represent approximately 80% of a CMBS deal, there is almost direct correlation between super-senior CMBS spread widening of 10 bp and borrower loan spread widening of 10 bp," said Michael D. Sneden, Executive Vice President at ValueXpress. "With the swap rate coming in 10 bp this week, the effect on borrowing rates is negligible right now. I just keep my fingers crossed that CMBS spreads stabilize at these new levels without widening further."

2.22.13: SBA Develops 10-Tab Submission Tool for 7(a) Loans

As part of its continuing effort to provide excellent customer service, the 7(a) Loan Guaranty Processing Center (LGPC) has developed a 10-Tab Submission tool to streamline the submission of all loan applications processed at the LGPC. Historically, the LGPC has accepted loan application packages via mail, fax, and FTP (SendThisFile) with no requirements for document organization.

SBA highly encourages use of the 10-Tab, as it will assist SBA's lending partners in preparing complete and orderly packages for submission, reduce the number of incomplete applications, and allow improved LGPC processing times. Lenders are not required to use the 10-Tab tool for applications submitted to the LGPC at this time; however, packages not organized using the 10-Tab format may experience longer processing times. Later this fiscal year, SBA expects to issue a notice identifying a specific date by which lenders will be required to submit origination packages using the 10-Tab format.

To aid in this submission process, the LGPC has developed 7(a) submission tools and information that can be found at http://www.sba.gov/category/type-form/lending-forms. Scroll to the bottom of the page and select the appropriate 10-Tab Express form for you:

1. 7(a) Submission Instructions and Checklist,
2. Templates for Application Submission,
3. Printable Submission Templates, and
4. Submission Tutorial.

2.20.13: CMBS Volume Surging

The commercial MBS pipeline hasn't looked like this since 2007, according to Commercial Mortgage Alert. Scheduled to hit the U.S. market by the end of next month are 17 transactions totaling $12.5 billion; this is on top of the $13.5 billion of offerings that have already priced since the beginning of the year, according to a survey by CMA. The explosion of activity puts issuance on track to reach $26 billion for the first quarter, more than four times higher than a year ago and the highest three-month total since the fourth quarter of 2007. The volume is much heavier than expected. At the beginning of the year, a panel of bond pros predicted that 2013 issuance would reach $65 billion, but the market is now on a $100-billion pace. While few think issuance will continue at the current rate throughout the year, many have raised their expectations.

There are already 11 transactions totaling $11.4 billion in the queue for April through June -- almost matching the $12.4-billion level in last year's second quarter. Multiple other deals are expected to be added. All told, 28 deals totaling $23.8 billion are in the pipeline. The breakdown is 14 multi-borrower transactions totaling $16.9 billion, 13 single-borrower offerings totaling $6.7 billion and a $250-million offering backed by distressed loans.

2.8.13: Report from the 2013 MBA CREF Convention

At the 2013 MBA Commercial Real Estate Finance Convention (CREF) “exuberance” replaced 2012’s “optimism.” The 2013 CMBS conduit loan machine is cranking full tilt: Declining spreads have made CMBS conduit loans competitive with insurance company offerings on commercial assets and within striking distance of GSE (Fannie/Freddie) offerings on multifamily loans. Should rates remain at these levels, this year’s CREF panelists suggested a doubling in volume to $90 billion in CMBS originations was not out of the question.

In fact, the crystal ballers predicted that lending would be robust across the board in 2013. According to the Mortgage Bankers Association, commercial banks and finance companies, with their balance sheets repaired, are predicted to increase lending 7% to $75 billion in 2013 (30% market share), while CMBS is expected to grow to $55 billion (22% market share). Insurance company originations are estimated to be flat at $50 billion (18% market share), while the GSEs are anticipated to decline 8% to $75 billion (30% market share) in the face of competition from CMBS and banks.

Of concern in the CMBS conduit lending arena is whether the rapid growth in CMBS conduit lending and the potential for a reduction in underwriting standards could “undermine the industry yet again” (a polite way of saying “blow up the CMBS market”). One insurance company veteran noted, “CMBS suffers from adverse selection (read: it makes loans on crappier deals), that’s why our industry delinquency is under 1% and yours is 10%. If CMBS conduit underwriting gets aggressive on these assets, watch out for another collapse.”

Another panelist noted, “CMBS is really the only unregulated lending platform, at least until Dodd-Frank provisions become law. The industry cannot expect the b-piece buyer to regulate the market, as they have the same pressure to get money out the door as everyone else. I suspect that it is just a matter of time until the CMBS conduit market overheats, and we repeat a painful correction.”

2.5.13: Spreads Tighten Further on Junior Investment-Grade CMBS

While AAA-rated senior investment-grade CMBS spreads remain flat, junior investment-grade CMBS spreads continue to tighten for recent CMBS issues as investors take on additional credit risk in search of more yields. Long-term super-senior CMBS with an initial 9.5- to 10-year life have seen spreads stuck at 72 basis points (bp) since the beginning of 2013 as all five multi-borrower CMBS offerings have priced the long-term super-senior bonds at 72 bp.

Meanwhile, the junior investment-grade classes continue to tighten. The junior investment-grade classes typically consist of AA-minus rated class B, A-minus rated class C and the BBB-minus rated class D. Subordination levels typically range from 6% for the BBB-minus class to 15% for the AA-minus class. The spreads on these classes have tightened on each issue since the beginning of the year, as the classes are generally oversubscribed, allowing dealers to successfully test tighter levels for each new deal. For example, the class B bonds from the Morgan Stanley/Bank of America (BoA) issue on January 9, 2013 priced at 155 bp and compressed to 145 bp for the Goldman Sachs deal on January 24, 2013, then to 135 bp on the Wells Fargo/RBS deal on January 28, 2013. The most recent deal to price, a $1.14-billion multi-borrower offering from Morgan Stanley and BoA, priced the class B bonds at 125 bp on February 5.

“The spread compression has been great for our portfolio of class B CMBS purchased from the last 12 CMBS issues, and it allowed us to take some profits,” noted Michael D. Sneden, Executive Vice President of ValueXpress. “But on the other hand, replacing those bonds with new CMBS at tighter spreads is scary; once the spread tightening stops or reverses, it could spell trouble for the value of the portfolio.”

“Borrowers should benefit from slightly tighter spreads on their loans,” suggested Jim Brett, head of underwriting at ValueXpress. “Most spread reduction results from compression in super-senior CMBS since those bonds comprise the bulk (80% +/-) of a CMBS issue, but there is nothing wrong with a little spread reduction from junior investment-grade bond spread compression.”

1.26.13: Ballon Ice-Meter Predicts 9 Inches of Ice

Ok, I have been writing this e-newsletter for a little over two years, and we all need a break now and again. Some people skydive, some go on safaris, bungy-jump, or whatever; I go ice fishing.

To be specific, I have gone ice fishing with the same group of four to six guys I know from high school at the same northern Pennsylvania lake (which will remain nameless – don’t want additional fishing pressure, you know) for the past 35 years. Doesn’t sound like fun? You should try it; the peace and quiet found on a frozen lake is Zen-like!

Anyway, one of my buddies, Doug, is a physicist and a fisherman, although perhaps not in that order. He has an exceptional mathematical mind. A number of trips ago, he thought it would be useful to predict the lake’s potential ice thickness. Where the rest of the guys would just note if temperatures were above or below freezing, that was not good enough for Doug; he pulled out his slide rule and developed a formula to predict the ice thickness based on daily temperature readings from the weather station nearest to the lake. At first we laughed, but as we added data points each year (projected versus actual – just like real estate cash flows), the model became more and more accurate. Now we look forward to seeing how close Doug’s model is to actual every year.

1.25.13: Dan Carbeck Joins ValueXpress

Dan Carbeck, a 35-year veteran in commercial real estate lending, joined ValueXpress effective January 15. Dan will be primarily responsible for commercial loan originations in the mid-western portion of the United States.

“Dan brings an outstanding breadth of experience to the ValueXpress team from his stints at M&T Bank, Mellon Mortgage Company and Key Bank. In addition, Dan produced for Fannie Mae/Freddie Mac lenders GMAC Commercial Mortgage and ARCS Commercial Mortgage,” commented Michael D. Sneden, Executive Vice President at ValueXpress.

Dan has originated CMBS conduit loans, Fannie/Freddie multifamily loans, life company loans and commercial bank portfolio loans during his career. While at Largo Real Estate Advisors, Dan originated $2- to $15-million commercial loans for Prudential’s PruExpress loan program.

Beginning in 2007, Dan operated the Midwest office for Bond Street Capital, a commercial real estate origination shop formed in 2002 by Barry Reiner, a former First Union Capital Markets executive, and Joe Forman. The firm arranges CMBS conduit loans, insurance company loans and commercial bank portfolio loans.

“The CMBS conduit loan market is on a tear, and I want to participate with ValueXpress,” said Dan. “ValueXpress is known for its loan closing expertise and clients love the company’s smooth processing and closing routines. ValueXpress has solid lender relationships and quality underwriting support from Senior Underwriter Jim Brett. I know that by working with ValueXpress my clients will have a positive experience obtaining their commercial loans. And that will be a positive reflection on me. I am aggressively seeking new clients knowing they will be well-cared-for by me and the ValueXpress team.” Dan can be reached at dcarbeck@valuexpress.com.

1.23.13: Dodd-Frank Rules Could Stop CMBS in Its Tracks

CMBS pros are keeping a close eye on proposed regulatory reforms that could dramatically affect the future of the industry. In the wake of the financial crisis, policymakers and regulators have proposed rules and regulations aimed at banks and other financial institutions to curb excessive risk-taking. A notable provision in the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Premium Capture Cash Reserve Account (PCCRA) could derail CMBS issuance depending on its final form.

PCCRA would require issuers to hold some level of risk retention from a CMBS issue. Most issuers work with a business model to pool and issue CMBS, and they have no intention -- and in many instances no capacity -- to retain a portion of the CMBS issue. It is likely PCCRA would discourage CMBS issuers from participating in the market and cause many current issuers to close shop.

Another proposed provision of concern targets the ability to transfer B-piece (also known as first loss bonds) investments. The proposed rule would prohibit a B-piece buyer from selling, leveraging, or hedging its first loss bonds. Ultimately, the B-piece buyer or first loss buyer would be required to hold its position for the full life cycle of the mortgages in the pool, which for most CMBS issues would be at least ten years. The universe of B-piece investors in CMBS is not that deep, as the first loss bonds have high risk, but also provide high returns. Any “handcuffs” on these investors could drive them away from investing in CMBS, and the ability for issuers to create CMBS falls apart without these investors.

The proposed rules have been slow to materialize into law. Hopefully this is a sign that regulators are giving the rules thoughtful consideration rather than the usual delay due to the inability to get things done. But should PCCRA or B-piece restrictions become law in their present form, it is quite likely that CMBS issuance will cease.

1.15.13: Wanna Meet at the MBA in San Diego, CA?

Michael D. Sneden, Executive Vice President of ValueXpress, will be representing the firm at the Mortgage Bankers Association Commercial Real Estate Finance (CREF)/Multifamily Housing Convention and Expo in San Diego, CA February 3-6, 2013. The convention is expected to attract over 2,500 commercial and multifamily professionals who will be networking with industry leaders and listening to professionals as they share their views on the direction of the industry.

“I have been attending CREF for over 15 years, and it is by far the best opportunity to meet my colleagues to share our past, current and future views on the commercial real estate lending markets,” said Sneden. “This year, with the explosion of CMBS conduit lending, I am looking to meet with other contemporaries that might not be participating in the growth of CMBS conduit lending to see if there is a way we can work together.”

Mike will be in San Diego from Sunday, February 3rd through Wednesday, February 6th. If you want to get together for a drink or chat between session presentations, please send Mike an email at msneden@valuexpress.com.

1.11.13: CMBS Begins 2013 with a Bang

The CMBS bond market began 2013 on a high note: Strong demand for the first conduit offering of the year pushed spreads to a post-crash low. The benchmark super-senior class of a $1.4-billion conduit offering by Morgan Stanley and Bank of America (BoA) priced at 72 basis points (bp) over swaps on Wednesday, 11 bp inside of the previous low achieved in November 2012.

“Our analysis concluded the quality of the collateral was high,” commented Jim Brett, who handles CMBS credit analysis at ValueXpress. “In addition, the underwriting metrics were solid in terms of pool LTV (61.3%), net cash flow DSCR (1.80x) and debt yield (10.78%).”

“Many of the classes of the issue were well oversubscribed,” noted Michael D. Sneden, Executive Vice President at ValueXpress. “We were buyers of the Class B securities, and we only received $1 million of a $5-million order as the Class Bs were 5x oversubscribed.”

The Morgan/BoA offering is backed by 64 mortgages on 123 properties; retail properties represent 37.1% of the collateral pool, followed by office at 21.4%. Hospitality properties were 16.0% of the collateral pool. The deal’s collateral was contributed by Morgan Stanley (88.9%) and BoA (11.1%).

The longer-dated triple A-rated super-senior classes all priced tighter than guidance. A $135.7-million tranche of 4.9-year bonds priced at 36 bp and $111.6 million of 7.5-year bonds priced at 60 bp over swaps. Meanwhile, $466.3 million of 9.9-year bonds sold at 72 bp. These prices tightened from guidance levels of 37 bp, 65 bp and 75 bp, respectively. The search for better yields strengthened demand for subordinate CMBS as well. In addition to the Class B bonds, which priced at 155 bp, 10 bp tighter than guidance, the junior triple A-rated class priced 15 bp tighter than guidance at 100 bp. The Class C bonds also were 15 bp tighter at 200 bp.

1.8.13: Commercial Real Estate CDOs Make a Comeback

Four Commercial Real Estate (CRE) Collateralized Debt Obligations (CDOs) totaling $1 billion were issued in the fourth quarter of 2012, suggesting that the new issue market has re-opened. These deals fill an important void in commercial real estate finance for transactions that cannot be included in traditional CMBS transactions.

The first CRE CDO was issued in 2000, and subsequently, deal managers began introducing commercial real estate loans into CRE CDOs, including whole loans and mezzanine loans. The structure is a particularly useful financing vehicle for commercial real estate loans on non-stabilized properties. Generally, the senior portion of the bond structure was sold to investors and the junior portion (typically 30%) retained by the deal manager, who was allowed to actively manage the collateral pool. However, in mid-2007, the market collapsed in the midst of the credit crisis and no CRE CDO was issued again until 2012.

In September 2012, Arbor Realty Trust issued a $125-million Collateralized Loan Obligation, or CLO, secured by a portfolio of loans on transitional multi-family properties. The underlying loans are to be refinanced through the Fannie Mae DUS program on stabilization of the properties. Arbor sold the 70% of the transaction structure and retained the 30% junior portion. Similarly, NorthStar Realty Finance issued a $351-million floating rate CMBS deal in October 2012 secured by a portfolio of 14 loans on various transitional commercial real estate properties. All of the principal from loan repayments goes to pay down the bonds in sequential order as the transitional properties stabilize and pay off. NorthStar sold the senior 65% of the capital structure and retained the most junior 35%.

“CRE CDO structures should help bolster the market for the origination of bridge loans on transitional properties, and we would expect to increase our production of loans for these CRE CDO programs in 2013,” commented Kevin Monahan, Senior Loan Originator at ValueXpress.

12.26.12: SBA 7(a) Premiums Reach the Stratosphere

Secondary market premiums on the sale of SBA 7(a) loan guarantees reached record highs in late December 2012 based on dealer pricing indications. The chart below shows the monthly trend in premium pricing during 2012:

2012 Premium*
Dec 117.50
Nov 117.00
Oct 117.00
Sept 116.00
Aug 116.00
Jul 115.50
Jun 114.50
May 114.50
Apr 113.50
Mar 113.50
Feb 113.50
Jan 112.50
*Based on Prime + 2.75%, Quarterly Reset, 25-year loan term.

Pricing steadily increased as 2012 progressed as investors sought decent relative yields on investments with short-term rate resets (the investor rate resets quarterly), driving up prices. The prices provide exceptional guarantee sale profits for institution selling guarantees. In addition, secondary market prices for larger loan guarantees above $1.5 million historically found lower bids relative to loan guarantees under $1.5 million. This is no longer the case as pricing is similar across all guarantee sizes. Note that the profit to guarantee sellers is partially reduced at prices above 110 as 50% of the proceeds above 110 are shared with the SBA.

“We continue to pursue SBA 7(a) loans in the five-state footprint surrounding New York City for our affiliated bank, Country Bank,” said Michael D. Sneden, Executive Vice President at ValueXpress. “We are working on a $5-million SBA 7(a) loan right now, and at 117.50, that would be a net profit of $426,562 on the $3,750,000 guarantee sale after the split with the government, a nice day’s work! Plus Country Bank will receive $37,500 annually in servicing fees during the life of the loan.”

12.28.12: CMBS Prognosis for 2013

CMBS bond spreads (and hence spreads to borrowers on their loans) and the Swap rate (the index used to set CMBS conduit loan rates) both fell as 2012 progressed; by year-end, the combination resulted in the lowest CMBS conduit loan rates ever recorded. In January 2012, Goldman Sachs priced the only multi-borrower CMBS deal for that month, a $1.15-billion offering that contained 80 loans with an average loan coupon to borrowers of 5.72%. In contrast, in late December 2012, JPMorgan and Ladder Capital priced a $1.07-billion offering that pooled 45 loans with an average coupon of 4.49%.

Can this downward rate trend continue through 2013? “I think not,” commented Michael D. Sneden, Executive Vice President of ValueXpress. “My crystal ball says that if our leadership is unable to reach a deal to fix the automatic spending cuts and tax increases until well into the first quarter of 2013, then rates stay at these levels until the summer of 2013 before rising. But if a solution is reached quickly, I see the equities market rising at a steady pace (along with the economy) and the Treasury/Swap market falling, resulting in higher Swap rates by the end of the first quarter of 2013 and rising further as the year progresses.”

“I see some of the higher Swap rates offset by a modest contraction in CMBS bond spreads, but still see a net increase in loan coupons. I predict a 2.25% 10-year Swap rate by the end of the first quarter of 2013 and a 2.50% average loan spread resulting in 4.75% coupons to borrowers, so line up now to get your money while rates are at a possible low point in the lending cycle,” Sneden said.

12.24.12: Creating Efficiency in the CMBS Loan Diligence Process

ValueXpress has been arranging CMBS conduit loans for its clients for over 15 years. The typical client is a small balance borrower ($5-$10 million), and many do not have much or any experience in the diligence process (read: lots and lots of documents) required to close a CMBS conduit loan. Therefore, by default, our corporate mission has evolved to use our knowledge of the CMBS diligence process and our human resources to guide borrowers through both the underwriting diligence and legal diligence quickly and efficiently, resulting in the least-painful experience for the sponsor possible. At the same time, the diligence burden is reduced for the lender, whose thin staff can be reoriented to other transactions that are not moving as smoothly. “We end up adding value for both the borrower and the lender in each transaction,” commented Jim Brett, head of underwriting at ValueXpress. “This creates a win-win for us as a firm: Borrowers refer us to other borrowers and lenders move our transaction to the top of the pile as they know the transaction will not be time-consuming.”

On most new transactions, the ValueXpress deal manager is working on-site within a few days of the execution of a loan application. If the borrower does not have a scanner, the deal manager brings one. The sponsor and deal manager go through each item on the checklist; the deal manager explains what is needed and why, and reviews each item for compliance before it is submitted to Jim, who then catalogs all the diligence, usually in a file-sharing environment such as DropBox. “It’s all about organization and having the knowledge to work with the borrower to collect diligence documents that comply with the lender request,” notes Jim. “Once this is understood, the transaction proceeds quickly to close.”

12.18.12: Insurance Companies Grab Large Blocks of Subordinate CMBS

In support of the strong demand for CMBS securities, it was reported that insurance companies were active buyers of AAA-rated senior CMBS with 30% subordination (generally classes A1-A3 and A-SB), and were big buyers of subordinate CMBS (classes AS, B and C), which generally provided subordination levels of 12%-22% and are generally rated AAA, AA and single-A (Fitch/S&P), respectively. Although the classes provide lower ratings and subordination, they pay higher yields to compensate for the addition risk compared with senior CMBS.

To accommodate the large buyers of subordinate CMBS, issuers created the “EC” class in many issues. The EC class essentially combined the AS, B and C classes and allowed the buyer to purchase all the securities within the classes, eliminating other potential buyers of the securities. For example, in a UBS-Barclays CMBS issue (UBSBB 2012-C2) that priced in July 2012, Class AS, Class B and Class C -- a total of $207.7 million of securities -- were combined into an EC class and sold to one investor.

“The EC class structure is great for the issuer, but a bummer for the little guy,” said Michael D. Sneden, Executive Vice President at ValueXpress. “We got shut out of our typical $5-million order of Class B securities from UBSBB 2012-C2 for Country Bank and on another bunch of deals in 2012 as well.”

12.14.12: CMBS Issuance Poised to Surge in First Quarter of 2013

Commercial Mortgage Alert reports that a big fourth quarter has lifted U.S. commercial MBS volume for 2012 above $48 billion — and strong issuance will continue in the first quarter. CMBS activity has soared almost 50% in 2012 from $32.7 billion in 2011. The increase was bolstered by close to $18 billion of issuance in the past three months — by far the largest quarterly volume this year.

A first look at the 2013 pipeline has identified $19 billion of transactions scheduled for January through March. Other transactions are likely to be added, setting the stage for another substantial increase in issuance in 2013. Below is a summary of CMBS conduit deals in the works for January 2013:

Issuer Deal Type Rate Type Amount ($mil.)
Morgan Stanley/BofA Conduit Fixed $1,400
Deutsche/Ladder Capital Conduit Fixed $1,300
Morgan Stanley/BofA Conduit Fixed $1,300
Goldman/Citigroup Conduit Fixed $1,250
Wells Fargo/RBS Conduit Fixed $1,250

The surge in activity has stemmed partly from a big rally in the bond market that drove down the funding costs of securitization programs, enabling them to cut their loan rates and compete more effectively with portfolio lenders.

“The great rates available to borrowers, pretty much all in the 4.0%-4.75% range, are spurring an incredible amount of refinancing activity and an increasing amount of purchase activity as the lower cost of debt is helping support higher real estate equity prices,” noted Michael D. Sneden, Executive Vice President at ValueXpress. “2013 is looking real good for originations right now.”

12.10.12: B-Piece Buyers Forcing Issuers to Pay Up for Hotel Loans

Many CMBS borrowers are asking why CMBS conduit loan spreads are relatively high for 65%-70% LTV hospitality loans. Part of the answer can be found in the way the buyers of subordinate CMBS (often referred to as b-piece buyers) look at the pricing and risks of hotel loans.

As a refresher, the b-piece buyer acquires the most risky bonds from a CMBS issue. The bonds are subordinate to the senior CMBS and incur the first principal losses from loans that default in the CMBS issue. The subordinate CMBS incur a principal loss when a defaulted loan is resolved with a principal recovery that is less than the outstanding balance on the loan. When less-than-full principal recovery occurs, the subordinate buyer takes a loss dollar-for-dollar with the amount of principal lost on the defaulted loan. As a result, the b-piece buyer receives the highest rate of interest on the subordinate bonds that it buys to compensate for the risks. In addition, the b-piece buyer (or its advisors) has the right to review each loan that is included in the CMBS issue and “kick out” any loans that it deems to be poorly underwritten or pose a default risk according to the b-piece buyer’s analysis.

Prior to 2007, it was common to have one or two loans kicked out of CMBS issues in which a typical issue tended to contain 150-200 loans. The originator would commonly stick the kicked-out loans in their next CMBS issue, usually successfully. With the tighter underwriting standards in CMBS underwriting today, it is uncommon for loans to be kicked out.

That said, hotels loans have been one of the worst performing in pre-2007 CMBS. The delinquency rate as of November 2012 was 12.24%, according to Trepp, nearly unchanged from the 12.28% reported in November 2011. In addition, principal recovery on hotels tends to be less than for other real estate asset classes because of the specialized nature of hospitality properties. So b-piece buyers, rather than kicking hotel loans out of CMBS issues, are requesting and receiving downward “price adjustments” on hotel loans, reducing the profit to the issuer. B-piece buyers are particularly critical of small balance, limited-service hotels located in tertiary markets with 65% LTV. As a result, issuers are quoting these deals with wider spreads than other asset classes to maintain profitability after these loans are “price adjusted” by b-piece buyers.

12.5.12: SBA 504 Program Still Best Opportunity for Owner-Occupied Purchases

The Small Business Administration's (SBA) 504 loan program provides long-term, fixed-rate financing for owner-occupied commercial real estate and for the purchase of long-term capital assets. 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 Certified Development Companies (CDC) partners with a bank that provides 50% of the project financing and the borrower typically puts in 10% as a down payment. The rate on the SBA portion of the loan (the 40% piece) is fixed at 4% for 20 years for loans that were funded by the most recent SBA debenture in December 2012. This rate is the lowest recorded since the program’s inception. Below is a chart exhibiting the history of the SBA 504 rate over the past 24 months:

2012,%

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
4.83 4.70 4.58 4.74 4.45 4.49 4.45 4.44 4.27 4.25 4.16 4.00

2011,%

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
5.73 6.06 5.93 5.89 5.63 5.51 5.58 5.13 4.69 4.83 4.94 4.94

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. 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.

11.29.12: ValueXpress Exhibits at 2012 AAHOA Washington District Regional Conference & Trade Show

On Friday, November 29, ValueXpress participated in the 2012 AAHOA Washington District Regional Conference and Trade Show at the Hilton Crystal City Hotel in Arlington, Virginia. The show featured the Asian-American Hotel Owners Association’s (AAHOA) current President Alkesh Patel and Washington District Regional Director Dharmendra Patel as well as the Washington District Regional AAHOA Ambassadors. The event focused on professional development in the areas of ADA compliance, e-marketing, debt restructuring and hotel trade area protection.

ValueXpress exhibited after the professional development forum. ValueXpress provided attendees with information on the exceptional interest rates available on commercial loans for hospitality properties.

“Although we have participated in the AAHOA annual convention and trade shows since 1997, we are exhibiting at regional conferences to educate AAHOA hoteliers on the great lending environment that exists right now,” explained Kevin Monahan, a Senior Loan Originator at ValueXpress. “Hotel borrowers are so beaten down by the 2008-2010 recession that they may not be aware that certain financing programs for hotels, including CMBS, are very active right now,” said Monahan, who manned the ValueXpress booth at the show.

ValueXpress is currently processing 10 CMBS conduit hotel loans for AAHOA members. For those new to the CMBS conduit loan product, the loans are fixed-rate (about 5% today) for 5, 7 or 10 years; are non-recourse (no personal guaranty); and allow for unrestricted cash-out. These loans are very popular for cash-out refinances. ValueXpress has completed over 125 CMBS conduit loans for AAHOA members over the past years.

For purchase transactions, the SBA 504 program remains the primary choice for AAHOA members as the program provides for 85% financing, much more than CMBS conduit. The 504 program allows AAHOA members to buy hotel properties with less equity contribution than CMBS. For conference attendees who visited the ValueXpress booth and want to follow up with Kevin, he can be reached at 973-579-6061.

11.26.12: CMBS Spreads Widen Amid Supply and Fiscal Cliff Concerns

While it seemed that the rally in CMBS securities would never end, the music stopped last week when dealers widened the price talk on a $1.4-billion conduit offering that was in the market. The offering, which priced on Friday, November 23, is backed by loans supplied by Jefferies LoanCore, Goldman Sachs, Citigroup and Archetype Mortgage Capital. The AAA-rated super-senior bonds priced 5 basis points (bp) wider than price guidance at 90 bp over swaps. The deal’s $111.1-million class of junior triple-A bonds, with 22% of subordination, was priced in-line with guidance at 123 bp. But the double-A-minus bonds priced at 185 bp, 15 bps wider than price guidance.

Contributing to the weakness in pricing is a seasonal drop in demand as many investors have starting closing their books for the year. In addition, the spread widening was attributed partly to uncertainty about whether Congress will avert $500 billion of tax increases and budget cuts scheduled to start kicking in January.

This week, Wells Fargo and RBS are expected to price their $1.3-billion CMBS conduit deal. The AAA-rated super-senior bonds are being offered at 95 bp over swaps, while the junior triple-A bonds are being shopped at 125 bp over swaps. The double-A-minus bonds were being marketed at 180 bp.

“For the first time since summer we received our full $8-million allocation of Class B CMBS from the Goldman/Citi deal,” said Michael D. Sneden, Executive Vice President of ValueXpress. “The spread widening helped a little, but the swap was in a bit so the overall yield of 3.45% on the Class B was not much better than our last purchase. Still, CMBS beat the yields on other fixed-income products with the same credit profile.”

11.21.12: Small Town Maul (Reported by the Wall Street Journal)

New York investor David Lichtenstein’s bet on four small-town malls didn’t pan out, leading him to forfeit the properties to his mortgage holders in 2009. It now appears the deal also was a big loser for investors in the malls’ $73.9-million securitized mortgage.

The last of the four malls recently was sold by the company that oversees the loan on behalf of bond investors, C-III Asset Management, and the final tally looks bleak: The bondholders recouped 22% of the initial loan amount, or roughly $16.4 million, according to real-estate research service Trepp LLC.

The loan was retired last month after C-III sold the fourth mall, Mount Berry Square Mall in Rome, GA, to Hull Storey Gibson Cos. for an undisclosed price. In 2010, Jones Lang LaSalle brokered the sale of the Martinsburg Mall in Martinsburg, WV for $11 million and Bradley Square Mall in Cleveland, TN for $4.4 million. The fate of another of the four properties, Shenango Valley Mall in Hermitage, PA, couldn’t be determined.

Mr. Lichtenstein said Tuesday he could have kept the properties if C-III had agreed to defer some of the mortgage’s amortization payments. A C-III representative declined to comment. Mr. Lichtenstein is better known for buying Extended Stay Hotels for $8 billion in 2007 and putting the chain into bankruptcy protection in 2009.

11.16.12: Low Rates Spur Surge in CMBS Loan Applications

With CMBS loan rates approaching historic lows, ValueXpress is seeing a surge in new loan applications. Loan activity is often high as year-end approaches, and in combination with low rates, fourth-quarter loan activity is expected to be extraordinary.

“We started November with 13 loans under application, many of which were signed up in October; subsequently, we added 3 more in the first week of November, for a combined total of about $100 million,” said Michael D. Sneden, Executive Vice President of ValueXpress. “We closed a portfolio of 3 loans yesterday for $20 million, and we have another 7 loans totaling approximately $40 million scheduled to close before the end of November. And the balance of the loans is expected to close in December.”

The surge in loan applications arises from very attractive loan rates. Loan rates are trending down; they are currently in the 4.0-4.5% area for 10-year fixed-rate CMBS loans secured by commercial properties and 5.0% for hotel properties. Fannie Mae loans for multifamily properties are even lower, under 4.0% for a 10-year term.

“The loans I am processing are 80% CMBS conduit loans, 15% Fannie Mae multifamily loans and a few community bank portfolio loans,” noted Jim Brett, Chief Underwriter at ValueXpress. “We are processing a significant amount of CMBS conduit hospitality loans in addition to retail and industrial properties.”

ValueXpress is working overtime to maintain closing schedules while continuing to deliver its typical high level of service to its clients. The company expects all transactions to be completed within the time frames required by its clients.

11.12.12: ValueXpress Teams Up with RBM Financial on Loan Diligence

With the surge of loan applications (see “Low Rates Spur Surge in CMBS Loan Applications”), ValueXpress has announced it is working with RBM Financial to ensure that loan underwriting and closing documentation required from CMBS conduit borrowers are managed in a timely manner to meet loan-closing time frames. RBM will assist ValueXpress on portfolio transactions and other transactions during peak periods in which there is potential that ValueXpress staff may not be able to handle the work volume.

“Our mission is to provide service to our clients by assisting them in understanding and completing the entire CMBS loan process in a timely and efficient manner,” said Michael D. Sneden, Executive Vice President of ValueXpress. “Should we experience peak loan volume, we want to ensure that service does not suffer; during those periods, RBM will assist us in maintaining the service level our clients expect.”

“My team has been completing diligence on real estate loans and assets for over 25 years,” commented Richard B. Marion, Principal in RBM Financial. “I have professionals who can hop on a plane at a moment’s notice should ValueXpress require resources on-site to work with its clients on loan diligence. My staff is instilled with the same service orientation as Mike’s team, and I am confident we will work well together.”

RBM Financial is a real estate advisory firm headquartered in Atlanta, Georgia. The firm provides due diligence services, underwriting and cash flow analysis for CMBS loans and CMBS securities for institutional investors and investment banks that originate CMBS loans for securitization.

11.7.12: CMBS Delinquency Rate Dips to 8.3%

According to Fitch Rating Services, the delinquency rate for commercial MBS loans inched down again last month, despite the addition of a big multifamily mortgage to the late-payment list. The percentage of securitized commercial mortgages that were 60 days past due stood at 8.29% on October 31, down 8 basis points (bp) from a month earlier, according to Fitch. After peaking at 9.01% in July 2011, the delinquency rate slid to 8.3% in February, cranked back up to 8.65% in May, and since then, it has dropped steadily. It is now at its lowest level since December 2010, when it was 8.23%.

The amount of debt removed from Fitch’s delinquency index continued to exceed the balance of loans added, although not by much. About $1.4 billion of mortgages were resolved via liquidations, modifications, or some other type of workout in October, while $1.3 billion of loans were newly counted as delinquent.

Meanwhile, the volume of outstanding CMBS stopped shrinking, at least temporarily. Some $4.6 billion of Fitch-rated CMBS was issued in October, outweighing the $3.4 billion of bonds that paid off or defaulted. The agency now maintains ratings on $390.2 billion of bonds backed by about 31,000 commercial mortgages. The rise in that balance, which serves as the denominator when calculating the percentage of delinquent loans, helped keep the rate down.

11.2.12: ValueXpress Up and Running Despite Sandy

With an ability to work remotely, the ValueXpress team is underwriting and closing loan transactions with its clients; closing schedule expectations remain on track. Jay Bhakta is with clients in Houston and Corpus Christi, TX finishing up due diligence on six transactions totaling over $35 million in loan proceeds; all are expected to close on schedule within the next 14 days. Jim Brett is coordinating this effort with our investment bankers from his home in central New Jersey. Mike Sneden is finishing three multifamily transactions that are scheduled to close in November and December. Gary Unkel is in the closing phase for two hotel transactions in San Antonio, TX that are expected to close as scheduled on November 14 and completing due diligence with Jim on an industrial transaction expected to close in December. Kevin Monahan and Ken Stevenson continue to send out loan proposals for new transactions to allow clients to take advantage of CMBS conduit loan rates in the 4.5% area that can close by year-end.

“Best of all, this work is being done with no one in our NY home office except Danny Dell,” said Michael D. Sneden, Executive Vice President of ValueXpress. “You don’t see Danny Dell on our web site as an employee? Well that’s because we keep him in a closet; Danny is our server. As long as Danny has power we can work from anywhere and our clients’ loans will close without us missing a beat.”

11.1.12: Deutsche Bank and Cantor Price CMBS Issue at Tighter Spreads

Deutsche Bank and Cantor Fitzgerald priced a $1.11-billion CMBS transaction today that found strong demand; it priced at tighter levels than the previous CMBS deal from Wells Fargo and RBS that priced on Tuesday, October 16. The AAA-rated super-senior bonds priced mostly in line with initial pricing guidance at 83 basis points (bp) over swaps and at tighter spreads than comparable paper in the previous Wells/RBS deal that priced at 85 bp. Spreads on the junior AAA-rated bonds priced 5 bp tighter than guidance at 122 bp (13 bp tighter than the RBS/Wells deal), and the AA-rated Class B bonds priced 8 bp tighter than initial guidance at 167 bp (13 bp tighter than the RBS/Wells deal) as investors moved down the credit stack to find decent yield. The class B bonds were 4.5x oversubscribed at the initial guidance level of 175 bp before pricing was tightened to the final pricing level of 167 bp. The deal’s collateral was contributed by Deutsche (48.3%), Cantor (38.6%) and Key Bank (13.1%). The offering is backed by 48 loans, with retail properties representing 40.6% of the collateral pool, followed by office and mixed-use at 24.5% and 14.6%, respectively. Hospitality properties were 12% of the collateral pool.

“The results of this offering continue an extraordinary rally in CMBS and are great news for CMBS borrowers and originators,” commented Michael D. Sneden, Executive Vice President of ValueXpress. “We are seeing another decline in spreads to borrowers of about 5 bp to the swaps-plus-225-240 range for a conduit loan with a 10-year term, resulting in interest rates less than 4.5% and close to 4.0% for lower leverage commercial deals.”

10.24.12: Average Loan Coupon Declines for CMBS Loans

Weighted-average loan coupons continue to decline. The recent Deutsche Bank/Cantor Fitzgerald deal set a new post-crash low with a weighted-average coupon of 4.63%, continuing a trend over the past few months of declining average coupons. The chart below shows the weighted-average coupons for recent CMBS offerings.

Issue Date Issuer Deal Size (mm) Weighted Coupon
6/28/12 UBS/Barclays $1,216.1 4.980%
7/13/12 MS/BofA $1,352.2 4.738%
7/20/12 Wells Fargo/RBS $1,301.0 4.920%
8/8/12 Deutsche/Cantor $1,321.2 4.931%
9/10/12 Citigroup $1,040.2 4.954%
9/14/12 UBS/Barclays $1,082.1 4.985%
9/19/12 Wells Fargo/Ladder $1,277.2 4.807%
9/27/12 JPMorgan $1,136.6 4.701%
10/3/12 Deutsche/Cantor $1,251.4 4.833%
10/3/12 MS/BofA $1,123.5 4.693%
10/16/12 Deutsche/Cantor $1,111.0 4.633%

“These results are impressive as CMBS conduit loans become more competitive with insurance company rates on commercial properties and Fannie Mae/Freddie Mac rates on multifamily properties,” commented Jim Brett, underwriting chief at ValueXpress. “We recently secured a CMBS conduit multifamily loan quote on a $10-million student housing transaction in the 4.25% area that was within 25 basis points of a 75% LTV Fannie Mae/Freddie Mac quote. With the tendency for more-aggressive appraisal outcomes in CMBS, the borrower is seriously considering the conduit deal over the Fannie/Freddie deal.”

10.19.12: Watch Kevin Monahan Discuss Commercial Capital Training Group

Kevin Monahan of ValueXpress was interviewed by Commercial Capital Training Group (CCTG). Click the arrow below to listen to what Kevin has to say about CCTG:

10.12.12: Bharti Patel Wins NOOK Tablet at 2012 Northeast Conference of Mortgage Brokers Trade Show

Mortgage banker Bharti Patel won a NOOK Tablet e-reader at the ValueXpress booth at the Northeast Conference of Mortgage Brokers Trade Show, held recently at the Trump Taj Mahal Casino Resort in Atlantic City, N.J. Bharti is a broker associate, loan officer and manager of Richa Realty Inc. and Richa Mortgage Co. Associated with Richa for more than 20 years, Bharti’s clients include those seeking to purchase or sell residential and commercial real estate and those seeking to finance their home, investment property or small business property. Bharti prides herself on knowing her clients well and understanding their needs; her clients come back to her time and again to purchase, sell and refinance their homes and small businesses. Richa, based in Edison, N.J., is a leader in the N.J. Asian American Community.

“The trade show was highly successful for us,” commented Kevin Monahan, a Regional Loan Originator who covers the northeastern United States for ValueXpress. “I reconnected with a significant number of my colleagues and I am busy following up with the more than 300 mortgage professionals who visited the ValueXpress booth at the trade show.”

10.10.12: CMBS Buyers Focus on Lower-Tier CMBS

The CMBS rally that took hold at midyear has been changing shape lately, according to Commercial Mortgage Alert. Increasingly, yield-hungry bond buyers are clamoring for subordinate paper, typically junior classes AS, B and C, which carries lower subordination levels and is riskier than senior CMBS.

While new-issue prices for super-senior bonds have leveled off since late September, they have jumped sharply for the junior classes of investment-grade paper. Also, values have soared in the secondary market on the equivalent classes of both post-crash issues and legacy transactions.

“There is just not enough to go around,” said one investor. “The stuff that’s getting the most attention now is anything that’s yield-y, so people are moving down the capital stack. Meanwhile, prices for super-senior bonds appear to have stabilized following a summer surge because the resulting yields aren’t as attractive as they were just a month ago.”

“Country Bank is a buyer of class AS and class B CMBS, and we are finding the spreads grinding 5-10 basis points tighter as each new deal prices,” commented Michael Sneden, Executive Vice President of ValueXpress. “Plus, we are getting our allocations cut on each deal; most recently, we received only $3 million of class B bonds from the WFRBS 2012-C9 deal in which we placed an order for $8 million of bonds.”

10.5.12: ValueXpress to Exhibit at 2012 Northeast Conference of Mortgage Brokers

On Tuesday, October 9 and Wednesday, October 10, ValueXpress will be exhibiting at the Northeast Conference of Mortgage Brokers Trade Show in Atlantic City, N.J. Plan to stop by the Trump Taj Mahal Casino Resort Exhibition Hall and see us; ValueXpress will be in Booth 303.

The annual Northeast Conference of Mortgage Brokers brings together commercial and residential mortgage professionals, many of whom are affiliated with the Mortgage Bankers Association (MBA) in the eastern portion of the United States. Each state MBA is dedicated to promoting growth and good business practices in the real estate finance industry, and it is a resource that provides communication and networking opportunities for its members.

“ValueXpress is pleased to have this opportunity to meet with mortgage brokers at this Conference to explain in detail its SBA 7(a), SBA 504, USDA B&I, CMBS conduit and conventional commercial loans for owner-occupied and investment properties,” said Michael D. Sneden, Executive Vice President of ValueXpress. “We will be jointly representing our affiliated company, Country Bank, at the trade show. The timing of the show is perfect for us as we are seeing a substantial increase in CMBS conduit loan originations providing 10-year fixed rates in the 4.5% area on a non-recourse basis for income producing properties. The beauty of this product is cash out is permitted unrestricted for any purpose.”

ValueXpress will be heavily marketing its CMBS conduit program. “The CMBS conduit market right now is on fire, and we want to share the benefits, of long-term, fixed-rate, non-recourse commercial loans for larger balance (more than $5 million) transactions,” said Jim Brett, head of underwriting at ValueXpress.

Need a little incentive to visit us at the show? ValueXpress will be giving away a Nook Tablet e-reader from a drawing of business cards collected at our booth during the show. The drawing will be at 4:00 p.m. on Wednesday, October 10; the winner need not be present at the drawing.

Would you like a personal appointment with a ValueXpress representative during the show? Call now and book an appointment with Kevin Monahan (973) 579-6061 or Mike Sneden (212) 883-6447.

10.3.12: CMBS Volume Could Hit $46 Billion for the Year

A surge of fourth-quarter deals is expected to lift full-year U.S. commercial mortgage-backed securities issuance to at least $46 billion, far above earlier estimates. Some $14.9 billion of transactions are expected to price in the fourth quarter, according to a review by Commercial Mortgage Alert. That would be on top of the $30.9 billion of activity in the first nine months of the year.

At midyear, issuance totaled $18.3 billion. While that appeared to put the sector roughly on track to reach the $38-billion annual projection by a panel of CMBS bond pros, a blowout in spreads in May and June put a damper on lending, threatening to depress second-half activity. But a bull market that began in July bolstered the competitive position of CMBS shops, and lending has picked up significantly -- especially in the past month -- leading to new entries in the deal calendar.

Five issues totaling $4.4 billion are scheduled for this month, including two that priced this week. Seven offerings totaling $6.5 billion are in the queue for November. And three transactions totaling $4 billion are on tap for December.

The projected $14.9 billion of fourth-quarter deals would exceed the $12.5-billion average of the second and third quarters and more than double the first-quarter volume of $6 billion -- a sign that the sector is gaining momentum after a long slump caused by the financial crisis and the ensuing recession. What’s more, several single-borrower transactions now under discussion could be added by yearend, continuing a surge of such deals.

9.28.12: A Quick Look at New Issue CMBS Loan Underwriting

According to research by CS First Boston, one concern about the increasing rate of CMBS issuance is that the quality of underwriting has deteriorated quickly, as originators stretch in terms of credit quality, in order to increase the volume of loans coming to the market. With this in mind, CS First Boston took a quick look at some of the trends it has seen following the latest spate of conduit issuance.

In its view, the drop in credit metrics from 2010 to 2011 is much starker than the change in top-level metrics that has taken place over the first three quarters of 2012. While it certainly has noted some negative trends, such as the increase in more highly levered interest only loans, CS does not, at least at this point, find these trends overly troubling.

That said, CS generally looked at overall trends in this analysis rather than individual deals. While the overall averages may have exhibited only small shifts, surely some deals are better underwritten than others.

Deals still need to be evaluated on a case-by-case basis, especially as investors gravitate further down the credit stack. CS has, for example, seen loans in some deals that have again been made using pro forma assumptions. While these may be justified on an individual basis, as they have learned in the past, it can be a slippery slope; a quirk in a single loan can quickly manifest itself to become a common trend across all deals.

9.21.12: Fed Move Spurs Pickup in CMBS Rally

CMBS spreads fell to post-crash lows after the long-term, super-senior bonds from a $1.3-billion multi-borrower offering by Wells Fargo, Ladder Capital and RBS priced at 85 basis points (bp) over swaps on Wednesday, September 19, 2012, according to Commercial Mortgage Alert. This was down from the 95-bp spread at issuance on the equivalent class of a $1.1-billion offering led by UBS and Barclays that priced a week ago. In both cases, the bonds flew off the shelves with spreads 5 bp tighter than price guidance from their dealers.

The surge in demand followed the Federal Reserve’s commitment to boost liquidity in the fixed-income markets by launching a third round of bond buying under its “quantitative easing” program. The move accelerated a CMBS rally that began just after the benchmark spread hit this year’s peak of 160 bp in late June.

The spread-tightening trend should be a boon to CMBS lenders, which are slated to float another $7 billion of offerings by the end of next month. “This feels pretty sustainable,” one CMBS trader said. “I wouldn’t be surprised to see spreads [on long-term super-seniors] hit 80 bp before they level off.”

Until last week, the post-crash low for new-issue spreads on benchmark paper was 100 bp, achieved on just two deals: a $1-billion conduit offering by Citigroup, Goldman Sachs and Natixis that priced on September 10 (Citigroup Commercial Mortgage Trust, 2012-GC8) and a $1.3-billion multi-borrower issue led by Wells and RBS in February 2011 (WF-RBS Commercial Mortgage Trust, 2011-C2).

In this week’s Wells-Ladder-RBS deal, the investment-grade bonds went out the door with spreads that were either in line with price talk or tighter by 5-20 bp. As for the UBS-Barclays issue, the investment-grade bonds, except for the benchmark class, matched guidance down to the double-A-minus level. The single-A-minus paper from that deal was placed at 300 bp, down 15-25 bp from talk, and the triple-B-minus bonds went for 575 bp, down 25-50 bp.

9.19.12: Tightening CMBS Spreads a Bonanza for Borrowers – Part II

In July I wrote that CMBS spread tightening has resulted in a very favorable rate environment for CMBS conduit borrowers compared with just a few months earlier. Well, based on the recent CMBS issues, borrowing rates are poised to drop further in upcoming weeks as the results of recent CMBS issues are reflected in new loan quotes.

“New loan quotes are expected to be in the range of 225-250 basis points (bp) over the 10-year swap rate,” commented Michael D. Sneden, Executive Vice President of ValueXpress. “With the 10-year swap rate at 1.75%, borrowing rates are solidly under 4.50% and larger transactions are seeing rates under 4.25%.” As evidence, 70% of the recent Wells Fargo/RBS CMBS deal that priced on September 12 contained loans with rates under 5%, and those loans were based on wider spreads prevalent a few months ago when most of the loans were closed.

With the 10-year swap rate at 1.75% and anticipated loan spreads of 250 bp, the all-in rate to borrowers on a $10-million shopping center or office building underwritten to a 70% LTV and 1.35x debt-service coverage ratio is in the 4.25% area, very attractive indeed.

9.12.12: Small Business Capital and the Mark Feathers Saga…Cont’d

It appears that I was off base when I suggested the Securities Exchange Commission (SEC) might not understand the business model for Small Business Capital. In July, I wrote, “If you understand the structure of SBA loans, the two SBC funds conceptually make sense. The SEC alleges the returns on the Prime Fund that likely received the sales proceeds from SBA guarantee sales were “too good to be true,” but the market for SBA guarantees is indeed 115%, which is very high,” said Michael D. Sneden, Executive Vice President of ValueXpress. “Perhaps SBC is culpable, but I wonder if the SEC is not following how the business works; we shall see as the investigation unfolds.” Click here to read that post.

Well, the receiver charged with recovering assets on behalf of investors is estimating losses of $12 million. The receiver notes many “grey area” business practices, including failure of documenting his $650,000 equity injection, excessive compensation, patronage and using company assets for personal use. Compensation included $15,000 per month for Mr. Feathers and $15,000 per month for his wife. In addition, Mr. Feathers received $232,000 in consulting fees, and his children and their caregiver were on company payroll. Company records include payments for “expensive” cars and credit card charges for personal use. The receiver goes on to list other “improper” expenditures.

“It appears that this situation has nothing to do with the origination and selling of SBA guarantees and the distribution of profits,” said Sneden, “so I am quietly going to watch the outcome, as the situation does not appear to be good for Mr. Feathers.”

9.7.12: ValueXpress Welcomes Ken Stevenson

Ken Stevenson, a 20-year veteran in commercial real estate lending, has joined ValueXpress, effective September 1. Stevenson will be primarily responsible for commercial loan originations in the western United States.

“Ken brings an outstanding breadth of experience to the ValueXpress team,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “Ken cut his teeth at S&P, rating CMBS in the 1990s, and took that experience to Lehman Brothers, originating over $1 billion of CMBS transactions from 2002 to 2006. Ken took that experience to the next level when he was tapped to become Group Head of the Northeast Region for SunTrust Bank, which was making a big push into CMBS loan origination. We are very fortunate to have someone of Ken’s caliber on board.”

Since 2008, Stevenson managed the CMBS Structured Product Team at Vanguard Group, the largest U.S. mutual fund company. At Vanguard, he was responsible for $10 billion of CMBS held in actively managed and indexed mutual fund accounts.

“I am looking forward to returning to the origination side of the business after watching my CMBS accounts reap the rewards of the market recovery,” commented Stevenson. “I have always been a believer in the CMBS loan product, and look forward to assisting my former clients and new clients secure the record-low rates now being offered on CMBS loans.”

Stevenson can be reached at kstevenson@valuexpress.com.

9.2.12: Delinquency Rate Falls 21 BP in August – Largest Decline Since November 2011

The long-anticipated leveling off of the U.S. CMBS delinquency rate became a reality in August. Over the last few months, we predicted that the Trepp CMBS Delinquency Rate would hit a high in early to mid-summer then decelerate in the second half of the year. That prognostication came to fruition in August when the delinquency rate fell sharply. The delinquency rate for U.S. commercial real estate loans in CMBS fell 21 basis points (bp) to 10.13% in August. It was the largest one-month drop since November 2011. And the decrease occurred after five consecutive months in which the rate increased, including three months that set all-time records.

The improvement in the rate was driven primarily by two factors. First, loan resolutions remained elevated. Almost $1.5 billion in loans were resolved with losses in August. The removal of these loans from the delinquent loan category accounted for 26 bp of downward pressure on the delinquency rate. Second, most of the 2007 securitized loans have passed their maturity date. The upward pressure that these loans put on the delinquency rate when they could not be refinanced upon maturity is now largely gone.

Among the major property types, the apartment, lodging, and office segments all improved. The laggards were industrial and retail loans; their rates drifted higher in August. Loans that were newly delinquent -- around $3.3 billion in total -- put upward pressure of about 57 bp on the rate. This was a sharp decline from July when newly delinquent loans resulted in an increase of 81 bp ($4.6 billion). Loans that cured -- about $2.8 billion -- put downward pressure of 48 bp on the rate in August. Added together, the impact of the loan resolutions, the effect of loans curing, and the effect of newly delinquent loans created a net decrease of 17 bp in the rate. One category to keep an eye on is loans that are past their balloon date but are current in their interest rate (“performing balloons”). This category now accounts for 1.13% of loans in the database, down 16 bp in August. If we were to consider these loans late, the delinquency rate would have been 11.26%. On this basis, the delinquency rate for August was down 37 bp from the July rate with performing balloons included.

Delinquency Status Percentage
Current 88.74
30 Days Delinquent 0.56
60 Days Delinquent 0.30
90 Days Delinquent 1.74
Performing
Matured Balloon

1.13 (1)
Non-Performing
Matured Balloon

1.30
Foreclosure 3.08
REO 3.15
(1) Loans that are past their maturity date but still current on interest are
considered current.


Period % 30 Days
or More Delinquent
Aug-12 10.13%
Jul-12 10.34
Jun-12 10.16
   
3 Months Ago 10.04%
6 Months Ago 09.37
12 Months Ago 09.52


8.29.12: Brokers: How to Get an MBA in CLO

Since May, ValueXpress has been participating in the education and training of professionals in commercial loan origination (CLO) as part of Commercial Capital Training Group’s (CCTG) education program. The ValueXpress CMBS presentation, which includes a review of the company’s specialty niche of hospitality financing, is one of over 42 different product segments and financial instruments discussed during the week-long program. Each month, a new group of students gets together with CCTG’s Kris Roglieri and Jon Consentino to learn how to become successful commercial loan brokers or more effective brokers.

“Each month I’m impressed by the caliber of people participating in the CCTG program,” states Kevin Monahan, a senior loan originator at ValueXpress and CCTG educator. “The program provides students with the tools and support needed to understand and implement successful commercial loan origination techniques, hopefully resulting in some big paydays down the road.”

If you are interested in CCTG’s training program or you would like additional information, contact Kris Roglieri or Jon Consentino at 518-694-3047 or visit CCTG’s website at www.CommercialCapitalTraining.com.

If you are a CCTG graduate and you have a potential CMBS or hospitality deal requiring a lender, please contact Kevin Monahan at 973-579-6061.

8.24.12: Calm Before the CMBS Issuance Storm

After only one issue at the beginning of August, the CMBS market is preparing for a flurry of deals in September and October. CMBS conduit shops are expected to team up, mainly with their usual partners; in September, the market can expect deals from JPMorgan/CIBC, UBS/Barclays, RBS/Wells Fargo, Goldman Sachs/Citigroup and Deutsche Bank. In October, Morgan Stanley/Bank of America and JP Morgan are expected to have deals ready to market. Total issuance is expected to approximate $8 billion.

With year-to-date 2012 issuance of $25 billion essentially flat with 2011, the surge in issuance will position the market to exceed full-year 2011 issuance of $36 billion, perhaps landing in the $40-$45 billion range, the largest issuance since the market resumed in 2010.

“It will be interesting to see if the new supply provides upward pressure on spreads,” said Michael D. Sneden, Executive Vice President of ValueXpress. “In the last three deals, investment-grade classes were oversubscribed and we had our allocations cut by 75%. Perhaps there will be enough bonds to go around this time.”

UBS and Barclays figure to be first out of the gate as their deal is expected to begin marketing right after Labor Day, but the RBS/Wells and JPMorgan deals will be right on the heels of the UBS deal.

8.20.12: Energy Boom Boosting Texas Hotel Performance

Jay Bhakta, a senior loan originator at the ValueXpress Jackson, MS office, has lived in Jackson, MS for over 20 years. During that time he has become a well-known financier to the Asian-American community, having financed numerous hotels, gas stations and fast food/convenience stores in the past ten years. The market slowed during the economic crisis, but more important, Jay noticed that Mississippi, Louisiana and Florida, his bread and butter states, were slow to recover.

So a couple of weeks ago, Jay called me. “Mike, I am going on the road, just like the old days,” he said.

I remembered the old days when Jay often hopped in a car or jumped on a plane to meet clients personally. Not that Jay had stopped doing that; it was just not working as well. So I asked Jay where he was going.

“I got a call from my Uncle Raj,” said Jay. “He says he’s hitting the cover off the ball in Corpus Christi, TX. I am stopping in Houston to see Ajay as well.”

“Huh,” I said to myself. I wondered what was going on.

“Mike, it's oil and gas,” Jay explained. “With increased domestic drilling for oil and gas, transient lodging is needed all over the place, and Texas is a major beneficiary.”

Needless to say, Jay’s trip is yielding results. We have more than ten hotel deals with term sheets out to borrowers. One borrower just keeps adding more properties -- currently four with a loan total over $25 million, including the highest performing Staybridge in the state of Texas.

Jay…please stay on the road!

8.17.12: Barclays: More Investors Now Focused on Both RMBS and CMBS

Investors in the non-agency secondary mortgage markets are now looking at opportunities across asset classes, according to Barclays Capital. "Since 2009, non-agency RMBS and CMBS have posted extraordinary price returns," said Barclays analysts in an email late Friday. "We believe more investors are now focusing on both asset classes and need to make allocation decisions."

Both sectors went through a period of issuance growth in 2003-2006, according to the note. And then in 2006-2009, both asset classes went through a long period of underperformance and asset sales.

"Since then, both have attracted wide-ranging interest from alternative as well as traditional money managers," Barclays analysts said. "Both markets have posted very substantial price gains since mid-2009." And they pointed out that prices in the non-agency RMBS space are now 60%-80% higher relative to the March 2009 bottom.

The analysis also highlights the nuances of each asset class. For example, lately, commercial real estate prices are more volatile than residential. Also, investors who traditionally picked either asset class may be moving into other markets, but remain largely disconnected from one another. Barclays is hoping to bridge this gap.

8.10.12: ValueXpress Looking for Loan Originators

Last November, I put out a call for loan originators to join our team; at that time Kevin Monahan and Leon Elliott came aboard. Kevin has approximately 10 deals committed and Leon has well over $60 million in loans approved, including a $32-million hotel portfolio loan and a $24-million office portfolio loan. The primary demand has been for CMBS conduit loans, which provide higher fees and faster processing time.

“The CMBS conduit market is on a tear. ValueXpress is now originating CMBS conduit loans at a $200-million annual pace, not far off the levels we were producing prior to the market crash in 2007,” commented Michael D. Sneden, Executive Vice President of ValueXpress. “So now I am repeating my efforts and looking to find additional originators as the market for CMBS loans is the best it’s been in four years.”

“We’re looking for individuals who are seeking a flexible, entrepreneurial and financially rewarding career path,” Sneden continued. “If you are a mortgage banking professional with specific experience in the origination of CMBS conduit loans, contact me at msneden@valuexpress.com so we can set up a time to talk.”

ValueXpress has access to a database of every closed CMBS conduit loan that is outstanding. The database has historical property operating data, rate and term information, servicer commentary and, most important, loan maturity. The ValueXpress origination team has been mining this database, carving it up based on the location of ValueXpress originators; this allows our originators to make personal contact with owners who are approaching maturity to assist them in refinancing their properties. As noted below, many CMBS conduit borrowers are having a difficult time paying off their loans; they are in great need of the services provided by ValueXpress.

8.7.12: July Payoff Report: Percentage of Loans Paying Off Hits New 12-Month Low

The percentage of loans paying off on their balloon date hit a 12-month low last month, according to the just-released Trepp July 2012 Payoff Report. With only 26.3% of loans reaching their balloon date paid off, the July total was well under the 12-month average of 41.6%. (This number simply sums the averages of each month and divides by 12; there was no balance weighting across the months.)

By loan count (as opposed to balance), 33.3% of loans paid off, which means the 12-month rolling average is now 52.2%. The disparity between the volume-based total and the count-based total indicates that it was mostly small balance loans that managed to pay off in June.

In comparison, the May payoff rate registered a paltry 29.4%. At the time, that was the lowest reading since October 2010, when the payoff percentage was 22.3%. July’s 26.3% payoff percentage was even lower than May’s 29.4%.

Prior to 2008, the monthly payoff percentages were typically well north of 70%. Since the beginning of 2009, however, there have only been four months in which more than half of the balance of loans reaching their balloon date actually paid off.

“These statistics are not surprising to us,” noted Jim Brett, Senior Underwriter at ValueXpress. “We recently helped a borrower that had a matured CMBS conduit loan and the special servicer was putting substantial pressure on the borrower to close. We had to process the loan quickly, and when the special servicer demanded $500,000 in late fees and default interest right before closing, we stepped in and helped with negotiations. We are actively searching the CMBS conduit loan universe to help other borrowers pay off their maturing CMBS conduit loans as there are obviously a lot a similar situations out there.”

8.1.12: Second-Quarter Commercial/Multifamily Mortgage Originations Up 25% from a Year Ago

Washington, DC (July 31, 2012) – Commercial/multifamily mortgage origination volumes during the second quarter of 2012 were up 25% from second-quarter 2011 levels and up 39% from the first quarter of 2012, according to the Mortgage Bankers Association’s (MBA) Quarterly Survey of Commercial/Multifamily Mortgage Bankers Originations.

“Commercial and multifamily mortgage lending and borrowing continued to pick up in the second quarter,” said Jamie Woodwell, MBA’s Vice President of Commercial Real Estate Research. “Low interest rates and continued stabilization and growth in the commercial real estate markets are helping support new loan originations, and every major investor group increased their lending over the quarter.”

The 25% overall increase in commercial/multifamily lending volume, when compared with the second quarter of 2011, was driven by increases in originations for retail and hotel properties. The increase included a 56% increase in the dollar volume of loans for retail properties, a 22% increase for hotel properties, a 19% increase for multifamily properties, a 15% increase for office properties and an 11% increase in healthcare property loans. These gains offset a 5% decrease in industrial property loans.

Among investor types, the dollar volume of loans for commercial bank portfolios increased by 58% over last year’s second quarter. There was also a 50% increase in loan volumes for Government Sponsored Enterprises (or GSEs – Fannie Mae and Freddie Mac), a 16% increase in volumes for conduits for CMBS and a 10% increase in volumes for life insurance companies.

Second-quarter 2012 commercial and multifamily mortgage originations were 39% higher than originations in the first quarter of 2012. Compared with the first quarter, second-quarter originations for hotel properties saw a 147% increase. There was a 66% increase for office properties, a 47% increase for industrial properties, a 33% increase for healthcare properties, a 29% increase for retail properties and a 21% increase for multifamily properties.

Among investor types, between the first and second quarters of 2012, loans for conduits for CMBS saw an increase in loan volume of 302%, loans for life insurance companies saw an increase in loan volume of 37%, originations for GSEs increased 28% and loans for commercial bank portfolios increased by 9%.

7.26.12: CMBS Spreads Reverse Direction and Tighten

CMBS spreads reversed direction and tightened in the past two weeks after CBMS offerings from Morgan Stanley/Bank of America (BoA) and Wells Fargo/RBS priced at sequentially tighter spreads from peak levels seen in June when UBS/Barclays widened pricing of long-term super senior CMBS from its multi-borrower issue to 160 basis points (bp) over swaps.

On July 13, Morgan Stanley and BoA priced the long-term, super-senior class of a $1.4-billion conduit deal at 135 bp over swaps after originally offering it at 145-150 bp. Demand for all of the investment-grade classes was strong as the underlying assets were viewed as high quality, and investors were compelled to put cash to work, despite lower yields. Half of the junior AAA-rated AS class, B class and C class were carved out for one buyer; this reduced the amount available for other investors and resulted in the classes being oversubscribed.

Demand increased further when ten-year bonds from the super-senior portion of a $1.3-billion multi-borrower issue led by Wells Fargo and RBS priced at 120 bp over swaps on July 20. The dealers had been marketing those bonds with price guidance of 130-135 bp. Most of the classes were oversubscribed.

“Demand for CMBS in the past 30 days has been very strong,” commented Michael D. Sneden, Executive Vice President of ValueXpress. “Although CMBS yields are relatively low, they are higher than comparably rated corporate securities and they provide diversity in the underlying income-producing assets to pay bondholders and transparency in cash flow reporting to investors,” said Sneden. “We received only 33% and 25% of our CMBS purchase orders on both the Morgan Stanley/BoA and the Wells Fargo/RBS deals, respectively, as the classes we ordered were oversubscribed.”

7.23.12: Tightening CMBS Spreads a Bonanza for Borrowers

CMBS spread tightening has resulted in a very favorable rate environment for CMBS conduit borrowers compared with a few weeks ago.

“Benchmarking borrower rates is becoming a daily event,” commented Michael D. Sneden, Executive Vice President of ValueXpress. “Borrowing rates are once again solidly under 5.0% and larger transactions are seeing rates under 4.5%. In fact, the Morgan Stanley/BoA CMBS issue that priced on July 13th featured two large loans with borrowing rates under 4%.”

The Morgan Stanley/BoA issue contained 6 additional loans with rates between 4.0% and 4.5% and a total of 36 loans (75% of the entire CMBS issue) that carried a rate of less than 5.0%. Similarly, the Wells Fargo/RBS issue featured 3 loans with rates between 4.0% and 4.5% and 38 loans (67% of the entire CMBS issue) that carried rates under 5.0%.

With the 10-year swap rate at 1.55% and loan spreads just south of 300 basis points, the all-in rate to borrowers on a $10-million shopping center or office building underwritten to a 70% LTV and 1.35x debt-service coverage ratio is in the 4.5% area, consistent with the rates seen in the Morgan Stanley/BofA and the Wells/Fargo CMBS deals.

7.18.12: Small Business Capital and the Mark Feathers Saga

For lenders and intermediaries involved in SBA lending, the saga of Small Business Capital (SBC) and its CEO Mark Feathers provides more drama than the TV show "The Housewives of New Jersey." SBC is a licensed SBA lender located in Los Altos, CA. The firm holds 1 of 14 non-bank SBA 7(a) licenses that allows the firm to make SBA loans and, more importantly, sell the guarantees associated with SBA 7(a) loans in the secondary market. SBA 7(a) loans are 75% guaranteed by the SBA, and in today’s market, the guaranteed portion of the loan can be sold at a substantial premium of up to 15% greater than its face amount (i.e., a $1-million guarantee will sell for upward of $1,150,000, providing an immediate profit of $150,000).

SBC was capitalized by private investors through an offering memorandum. The offering memorandum pitched two funds, the Investors Prime Fund and the SBC Portfolio Fund. It is likely that the SBC Portfolio Fund was structured to hold the unguaranteed portion of SBA 7(a) loans (25% of the total loan), thereby generating interest income for investors from mortgage payments. The Investors Prime Fund probably recorded the income from guarantee sales and was structured to share that income among SBC and investors in the Prime Fund. In addition, SBC collected management fees from both funds, which is not unusual.

On June 29, 2012, the SEC shut down SBC alleging fraud in a “Ponzi-like” scheme. The SEC claims that SBC and Mark Feathers were paying returns that partly came from fund profits and partly from other investors, typical of a Ponzi fraud.

“I am watching this one,” said Michael D. Sneden, Executive Vice President of ValueXpress. “If you understand the structure of SBA loans, the two SBC funds conceptually make sense. The SEC alleges the returns on the Prime Fund that likely received the sales proceeds from SBA guarantee sales were “too good to be true,” but the market for SBA guarantees is indeed 115%, which is very high,” said Sneden. “Perhaps SBC is culpable, but I wonder if the SEC is not following how the business works; we shall see as the investigation unfolds.”

7.13.12: Trepp: Only 28% of Maturing 2007 CMBS Loans Paid Off in Full

According to Trepp, 2007 marked the year that commercial real estate values and the surrounding euphoria peaked. In the five years since, investors have spent countless nights fretting about the weak underwriting, optimistic revenue forecasts and inflated values tied to these loans. Prevailing wisdom indicated that the default rate would be high and many of the loans would struggle to refinance. Now that 2012 is half over, we can see how these loans have fared. For the most part, their performance has met investors' dismal expectations.

Almost 13% of the loans were paid off prior to their maturity date. Another 15% paid off at the balloon date or in the months after the maturity date. Therefore, only about 28% of the Class of 2007 loans paid off in full. The Class of 2007 loans that matured in the first half of 2012 in its entirety looks like this:

Total Balance of Loans: $18.6 billion
Extended: 30.49%
Disappeared Early:
(Loss): 8.26%
(Par): 12.94%
Paid Off at Balloon:
(Loss): 2.63%
(Par): 15.19%
Still Outstanding (includes extended loans): 60.98%

7.9.12: Apparently Discounted Payoffs Are Okay for CMBS Conduit Loans

A detailed read of the 699-page prospectus for the CMBS issue from Jeffries LoanCore, Goldman Sachs and Citigroup (GSMS 12-GCJ7) that closed in June 2012 revealed some interesting facts regarding refinance loans in which the prior lender was being paid off at less than the full amount due. Pages 29-30 of the prospectus state: “Seven (7) of the mortgage loans, representing approximately 13.7% of the aggregate principal balance of the pool of mortgage loans as of the cut-off date, were refinancings of defaulted loans or otherwise involved discounted payoffs.” The prospectus described a $5-million principal forgiveness from the prior lender on the 4th-largest loan in the pool, an $87-million industrial loan. In addition, the majority of the 10th-largest loan, the $47-million McCraney Industrial Portfolio, went to pay off a $63.5-million obligation for only $39.6 million.

“Whereas the commercial banking system is not inclined to finance a property in which the prior lender is taking a loss, the nature of CMBS underwriting is on current and sustainable cash flow, including appropriate vacancy, management fees, and capital reserve assumptions, that concludes an appropriate loan amount,” notes Michael D. Sneden, Executive Vice President at ValueXpress. “If the concluded loan amount is acceptable to the borrower, the amount it pays off is almost immaterial, allowing for discounted payoff situations.”

7.3.12: Fracking Boosts Hotel Business

Hydraulic fracking has positively influenced hotel performance in areas with high fracking activity. One such area in the eastern portion of the United States is in the “Marcellus Shale” region, mostly found under the states of Pennsylvania, Ohio and West Virginia. These three states allow fracking, a process of horizontal ground drilling in conjunction with injection of high-pressure water and chemicals to extract natural gas. The Marcellus Shale has resulted in a significant positive impact from gas exploration companies establishing operations in these areas and travel to these areas by a variety of natural gas specialists. As a measure of impact, Smith Travel Research reports increases in revenue per available room (RevPar) of 9.3% in 2010 and 9.9% in 2011.

“I am getting a lot of calls for hotel construction loans in central and north central Pennsylvania,” notes Michael D. Sneden, Executive Vice President at ValueXpress LLC. “My sources were reporting 100% occupancy at hotels in the heart of drilling areas. The concern is that the fracking process is an in-and-out effort. You drill the well, connect it to a pipeline and leave. Eventually, all this transient demand for hotel rooms will end.”

Sure enough, with the collapse of natural gas prices to below $3.00/mcf in 2012 from over $9.00/mcf in 2008, drillers are shutting down their efforts, capping wells and going home. As a result, growth in hotel demand has slowed considerably in the Marcellus Shale region.

6.29.12: CMBS Spreads Widen Further, Affecting Loan Rates

After holding relatively steady in the face of rising CMBS spreads, conduit loan rates are starting to increase; spreads on the two most recent deals from JP Morgan/CIBC and UBS/Barclays widened at pricing. Prior to these deals, CMBS spread widening was offset by decreases in the swap rate that left the all-in rate to borrowers on a $10-million shopping center or office building underwritten to a 70% LTV and 1.35x debt-service coverage ratio in the 4.75% area.

The swap rate is no longer declining in tandem with the increases in CMBS spreads. While the 10-year swap rate hovers around 1.75%, CMBS loan spreads have increased to the 3.25% area, resulting in an all-in rate to the borrower of 5.0%.

The JPM/CIBC deal, a $1.3-billion transaction, priced on June 22 its $346.9-million super-senior class of 9.9-year bonds at 150 basis points (bp) over swaps; up from 140 bp on the prior deal by RBS and Wells Fargo that priced on June 7. UBS and Barclays priced a $1.2-billion offering on June 28 with its $479.7-million super-senior class pricing at 160 bp, 10 bps wider than the JPM/CIBC deal and 20 bps wider than the RBS/Wells deal.

“The widening of spreads on CMBS issues is putting upward pressure on borrower loan rates,” commented Michael D. Sneden, Executive Vice President of ValueXpress. “The supply of CMBS is greater than what the investment community can absorb, considering the yield on 10-year super-senior CMBS is a relatively low 3.25%.”

6.22.12: Characteristics of Hotel Loans in CMBS 2.0

Jim Brett, senior loan underwriter, head closer, CMBS research analyst at ValueXpress and all-around good guy, recently prepared a study of the 222 hospitality loans that have been included in 35 CMBS issues since 2010. The effort discovered trends that can be utilized to advise our hospitality borrowers on expected deal structure, underwriting parameters and rates for a CMBS conduit loan.

Here are some of the basics:

  Low
High Avg.
Loan Size (millions) $3.2 $145 $15.9
DSCR 1.36x 4.13x 1.80x
LTV 21.8% 74.9% 57.4%

Some caveats to the data: Only two loans report DSCR < 1.40x and 12 < 1.45x. In regard to LTV, only 10 loans of the 222 reported LTV > 70%, and 26 reported LTV between 65%-70%. The data support market quotes for hotels requiring a minimum DSCR of 1.45x and LTV < 65%, but suggest that LTV of 65%-70% with a 1.45x DSCR might be possible.

Rate dispersion:

Up to 4.99%
5.00 - 5.49%
5.50 - 5.99%
6.00 - 6.49%
6.50 - 6.99%
7.00 - 7.49%
8.00 - 8.49%
17
42
74
68
18
2
1

It is difficult to obtain specific takeaways on rate, except to say that rate is really based on market timing. The largest loan, at $145 million and secured by the Intercontinental Hotel in Chicago, IL, received a rate of 5.61% based on 1.57x DSCR and 50.2% LTV. Clearly, many other hotels did better than this, including a $7.7-million Candlewood Suites in Killen, TX, with a rate of 5.05%.

Many limited- and full-service franchise brands in the “mid-scale” and better franchise scale (as defined by Smith Travel Research) are represented. No “economy” brands are represented. Better independent hotels can be found in CMBS as well, represented by approximately 15 hotels. Another theme is most hotels are located in primary or secondary markets. Hotels in smaller markets, typically limited service, are underwritten with higher DSCR and lower LTVs.

6.19.12: SBA Appropriation May Increase by $237 Million

In this election season it has become nearly impossible to pass bills that were once routine, but there may be at least one exception: related to the Small Business Administration (SBA). Last week, the Republican-led U.S. House Appropriations Committee unveiled its bill to finance the SBA and several other government agencies. And what is most notable about the four pages dealing with the SBA is the prospect for comity, not conflict.

In all, House Republicans have proposed appropriating $1.16 billion to the SBA -- $989 million excluding disaster funding -- about $40 million more than the Obama Administration has sought and $237 million more than the agency received this year. In its broad outlines, the funding proposal from the House is remarkably similar to the administration’s request. The main difference is that the House finances subsidies that would permit the SBA to guarantee more lending in its main loan programs than the administration would. The increase may not have a meaningful impact on lending, though, since these figures are ceilings, and it’s not clear that lending will reach them. (If the first eight months of the 2012 fiscal year are indicative, the agency won’t come close to bumping up against the 2013 ceilings.) More meaningfully, the House would direct $112.5 million to small business development centers, as much as the centers received last year and $11.5 million more than the administration requested.

On June 14, the U.S. Senate Appropriations Committee produced its own bill financing the SBA (among other agencies) and largely followed the same template, proposing $1.12 billion. That is less than the House bill, but it directs more money to microlending and to the counseling programs than either the House proposes or the administration wants. At the same time, it pares back the House’s loan subsidy (and corresponding lending limits) to the administration’s request.

6.15.12: CMBS Conduit Loan Rates Steady Despite Capital Market Turbulence

CMBS conduit loan rates are holding relatively steady despite market turbulence surrounding the European debt crisis. Fixed income professionals are increasingly worried about whether Greece will exit the European Union and whether debt-related trouble will spread to Spain, Italy and Ireland. Relative volatility in financial markets is high, potentially affecting CMBS spreads and hence CMBS conduit mortgage spreads, but so far the impact has not had a dramatic impact on rates to borrowers.

CMBS spreads did widen on the most recent CMBS issue, a $1.1-billion transaction that RBS and Wells Fargo priced on June 7. The $418.0-million super-senior class of 9.9-year bonds priced in line with guidance at 140 basis points (bp) over swaps. But among the subordinate bonds, the $82.8-million junior triple-A rated bonds and $58.0-million double-A rated bonds both priced 5 bp wider than guidance, at 205 bp and 280 bp over swaps, respectively.

Although CMBS spreads have widened and spreads on loan quotes to borrowers have widened by about 15 bp, all-in borrower rates have not changed much because the swap rate has decreased by approximately the same amount. A typical $10-million shopping center or office building underwritten to a 70% LTV and 1.35x debt-service coverage ratio is seeing a CMBS conduit spread quote of 290 bp over the 10-year libor swap. Four weeks ago, the resulting interest was 4.80%; two weeks ago, the rate was 4.60%; and today with the 10-year swap at 1.80%, the borrowing rate is 4.70%. So the all-in rate has been range-bound despite all the debt challenges in Europe.

CMBS spreads will be tested in the next few weeks as issuers prepare to sell $6 billion in CMBS in five multi-borrower CMBS issues that are expected to price by the end of July. The supply of bonds, together with market uncertainty, could result in additional spread widening.

6.7.12: Kevin Monahan to Return as Instructor for Commercial Capital Training Group

Kevin Monahan, Senior Loan Originator at ValueXpress, addressed the May 2012 class of the Commercial Capital Training Group (CCTG) in Albany, NY. CCTG is a one-of-a-kind training company that provides a one-week, comprehensive commercial training and education program tailored for new and experienced commercial loan and mortgage brokers.

Monahan’s presentation provided an overview of ValueXpress and its loan products, an overview of the CMBS product, and a closing that explored “Why it’s a great time to be brokering hotel loans.” The presentation, enthusiastically received by the CCTG students and instructors, was followed by a lengthy Q&A session that covered specific loan product details, loan scenarios, and the proper pricing and structuring of deals. “The Q&A portion was a lot of fun, as it allowed me to get to know the students a bit and to tailor the ValueXpress products to their particular business,” Monahan said.

The class, which consisted of a mix of commercial lending rookies and veterans, was eager to hear about the unique product mix offered by ValueXpress, the CMBS product in particular, and our hospitality lending expertise. Monahan noted, “They appreciated that we offer them a unique mix of loan products, both CMBS and SBA, combined with a strong desire to assist them with their hotel deals. I feel they walked away gung-ho on finding hotel deals and understanding that ValueXpress can help them make a lot of money.”

The presentation was so well received that CCTG Instructors Kris Roglieri and Jon Consentino invited Monahan back to speak on June 20.

6.5.12: Country Bank Active CMBS Buyer

Country Bank, a New York state community bank affiliated with ValueXpress, has been actively buying new issue CMBS for its investment portfolio, attracted to their high relative yield, underlying asset diversity and attractive capital risk weighting.

The bank first began investing in CMBS during the 2008 financial crisis when the value of CMBS plummeted well in excess of their intrinsic value based on the expected performance of the underlying loans. The bank engaged Mortgage Investment Group, a company headed by Michael D. Sneden, Executive Vice President of ValueXpress, to perform analytics on the loans underlying 200 2005-2007 CMBS issues to determine the issues that were expected to perform better than their peers. The company created a list of about 50 CMBS issues that were expected to outperform, and in 2008-2010, the bank purchased and sold approximately $150 million in CMBS, recording significant capital gains over the period.

When the CMBS market fully recovered in 2010, the bank shifted its focus to new issue CMBS. CMBS loans underwritten since the market resumed in 2010 have been conservatively underwritten, contain no “pro-forma” loans, and are structured to provide better lender protection; most loans feature collected TILC and structural reserves, cash flow sweep escrows in advance of key tenant expirations to collect cash for TILC/debt service should tenants vacate, and many loans feature cash clearing accounts that capture property cash flow in the event of declining property performance. As a result, Country Bank has been comfortable investing in junior AAA-rated CMBS and AA-rated CMBS that are providing yields in excess of 4.5%, which are attractive relative to alternative fixed-income investments.

6.1.12: ValueXpress to Assist Marine Corps Heritage Foundation in Development of Hotel

ValueXpress is working with the Marine Corps Heritage Foundation in its efforts to develop a new hotel at the National Museum of the Marine Corps in Quantico, VA. The National Museum of the Marine Corps, a 100,000-square-foot facility located along Route 1 and Interstate 95 in Quantico/Triangle, is a standing tribute to the service men and women of the U.S. Marine Corps. Completed in 2006, the museum has become the number-one tourist attraction in Virginia, exceeding a reported 500,000 visitors annually.

The museum site contains a 10-acre parcel of land directly opposite and facing the museum in a wooded setting that has been earmarked for a hotel and conference center. ValueXpress is engaged with the Marine Corps Heritage Foundation in evaluating potential franchise affiliations and room count, in addition to the optimum size for meeting space to be contained within the conference center. It is expected that the hotel will be an upper upscale (i.e., Embassy Suites) or upscale franchise (i.e., Hilton Garden Inn). The museum and hotel site are immediately accessible to I-95, which is expected to help drive room demand from a variety of sources beyond the military.

ValueXpress is involved in the effort as a result of its experience financing more than 100 U.S. hotels, including nearly every franchise affiliation. This experience has allowed ValueXpress to become intimately familiar with the most successful brands in the United States, and ValueXpress will bring that experience to the Marine Corps Heritage Foundation team.

“I am excited and honored to be a part of the team charged with securing hotel development for this extraordinary site,” said Michael D. Sneden, Executive Vice President of ValueXpress. “Working beside two U.S. Marine Corps Generals on this project has been awe-inspiring and I hope my knowledge of the hospitality industry can lead to a highly success hotel and conference center project for this great organization.”

5.30.12: Legacy CMBS Delinquency Rates Continue to Rise

In a sign that the troublesome class of 2007 loans has not yet made the grade, the CMBS delinquency rate hit a new high in May after steadily creeping up over the last three months. New research from Trepp shows that the delinquency rate is now 10.04%, up 24 basis points (bp) from last month (9.8%) and a whopping 67 bp since February (9.37%), an indication that the rocky CMBS market has not yet reached solid ground.

“It is definitely not exactly as we and others have thought over the last three to five months,” said Manus Clancy, senior managing director at Trepp. Clancy predicted earlier in the year that the market could easily see a spike of 70 bp in the short term, as five-year loans that were securitized in 2007 began to reach their maturity dates. The good news, he said, is that these loans were “heavily” front loaded.

“We should see another month or two where we kind of bump along in a negative direction, but after that, we should start seeing the delinquency rate start to level off beginning in the middle of the summer,” Clancy said, noting that the rate could continue to edge up in the next couple of months. Out of the five major property types, the delinquency rate was driven by large increases in hotel and industrial loans. According to the report, the hotel delinquency rate surged 172 bp and is now back over 12%, and the industrial delinquency rate is up 46 bp and remains the second-worst category at 12.82% currently versus 11.96% in 2011.

And despite its strength in the overall marketplace, Clancy said the worst sector is multifamily, at 15.17%. “On bank balance sheets, multifamily has done pretty well, and in the REIT sector, it has done well,” he said, explaining that a large chunk of the 15.17% is made up of loans that were done like Stuyvesant Town, which holds a delinquent $3-billion loan, amounting to 4% of the total number, but we “should see a leveling off in the second half of the year.”

5.22.12: 504 Poolers Begin to Shut Origination Window

Lenders that are originating SBA 504 loans (both in the construction/acquisition and refinance program) purely for pooling the first mortgage loan for sale in the secondary market are beginning to shut down those operations in anticipation of the expiration of the program on September 23, 2012. Since SBA 504 loans cannot be pooled until 504 debenture funding, the last opportunity to pool loans will be the September 12, 2012 debenture funding date, and even that date is cutting it awfully close to the program expiration date. Realistically, lenders are looking at the August 15th debenture funding date as the last opportunity for closed 504 first mortgage loans to be pooled and sold. To make the August 15th date, all documents need to be with Colson by July 24th, and given a 60-day period to efficiently close an SBA 504 loan, that would imply any application taken after May 24th is not likely to make the cut-off for pooling and sale in the secondary by the end of the program.

“When we sat down and looked at the timeline, we decided to effectively cut off applications of 504 loans originated for pooling and sale in the secondary market as of June 1, 2012,” said Tim Moffett, Vice President and head of Government Guaranteed Lending at Country Bank. “However, we like the SBA 504 program and will continue to originate 504 loans for the bank’s balance sheet.”

5.18.12: CMBS Conduit Loan Rates Decline with Treasury Rally

CMBS conduit loan rates have fallen to the lowest levels since the restart of CMBS lending in 2010. Interest rates on CMBS conduit loans are set based on a spread over the libor swap rate corresponding to the loan term. Recently, libor swap rates have declined in tandem with the 10-year treasury rate, while spreads have remained stable. Just a few weeks ago, the 10-year swap rate was 2.05% versus 1.84% at the market close on May 18.

A typical $10-million shopping center or office building underwritten to a 70% LTV and 1.35x debt-service coverage ratio is seeing a CMBS conduit spread quote of 275 basis points over the 10-year libor swap. Two weeks ago, the resulting interest was 4.80%. Today, that loan closes at 4.59%.

“Rates are solidly in the mid- to high 4% area across the board for 10-year CMBS deals,” commented Michael D. Sneden, Executive Vice President of ValueXpress. “These are exceptional levels and they are driving a significant amount of new CMBS loan applications. Even hotel loans are slightly below 5% now.”

It is possible swap rates and Treasury rates will not stay at these levels for long, but for quick moving borrowers, the window presents an excellent opportunity to lock in a very low interest rate.

5.14.12: Rates on 5-Year CMBS Conduit Loans Worse Than 10-Year Deals

Rates on 5-year CMBS conduit loans are higher than loans with a 10-year term, and the difference between the two appears to be increasing. Normally in commercial lending, when the 5-year Treasury or libor swap rate is lower than the 10-year Treasury or libor swap rate, loan rates on deals with a 5-year term will have a lower interest rate than deals with a 10-year term. Oddly, this is not currently the case with CMBS conduit loans.

“We recently closed a $12-million hotel loan with a 5-year term,” said Jim Brett, senior loan underwriter at ValueXpress. “The loan was committed at the end of April and the application was signed in March. The borrower was given both a 5-year and a 10-year option.”

“The 5-year option was offered at the 5-year swap rate plus 485 basis points (bp), while the 10-year option was at the 10-year swap rate plus 360 bp. At application, the proposed rate on the 5-year deal was 5.85%, while the proposed rate on the 10-year deal was 5.75%. While the difference between the two deals was relatively small, it still seemed odd that the 5-year deal carried a potentially higher rate. The borrower selected the 5-year rate because it provided more flexibility should values increase in the next five years.”

“When the deal was committed, the difference between the two deals worsened. The spread on the 5-year deal increased to 500 bp, while the spread on the 10-year deal declined to 340 bp. The proposed rate on the 10-year deal was 5.40%, while the 5-year deal had soared to over 6.0%, based on the corresponding 10- and 5-year libor swap rates of 2.0% and 1.1%, respectively, at commitment.”

“The increase in the 5-year rate was distressing to the borrower,” Brett said. “The deal manager from the investment bank explained that 5-year CMBS bonds do not trade well in the market, translating to higher rates to borrowers.”

5.7.12: Cash Management and CMBS Conduit Loans…Not Perfect Together: Part II

A recent post of ours outlined the insistence on cash management accounts for nearly all CMBS conduit loans. In summary, cash management accounts are set up for each transaction as a bank account in the name of both the borrower and the lender, but it’s primarily under the borrower’s control. Depending on how the loan documents read, the lender can seize control of the property cash flow in the event of declining performance or default.

After reading many CMBS prospectuses, cash management can be broken down into three types of “lockboxes” and cash management accounts. It is important to understand these pieces to negotiate the least-burdensome structure for borrowers. Below is a matrix of possible lockbox/cash management structures:

 
Lockbox
Cash Management
 
None
None
 
Soft
Springing
 
Hard
Up Front Cash Management

 

Lockbox/Cash Management Options:  
   
None Prevalent in pre-2008 CMBS transactions, the loan documents provide for no lockbox or cash management, and the lender has no control of borrower cash flow. This option is generally only available for low leverage deals.
   
Soft/Springing All funds from the property are deposited into a lender-controlled bank account. As long as the property debt-service coverage ratio is above a pre-determined level (typically 1.10-1.20x), cash deposits pass immediately to the borrower’s operating account. This is the most desirable lockbox structure other than none.
   
Hard/Up Front CM All funds received by the borrower or property manager must be deposited into a lender-controlled bank account within one day of receipt. Deposited funds fill “buckets” in the following order: (1) monthly principal and interest, (2) real estate tax and insurance escrows, (3) replacement reserve escrows, (4) late fees and charges, and (5) operating expenses. One day before the loan payment date, funds in bucket (5) are released to the borrower, but only in accordance with an expense budget approved by the lender.
   

As you can see, a hard lockbox with up-front cash management is extremely burdensome to the borrower and must be negotiated up front to obtain relief. This structure is most often prevalent on hotels and often, at a minimum, the operating expense portion of the “bucket” filling can be negotiated so the borrower receives all cash flow after buckets (1)-(4) are filled.

5.4.12: Mahesh (Mike) Patel Wins iPad 2 Drawing at AAHOA Show

Hotel owner Mahesh (Mike) Patel won a new 32GB iPad 2 at the ValueXpress booth at the Asian-American Hotel Owners (AAHOA) Convention and Trade Show in Atlanta, GA last week. When we first called Mr. Patel and told him he’d won the iPad, he responded, “No, I already received the iPad that I won.” We learned that this indeed was Mike’s lucky day; earlier, he had won an iPad drawing sponsored by AAHOA. Mike went home with 2 iPads!

Mr. Patel is the owner of the Super Inn Motel located on 4200 Wesley Drive in Decatur, GA, 20 miles west of downtown Atlanta. The property has immediate access to I-20 and the I-285 loop that surrounds Atlanta. According to Mike, his motel features very friendly hotel staff and clean rooms that fit travelers on a budget. Mike noted that the property is in close proximity to McDonalds, Popeye’s Chicken and Golden Dragon Chinese; hungry guests don’t have far to travel to get a meal.

“We were thrilled that Mike 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 Mike and laugh about his winning 2 iPads in one day.” Over 400 cards were submitted for the ValueXpress iPad drawing, which we consider a big success.

5.1.12: Opportunities & Challenges for Portfolio Lenders and CMBS

On May 1st CRE Finance Council sponsored a seminar on the prospects for commercial real estate lending in the near and longer term. Panelists were a mix of CMBS conduit pros and insurance company lenders; they included Jon Martin from Wells Fargo, representing both a portfolio bank lender and CMBS originator, and Philip McKnight of Easdil Secured, representing the brokerage community that places commercial loans with commercial banks, insurance companies and CMBS shops.

The universal opinion expressed is that insurance companies will continue to capture the choice assets, with interest rates in some cases that begin with a 3, but in most cases in the low 4% range for a 5- to 7-year loan and not much higher for a 10-year deal. General agreement is that the CMBS conduit loan originators cannot compete at that level; however, the CMBS panelists were quick to point out that the spread gap between insurance company quotes and CMBS is shrinking in 2012, with sub-5% rates on CMBS possible for the right asset. In addition, general opinion is that CMBS will capture all of the insurance company scraps: higher leverage, tertiary location, older assets and perhaps some less-than-mainstream asset types. Strong feelings were expressed that there will be lots of this business for conduit lenders.

But not enough to feed all the CMBS origination machines when the conversation turned to underwriting. The panelists shared concern regarding competition among originators leading toward a slow erosion of underwriting standards.

“As a buyer of CMBS securities for our affiliated bank, Country Bank, I was listening intently,” said Michal D. Sneden, Executive Vice President of ValueXpress. “I need to know when to stop buying new issue CMBS when the underwriting gets out of hand.”

4.30.12: Cash Management and CMBS Conduit Loans…Not Perfect Together

One of the more burdensome structural features of CMBS 2.0 (post-2010 CMBS conduit loans) has been the insistence of cash management accounts for nearly all CMBS conduit loans. In summary, cash management accounts are set up for each transaction as a bank account in the name of both the borrower and the lender, but it’s primarily under lender control. Depending on how the loan documents read, the lender can seize control of the property cash flow in the event of declining performance or default.

The reasoning for cash management accounts stems from borrowers not considering the lender a top priority in uses of cash during periods of property stress and diverting cash flow to uses other than paying debt service, real estate taxes and the like on properties secured by CMBS conduit loans. So to protect themselves, lenders have inserted themselves in the cash flow stream.

The way cash management works is all property cash flow must pass from the property source (tenant rent payments, credit cards receipts from a hotel room sales, etc.) through the cash management account. As long as the property is generating a DSCR greater than a prescribed level (generally 1.15-1.25x) the funds pass immediately into the borrower’s operating account. This is known as a “soft” or “springing” form of cash management, as the lender’s right to control the cash “springs” upon a “trigger event,” such as the property falling below the prescribed minimum DSCR, whereby the lender stops the cash pass-through and begins to collect debt service, escrows and capital reserves and remitting the balance of the cash only in accordance with an operating budget. While “springing” cash management sounds bad, “hard” cash management is worse.

“Hard” cash management requires all of the above; however cash flow does not pass immediately into the borrower’s operating account. Instead, cash flow is directed into buckets for debt service, escrows, capital reserves, operating expenses, and once a month, the operating expense bucket is released to the borrower to pay operating expenses.

“One of my borrowers asked why the lender doesn’t simply take the property at closing since they have all the cash anyway,” said Michael D. Sneden, Executive Vice President of ValueXpress. “But he was right, it is important to negotiate into a less-onerous “springing” cash management and water down the provisions of “hard” cash management on properties such as hotels. ValueXpress has been successful in reducing the burdens of “hard” cash management in all the CMBS conduit loans that have required it,” said Sneden.

4.23.12: ValueXpress Exhibiting at AAHOA Trade Show in Atlanta, GA

ValueXpress will be exhibiting at the annual Asian American Hotel Owners (AAHOA) Trade Show in Atlanta, GA, May 3-4, 2012. ValueXpress will be located in booth 739 at the Georgia World Congress Center noon-6:00 p.m. on both Thursday, May 3 and Friday, May 4.

“ValueXpress is an Allied Member of AAHOA and has been exhibiting at the AAHOA Trade Show for over 15 years,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “We have completed over 100 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.

4.19.12: Lending Rebound Bolstering CMBS Pipeline

According to Commercial Mortgage Alert (CMA), commercial MBS issuance is picking up steam. After a slow first quarter, volume is now on track to reach $20 billion by midyear. That would surpass the $17.1 billion of activity in last year’s first half and put the sector on pace to exceed the $38-billion annual issuance forecast by a panel of CMBS professionals. Ten more transactions totaling $11.8 billion are expected to price by midyear, according to a review by CMA. Coupled with the $3 billion of transactions that have already priced this month, second-quarter volume would total $14.8 billion -- more than double the $6 billion of first-quarter activity.

According to CMA, the pipeline through June 30 contains eight multi-borrower transactions totaling $10.2 billion, a $1.4-billion single-borrower deal and a $200-million distressed-loan securitization. By month, that breaks down to $2.9 billion for the rest of April, $2.9 billion in May and $6.0 billion in June. The pickup in activity reflects somewhat better lending conditions for CMBS shops in recent months. What’s more, lenders said borrower inquiries have increased steadily over the past few weeks, raising hopes for a busier second half.

4.16.12: AAHOA Heads to Washington, D.C. in Support of SBA Program Extensions

Asian American Hotel Owners (AAHOA) leaders met with members of Congress to discuss two legislative priorities. In recent months, discussions in Washington, D.C. have centered on eliminating the SBA 504 Loan Refinancing Program, which is scheduled to expire in September. AAHOA has asked Congress to make its first priority this year reauthorizing the program under the Small Business Jobs Act. Additionally, AAHOA asked lawmakers to remove some onerous program eligibility requirements that prevent many hoteliers and other small business owners from taking advantage of the SBA 504 program.

“We believe Congress needs to make the criteria simple,” explained Anurag Varma, AAHOA Legislative Counsel. “We want to say those who have received [SBA] loans all these years should still be able to get the loans.” Varma was referring to hard and fast rules that, for example, disqualify a borrower unless the borrower can certify that timely loan payments were made for the previous 12 months. Varma suggested that the loan underwriting criteria should be sufficiently flexible to accommodate alternative ways to demonstrate a borrower’s creditworthiness. The association also suggested special exemption for borrowers who miss a payment due to circumstances beyond their control, such as a bank failure.

“People on the Hill are more interested to hear our ideas about simplifying the process,” Varma said. “This is truly a costless idea and something Congress can get behind.”

4.6.12: After Slow Quarter, CMBS Volume Should Pick Up

CMBS issuance in the United States got off to a slow start in the first quarter, but activity is expected to step up in coming months, according to Commercial Mortgage Alert. Only $6 billion of CMBS priced January-March, down 32% from a year earlier and virtually flat with fourth-quarter 2011. The depressed issuance reflected the slowdown in originations in the second half of 2011 because of fallout from the European debt crisis and concerns of a potential double dip in the U.S. economy.

Volume is now on pace to reach just $24 billion this year -- well below the $38 billion forecast by a panel of bond pros. But lending by securitization programs picked up in the first quarter as CMBS spreads tightened. That will accelerate activity in the second and third quarters, although it’s too soon to say whether the $38-billion prediction can be achieved. All told, 11 private-label U.S. transactions priced in the first three months -- four multi-borrower CMBS deals, three single-borrower CMBS offerings and the junior portions of four Freddie Mac issues.

In April, UBS and Barclays plan to team up on a $1.5-billion conduit deal instead of floating separate offerings. ValueXpress has originated loans for the UBS/Barclays issue. Meanwhile, J.P. Morgan, which didn’t have any partners in its last four conduit issues and was expected to go it alone again in March, will join forces with Ladder Capital on a $1.3-billion deal in April. And the buzz is that Cantor Fitzgerald is in talks to join forces with Deutsche on an upcoming deal. The three transactions are expected to total approximately $3.8 billion.

4.3.12: What’s the Direction of Debt Yield on CMBS 2.0 Issues?

Since the restart of the CMBS market in June 2010 when JPMorgan issued $716 million of CMBS, market participants have focused on a metric called debt yield. Debt yield is the property net cash flow (generally defined as actual income and expenses including management fees less capital reserves regardless of whether actually incurred) divided by loan amount. Debt yield for a CMBS issue would be the weighted-average debt yield for all the underlying properties. CMBS professionals believe debt yield is a better measure of leverage compared with debt-service coverage ratio because debt yield recognizes that in low interest-rate environments, a property may exceed the required debt-service coverage ratio for the loan amount, but may not be able to refinance at maturity if cash flow has not improved and rates are higher when the loan is refinanced at maturity.

When analyzing CMBS issues, debt yield is an excellent metric as it is possible to have two CMBS issues each with a weighted-average debt-service coverage ratio of 1.50x, but with two different risk profiles that can be identified through debt yield. Suppose one pool has a weighted average interest rate of 7% and the other 5%. The debt yield on the 7% pool will be higher than the 5% pool, indicating the 5% pool has a much greater balloon refinance risk than the 7% pool.

In 2010, there were six multi-borrower CMBS issues. The weighted-average debt yield is currently 13.44%, a benchmark for low leverage. At the other extreme, the debt yield for the benchmark legacy (pre-2008) CMBS issue GSMS 2007-GG10 is currently 6.94%. In 2011, there were 18 multi-borrower CMBS issues with the average debt yield of 11.22%, a significant reduction from 2010 levels as the market became more comfortable with CMBS risk. In 2012, four multi-borrower CMBS issues have average debt yield of 11.44%, indicating that debt yields are remaining relatively steady in the mid-11% area.

“We are buying CMBS 2.0 for our affiliated bank, Country Bank, and we are using debt yield in our bond analysis,” said Jim Brett, CMBS analyst and loan underwriter for ValueXpress. “We are comfortable with deals that have debt yield north of 11%; hopefully, underwriting does not loosen to allow debt yields to fall below this level.”

3.29.12: Chris Hurn Speaks to Congress in Support of Small Business

Chris Hurn, founder and CEO of Mercantile Capital Corporation and a leader in the SBA 504 finance industry, testified on March 29 before the Senate Committee on Small Business and Entrepreneurship to recommend extension of the SBA 504 refinance program and the SBA 504 First Mortgage Loan Pooling Program (FMLP). Both programs, which provide very competitive commercial loans to business owners, are set to expire in fall 2012.

The SBA 504 refinance program allows business owners to use the SBA 504 program, traditionally allowed for construction and acquisition of businesses only, to refinance existing business loans to capture more favorable terms. Historically, only the less-competitive SBA 7(a) loan program provided for refinancing of business loans into an SBA program.

The FMLP program allows banks and finance companies that fund the conventional first-mortgage portion of an SBA 504 loan to sell a portion of the loan in the secondary market, earning fees and providing capacity to make additional loans.

While Chris was only provided about 7 minutes of speaking time, he submitted 12 pages of testimony. When asked about the outcome, Chris said, “It’s going to take a while (to move this agenda), but we may have moved the ball a bit today.”

3.26.12: CMBS Conduit Loan Rates Decline with CMBS Spreads

CMBS conduit loans rates are declining in concert with the powerful rally in the CMBS market that began in January. Strong demand for CMBS continues based on the results of a $925-million conduit offering led by Wells Fargo and RBS that priced on Friday, March 22. All but one of the investment-grade classes in the Wells-RBS deal priced at or below spread guidance. The benchmark class of the Wells-RBS deal, encompassing $385 million of super-senior bonds, sold with a spread of 105 basis points (BP) over swaps. That was in line with price talk and matched the spread at issuance on equivalent paper from the $1.1-billion conduit deal that Morgan Stanley and Bank of America (BOA) priced a week earlier.

Wells and RBS placed the rest of the super-seniors with spreads 5-10 BP tighter than price guidance. The junior triple-A class priced at the low end of guidance at 140 BP. Similar bonds in the Morgan-BOA deal priced at 155 BP at issuance. The double-A bonds in the Wells-RBS deal priced at 225 BP, down from price talk of 240-250 BP. The single-As went for 350 BP, after being talked at 350-360 BP.

“After the Wells-RBS deal priced, CMBS originators scurried back to their desks to re-price downward existing loan applications,” said Michael D. Sneden, Executive Vice President of ValueXpress. “We received our first sub-300 BP spread quote shortly thereafter. That puts the interest rate at about 5.25% for the CMBS conduit borrower, which is very attractive.”

3.22.12: Increased CMBS Loss Severities

While new CMBS issues are the rage with investors, legacy CMBS is still a challenge for subordinate bondholders that continue to take it on the chin. On Thursday, March 22, Moody’s reported that the weighted-average loss severity for commercial mortgage-backed security loans liquidated in the fourth quarter increased 130 basis points (BP) to 41.0%, the highest since first-quarter 2010.

For the five major property types, loans backed by hotel properties [have] the highest weighted-average loss severity at 46.2%, while loans backed by office properties have the lowest weighted-average loss severity at 36.4%, according to Moody's fourth-quarter Loss Severities report. At 45.1% loss severity, the retail sector’s loss severities ranked second, followed by multifamily at 39.2% and industrial at 38.0%.

The report said $14.6 billion of CMBS loans were liquidated between January 1 and December 15, 2011, a $4.1-billion increase from a year ago.

"The three vintages with the highest loss severities are 2008, 2007 and 2006 at 55.5%, 51.6% and 50.8%, respectively," according to the Moody’s report. "These vintages comprise 57.1% of CMBS collateral and 71.1% of delinquent loans. The 2005, 2006 and 2007 vintages are ultimately expected to experience aggregate losses of 6.9%-12.3% of the total balance at issuance, with most of the losses yet to be realized as the aggregate loss for those vintages is below 2.5%."

3.14.12: Mike Delafraz Wins NOOK Tablet at Regional Conference of MBAs Convention and Trade Show

Mortgage banker Mike Delafraz won a new NOOK Tablet e-reader at the ValueXpress booth at the Regional Conference of MBAs Convention and Trade Show held recently in Atlantic City, N.J. at the Trump Taj Mahal Casino Resort. Mike was excited to win the e-reader, as he was just about to purchase one.

Mike is the President of City Capital Mortgage Banking Corp., an FHA and conventional home loan lender based in Floral Park, NY. The firm is a licensed Mortgage Banker with the NYS Banking department and is very active in the origination of FHA and conventional loans in the N.Y. boroughs and Long Island.

When asked how he would sum up his firm and business model, Mike said, “I have a great staff that can expedite the entire loan transaction. They know how to communicate. The high level of service results in long-term customer relationships, which is the key to our success.”

“The trade show was highly successful for us,” commented Kevin Monahan, a regional loan originator for ValueXpress; Kevin covers the northeastern United States. “I reconnected with a significant number of my colleagues and I am busy following up with the over 200 mortgage professionals who visited our booth at the trade show.”

3.6.12: CMBS Spreads Tighten Across the Board in February

Trepp reported that the powerful rally in the CMBS market that started at the beginning of 2012 extended for a second month, giving investors a lot to cheer about in February: The market has tightened in four of the last five months. After a miserable stretch from June through mid-September 2011, the market reversed course with a powerful rally. The market was tighter in October, essentially flat in November, and tighter in December, January and now February.

Overall, spreads on legacy (pre-2008 issue) super senior CMBS with 30% original credit enhancement narrowed 20-35 basis points (BP) during the month. Those with smaller gains tended to be bonds that were well respected and were already trading at relatively tight levels. The bigger gains came from bonds backed by more questionable collateral.

The benchmark GSMS GG10 CMBS issue super senior class A4 bond ended February at 219 BP over swaps. This was 30 BP tighter than January's closing level. Since the beginning of 2012, the spread on the GG10 has fallen 59 BP, which corresponds to more than three points of price appreciation since the beginning of the year. The GG10 price is firmly in "super premium" territory with its price approaching $112.

To give the recent rally some perspective, 2005 super senior class A4 bonds are now changing hands at 100 BP over swaps (or better in many cases), while 2006 super senior class A4 bonds can be seen trading at 125 BP over swaps. We noted that the AM class and AJ class sectors had seen significant tightening in January. Each of those markets continued to rally in February, but the gains weren't nearly as lavish. Trepp estimates the gains in those segments at 30-40 BP for the AMs and 50-60 BP for the AJs. In January, the spread tightening of some AJs was off the charts.

3.1.12: SBA Announces Updated Lender Website

The Office of Communications and Public Liaison (OCPL) worked with SBA stakeholders to solicit feedback on improving the current Lender website located at http://www.sba.gov/for-lenders. As a result of feedback from local SBA offices, the Office of Capital Access (OCA), select lenders and SBA Loan Processing Centers, the redesigned site was launched on February 28, 2012.

Updates to the website include the following:

In addition, a new top-level navigation bar highlights lending steps, loan programs, and information for new lenders, as well as allows direct access to loan centers and lender reports and data. Current links/bookmarks will remain intact. Over the coming weeks, the SBA and OCPL will continue to solicit feedback as they work to improve the user experience.

“The SBA has done a nice job creating a centralized location for lenders to easily access information in all stages of the SBA lending process, start to finish, in this redesign,” commented Jim Brett, senior underwriter at ValueXpress responsible for all SBA underwriting. “I can find SBA forms, SOP regulations, contact information and other critical information right from the home page and that helps me process SBA loans quicker.”

2.28.12: Commercial Real Estate Loan Prices Regaining Pre-Recession Values

Costar reported that the aggregate value of bank and CMBS real estate loans sold last year rebounded to levels not seen since 2008. Whole real estate loans, both commercial and residential, offered by the Federal Deposit Insurance Corp. (FDIC) last year sold at 84% of their book value compared with 34% in 2010 and 72% in 2008. What's more, performing commercial real estate (CRE) loans the FDIC sold last year went for 91% of book value. Performing residential loans in 2011 also went for about 91% of their book value.

The FDIC also pools sub- and nonperforming real estate loans from failed banking institutions and sells them through structured transactions. In these cases, the winning bidder purchases a portion, typically 20%-40%, of the equity in the mortgage pool. To date, all such transactions have included some form of FDIC financing. Typically, these deals include a number of construction and development loans and hence tend to have lower valuations. The implied value on the winning structured loan bids in 2011 held steady at an average in the low 40% area to book value. The average value of these types of transactions in 2008 and 2009 was in the low to mid-30s.

CMBS loans priced by online debt trader DebtX also climbed to 86.1% as of December 31, 2011 from 85.2% as of November 30, 2011. Loan values were 79.4% as of December 31, 2010.

"CRE loan prices in December rose to their highest level in more than two years," said DebtX CEO Kingsley Greenland. "The price increases are the result of a decline in treasury yields, a decrease in credit spreads and improving CRE fundamentals."

2.24.12: ValueXpress to Exhibit at 2012 Regional Conference of MBAs

On Tuesday, March 13 and Wednesday, March 14, ValueXpress will be exhibiting at the Regional Conference of MBAs Convention and Trade Show in Atlantic City, N.J. at the Trump Taj Mahal Casino Resort. Stop by Booth 2 to see us at the Taj Mahal Exhibit Hall on Wednesday, March 14, noon-3:00 p.m. during the commercial show or at Booth 117 7-9 p.m. during the residential show. ValueXpress will also be at Booth 117 at the conclusion of the residential show on Wednesday, March 14, noon-5:00 p.m.

The Regional Conference of MBAs annually brings together commercial and residential mortgage professionals located and affiliated with the Mortgage Bankers Association in the eastern portion of the United States (NJ, NY, PA, DC, CT, HH, MA, RI, MD, DE). Each state Mortgage Bankers Association is dedicated to promoting growth and good business practices in the real estate finance industry and is a resource that provides communication and networking opportunities for its members.

“ValueXpress is pleased to have this opportunity to meet with mortgage brokers at this Regional Conference to explain in detail its SBA 7(a), SBA 504, USDA B&I, CMBS conduit and conventional commercial loans for owner-occupied and investment properties,” said Michael D. Sneden, Executive Vice President of ValueXpress. “We will be jointly representing our affiliated company, Country Bank, at the trade show. The timing of the show is perfect for us as we provide information on Country Bank’s expanded SBA footprint into the six-state region surrounding New York City.”

ValueXpress will also be marketing its CMBS conduit program. “The CMBS conduit market right now is on fire, and we want to share the benefits, of long-term, fixed-rate, non-recourse commercial loans for larger balance ( > $5 million) transactions,” said Jim Brett, head of underwriting at ValueXpress.

Need a little incentive to visit us at the show? ValueXpress will be giving away a Nook Tablet e-reader from a drawing of business cards collected at our booth during the show. The drawing will be at 4:00 p.m. on Wednesday, March 14th; the winner need not be present at the drawing. Would you like a personal appointment with a ValueXpress representative during the show? Call now and book an appointment with Kevin Monahan (973) 579-6061 or Mike Sneden (212) 883-6447.

2.20.12: CMBS for Joe Six-Pack Courtesy of Blackrock

Blackrock, one the world’s leading providers of investment and advisory services, announced on Wednesday, February 15, that it has launched an exchange-traded fund (ETF) that tracks investment-grade CMBS. The CMBS fund, iShares Barclays CMBS Bond Fund, is the first such fund to track the CMBS market. Because it's not actively managed, the fund carries only a 25-basis-point annual management fee. An ETF is similar to a mutual fund in that it holds a portfolio of investments whose values are determined daily and it trades on major exchanges. The CMBS fund trades on the NYSE, making it accessible by individual investors.

The CMBS fund, which was launched on Tuesday, holds positions in 27 CMBS transactions with an average S&P rating of A-. Its biggest holding, which makes up 5.1% of its portfolio, is comprised of bonds from the Aaa-rated class of GS Mortgage Securities Corp. II, 2006-GG8. The fund, which is expected to grow in size over time, will invest only in public, investment-grade CMBS from deals larger than $300 million each. Individual tranches must be at least $25 million.

“This is a fascinating development! A colleague of mine recently commented that, in general, individual investors are shut out of the CMBS investment market, which is disappointing as the risk-adjusted yield on CMBS is very attractive relative to other fixed-income products,” commented Michael D. Sneden, Executive Vice President of ValueXpress. “We have previously evaluated the CMBS in the EFT, and although they have been downgraded, they all should be “money good” through maturity (right now the holdings have an expected life of about 3.5 years).” The current yield on the EFT is about 3.0%. Click here for information on the ETF.

2.16.12: Buyers Eager for Big Wave of CMBS

“Commercial Mortgage Alert” reports that thanks to pent-up demand a flood of multi-borrower commercial MBS issues over the next six weeks is likely to fetch higher prices than the year’s first such transaction. A half-dozen conduit deals totaling $6.5 billion are expected by the end of next month. The year started slow with just one multi-borrower offering to date. CMBS investors and traders said the higher-rated classes of the new issues are likely to price at spreads at least 10-20 basis points (BP) tighter than those on equivalent paper in the $1.2-billion January 24th transaction from Goldman Sachs, Citigroup and Archetype Mortgage Capital.

The bullish outlook is bolstered by activity elsewhere in the CMBS market. The second private-label issue of the year, a single-borrower offering, priced in line with guidance on Wednesday; at 110 BP over swaps, it has a meager 2.2% yield. The $625 million of 4.9-year bonds, all-in-one triple-A tranche, were backed by a loan from Deutsche Bank to New York developer Sheldon Solow on a trophy office building at Nine West 57th Street in Midtown Manhattan. When those bonds hit the secondary market the next day, spreads tightened another 5 BP.

On the secondary market, a CMBS rally that took hold late last year has lost some of its steam over the past two weeks or so, but spreads remain notably tighter than they were a month ago. Ten-year notes with 30% subordination from the Goldman-Citi deal (GS Mortgage Securities Trust, 2012-GC6), which priced with a 120-BP spread at issuance, were trading at 110 BP this week. So were comparable super-seniors from other multi-borrower deals that had been trading with 125-BP spreads at yearend.

Junior triple-A bonds from recent issues, with subordination of 19.1%-22.1%, were changing hands at 230-235 BP this week — down 25 BP from a month ago and 45 BP from yearend. Double-A spreads have contracted to 315-320 BP, down 40 BP since mid-January and 80 BP for the year.

2.10.12: Report from the 2012 MBA CREF Convention

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.”

2.7.12: What’s Happening to Defaulted CMBS Loans?

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:

1.31.12: SBA Administrator Karen Mills Elevated to Cabinet-Level Position

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.”

1.25.12: Fed Expected to Hold Rates Low Until 2014

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.”

1.23.12: $11 Billion in CMBS Pipeline Through April

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.

1.18.12: SBA 504 Refinance Program to End in 2012

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.

1.13.12: CMBS Prices Rise Again

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.”

1.6.12: Record Month for SBA 504 First Mortgage Lien Pool (FMLP) Program

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.

1.3.12: CMBS Delinquency Rates Continue to Drop -- for Now

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.

12.30.11: Top CMBS Issuers of 2011

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.”

12.28.11: Sears and Kmart Closings May Affect CMBS Loans

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.

12.21.11: Mezzanine Loans Available for CMBS Originations

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.”

12.16.11: Commercial Lending Outlook for 2012

“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.”

12.9.11: UBS and Citigroup Price CMBS Issue Amid Strong Demand

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."

12.5.11: Country Bank Rises to 22nd Spot on Crain’s Top SBA Lenders

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."

12.1.11: Leon Elliott Joins ValueXpress

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.

11.25.11: Country Bank Expands SBA Lending Footprint

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.”

11.22.11: AAHOA Hotel Reservation Site “MyBestHotelRate.com” Now Live

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.

11.17.11: ValueXpress Looking for Loan Originators

“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.”

11.15.11: Country Bank Applies to Become 504 First Lien Pooler

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.

11.7.11: SBA 7(a) Premiums Strengthening for Larger Guarantee Amounts

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.”

11.2.11: CMBS Conduit Deals Close Lightning Fast

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.”

11.1.11: RBS and Wells Fargo Price Successful CMBS Issue

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.


11.1.11: Trepp and Fitch Report October CMBS Delinquency

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


10.21.11: CMBS Conduit Partner Needs $100M in Loans by Year-End

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.”

10.18.11: Spread Widening Provides Investment Opportunity in 2005 Class AJ CMBS

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.

10.13.11: SBA Releases New 504 Refinancing Guidelines on Cash-Out

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.

10.7.11: Uptick Seen in CMBS Conduit Multifamily Originations

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.”

10.3.11: Trepp and Fitch Report CMBS Delinquency for September

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:


9.26.11: SBA Issues New Standard Operating Procedures for 7(a) and 504 Loans

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.”

9.23.11: Buyers Grab Super-Senior CMBS from Recent Offerings

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.”

9.19.11: FDIC Reclassification Troubling for Hoteliers

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.

9.13.11: Rates on Fannie Mae Loans Continue to Decline

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.”

9.8.11: SBA 504 Loans Hit Record-Low Interest Rates for September

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.

9.6.11: Freddie MAC to Step Up Multifamily Loans

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.

9.1.11: CMBS Delinquency Rate Recedes Sharply in August

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:

8.25.11: Spread Widening Slows CMBS Originations

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.”

8.22.11: M.P. Patel Wins IPAD 2 Drawing at Trade Show in New Orleans, LA

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.”

8.17.11: Strong Demand, Tight Supply Improve Demand for Apartments

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.

8.12.11: CMBS Spread Continue to Widen

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



8.8.11: Markit to Introduce New Index to Hedge CMBS

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.

8.4.11: SBA Aims to Avoid Shutdown as 7(a) Loans Approach Cap

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.

7.29.11: CMBS Spreads Blow Out; Borrowers Repriced

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.”

7.28.11: S&P Suspends Ratings on New Issue CMBS 2.0 Deals

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.

7.20.11: Inspector General Issues Scathing Audit Criticizing Banco Popular Regarding SBA Loan Underwriting

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.

7.15.11: ValueXpress iPad Free Raffle at Upcoming Trade Show in New Orleans, LA

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.

7.14.11: Soft Market Confronts CMBS Offerings

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.

7.6.11: ValueXpress Seeks Large High Leverage Hotel Loans

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.”

6.30.11: Up-Front Costs Concern Small Balance Conduit Borrowers

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.”

6.27.11: SBA Guarantee Premiums Remain Lofty

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.

6.20.11: ValueXpress to Exhibit at Leuva Patidar Samaj Trade Show in New Orleans, LA

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.

6.18.11: AAHOA Report: Debt Available for Hotel Owners

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.”

6.17.11: Subhash Shah Wins IPAD 2 Drawing at AAHOA

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.

6.10.11: Tighter Spreads Expected on Upcoming Conduit Deal

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.

6.2.11: CMBS Delinquencies Drop to 9.6% in May

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.

5.31.11: Growing SBA 504 Secondary Market

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.

5.27.11: S&P Identifies Troubling Trends in New CMBS

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.

5.20.11: CMBS Pipeline: An Anticipated $17 Billion Through September 30, 2011

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.

5.18.11: B-Piece Buyers Wait on Risk Retention's Final Act

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.”

5.11.11: SBA and Flood Insurance – Check Private Sources in Addition to NFIP

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.

5.3.11: Commercial Mortgage Bonds: Largest Rally Since July

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.

4.28.11: Killeen-Temple-Fort Hood, TX Claims Top Spot in 2010 Best Performing Cities

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.”

4.25.11: Moving the 504 Refinance Program Forward: SBA Removes Another Roadblock

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.

4.22.11: ValueXpress to Exhibit at AAHOA Trade Show in Las Vegas, NV

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.

4.19.11: Underwriting on CMBS Loans Loosens as Cautious Optimism Hits

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.

4.15.11: SBA Requiring Reserves for Certain Lenders Selling Loans in the Secondary Market

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:

  1. Make an initial deposit in the amount of either:

    a. Two (2) times an SBA lender’s average 7(a) loan size (determined by dividing the SBA lender’s gross dollars outstanding by the number of 7(a) loans outstanding) if the SBA lender’s gross dollars outstanding for its active loans is $10 million or greater, or

    b. One (1) times an SBA lender’s average 7(a) loan size (determined by dividing the SBA lender’s gross dollars outstanding by the number of 7(a) loans outstanding) if the SBA lender’s gross dollars outstanding for its active loans is less than $10 million.

  2. In addition to the initial deposit, the SBA lender will be required to deposit a Reserve Amount for each sale of a Guaranteed Portion in the Secondary Market. The Reserve Amount equals the total gross dollar amount of the Guaranteed Portions to be sold, multiplied by the greater of (1) SBA's overall 7(a) loan guarantee repair/denial rate as calculated by SBA for the most recent available quarter or (2) the SBA lender's 7(a) loan guarantee repair/denial rate as calculated by SBA for the most recent available quarter.



4.7.11: ValueXpress Lowers CMBS Conduit Loan Minimum to $1 Million

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.

4.1.11: CMBS Prices Recover from Disaster in Japan

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.”

3.29.11: SBA Opens 504 Refinancing to More Firms

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.

3.24.11: Competition Heats Up for CMBS Conduit Loans

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.

3.23.11: Goldman Sachs/Citigroup Price CMBS Deal at Wider Spreads

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.

3.17.11: ValueXpress Helps New Borrower Complete 7(a) Process

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.”

3.9.11: Michael D. Sneden Returns to Westchester Business Council: “Learn How to Prepare a Business Loan Application”

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.


3.4.11: Trepp: CMBS Buyers’ Faith Rewarded as U.S. Delinquency Numbers Level Off

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.

2.28.11: S&P: Larger CMBS Deals to Market after Period of Stagnation

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."

2.23.11: What Obama’s Budget Means for the SBA

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.”

2.18.11: SBA 504 Refinancing Is Official!

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.

2.17.11: Morgan Stanley and CDC Direct Team Up

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.”

2.10.11: CMBS Conduit Loan Origination in 2011 & Beyond: Report from the MBA CREF Convention

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.

2.4.11: SBA Removes Warranty Period for Loans Sold at a Premium in the Secondary Market

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.

2.1.11: Trepp Reports Delinquency Rate Reaches Another Record High

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.

TABLE 1
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


1.27.11: Looking Under the Hood of the Goldman/CitiGroup CMBS Deal

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.”

1.26.11: Small-Business Loan Amounts Rise at the Jersey Shore

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."

1.19.11: ValueXpress News & Recent Closings Biweekly Now on WordPress

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.

It’s simple to sign up: (1) Click http://valuexpress.wordpress.com and (2) arrive at the ValueXpress home page, where you can (3) click on the “Sign Me Up” button in the right-hand column. Once you’ve clicked the button, you will begin to receive News & Recent Closings automatically every time we post. It’s that easy.

1.13.11: SBA Guarantees: Should I Sell or Should I Hold

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

1.7.11: CMBS Prices Rally Yet Again

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.”

1.3.11: ValueXpress in Discussion for New SBA Relationship

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.”

12.31.10: 2010 Highlights in Commercial Lending

“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.”


12.27.10: Michael Sneden Keynote Speaker at January 20th Business After Business Social Networking Event

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.


12.21.10: Will Refinancing of SBA 504 Loans
Take Off?

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!

 

12.17.10: ValueXpress Processes $15-Million in SBA 7(a) Loans Before Cutoff

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.”


12.16.10: Goldman Sachs and Citigroup Price $876.5-Million CMBS Offering

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.


12.7.10: Self-Storage Presents an SBA Lending Opportunity

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.”


11.26.10: $35-Billion U.S. CMBS Issuance Forecast for 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.


11.22.10: Banks Can Use the SBA 7(a) Program to Reduce Portfolio Risk

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.

11.16.10: CMBS Deal Flow Picks Up According to Recent MBA Survey

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.

11.10.10: SBA Form 1086 Warranty Period Removal to End the Delay in Sale Treatment

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.

11.5.10: Solutions Proposed to Split Large SBA 7(a) Loan Guarantees

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.”

11.2.10: Low Premiums on Larger SBA Loan Guarantees

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.

Now consider the effects of the new higher guarantees created by the Jobs Act. ValueXpress just received approval of a $5-million loan that obtained a $4.5-million loan guarantee. If this loan was placed in a typical $30-million pool, the concentration would be 15%. This level creates a prepayment risk level that is of concern to investors, and therefore, the premium on the loan is being bid much lower than smaller loans, on the order of 105% for a Prime + 2% loan.

10.29.10: SBA 7(a) Applications Brisk Until End of Year

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.

10.26.10: ValueXpress and Lumbee Guaranty Bank Obtain SBA 7(a) Approval

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.”

10.20.10: ValueXpress CMBS Partner Seeks Multifamily Loans

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.”

10.15.10: CMBS Prices Continue to Rise

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.

10.8.10: SBA to Accept Applications for Loans in Excess of $2 Million

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.”

10.6.10: Resurgent CMBS Market No Cure-All for Troubled Borrowers

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?”

10.1.10: JPMorgan Launches $1.1-Billion CMBS Conduit Offering

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.

9.27.10: 60- to 120-Day Wait for Higher SBA Limits

“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.

9.23.10: Country Bank Ramps Up SBA Lending

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.”

9.17.10: U.S. Senate Passes Small Business Bill

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.”

9.13.10: JPMorgan Issues $485 Million in CMBS

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.

9.8.10: CMBS Delinquencies Accelerate in August

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.

9.3.10: SBA Loan Guarantee Premiums Soar in August

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.”

8.30.10: CMBS Prices Continue Climb, Class AM Bonds Reach $100

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.

8.26.10: Use HUD 221(d)4 Program for Multi-Family Rehab Loans

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.

8.13.10: Business Owners Struggle as Lending Bill Stalls*

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.

8.11.10: SBA 504 Loan Interest Rate Drops Below 5% for Small Business Borrowers*

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).

8.9.10: Demand Strong for Goldman’s CMBS Issue

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.

8.2.10: Thomas Wallace, President of IDS Corporation, Reports on HR 5297

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.

7.30.10: CMBS Prices Continue a Slow, Steady Climb

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.

7.26.10: CMBS Conduit Loan Quotes Are Flowing

“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.”

7.23.10: U.S. Senate Votes $30 Billion in Small-Business Aid

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.”

7.21.10: CMBS Market Rises from Ashes of Collapse*

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.
.
*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."

4.9.10: RBS Deal Fares Well

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.

ARCHIVES

4.18.14: CMBS Conduit Loan Rates Fall

4.14.14: CCTG Graduates Gaining Traction in CMBS Originations

4.9.14: Fixed-Rate SBA 7(a) Loans Becoming More Prevalent

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11.15.11: Country Bank Applies to Become 504 First Lien Pooler

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10.13.11: SBA Releases New 504 Refinancing Guidelines on Cash-Out

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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

7.20.11: Inspector General Issues Scathing Audit Criticizing Banco Popular Regarding SBA Loan Underwriting

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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

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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

3.9.11: Michael D. Sneden Returns to Westchester Business Council: “Learn How to Prepare a Business Loan Application”

3.4.11: Trepp: CMBS Buyers’ Faith Rewarded as U.S. Delinquency Numbers Level Off

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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

12.27.10: Michael Sneden Keynote Speaker at January 20th Business After Business Social Networking Event

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

4.9.10: RBS Deal Fares Well

4.1.10: ValueXpress Provides $2.5-Million Loan in Conjunction with DPO That Saves Borrower over $6 Million

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

12.22.09: President Obama Signs Bill to Extend Higher Guarantee Level and Reduced Fees for SBA 504 and 7(a) Loan Programs

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

10.21.09: President Obama Proposes to Raise SBA Loan Limits

VALUEXPRESS