Loan-to-value (LTV) levels for CMBS conduit loans have dropped over the past two years due to a variety of factors, including the implementation of risk-retention rules and picky buyers of subordinate CMBS securities (known as b-buyers) that prefer lower leverage CMBS transactions that are perceived to be less risky. The weighted average LTV ratios for CMBS transactions decreased from 64.1% in 2015 to 60% in 2016 and to 57.5% last year.
But the tighter credit-quality standards that are presumably behind lower LTVs are now crimping the ability of CMBS conduit lenders to generate sufficient supply of loans for new CMBS issues. Plus, subordinate CMBS buyers have a lot of capital to deploy and to a degree have themselves to blame for crimping new bonds for themselves to buy.
CMBS lenders are now considering increasing LTVs to generate more loans. B-buyers are also on board. “We are not afraid of 75% LTV CMBS loans, just structure them properly,” commented one b-buyer. “75% LTV loans structured with no or moderate levels of interest-only payment periods and that contain appropriate reserves and cash management provisions in the event of poor performance are fine with us.”
This new attitude toward leverage should improve loan flow. “We have always been a proceeds-driven loan product and it will be helpful to get back to our roots,” commented one CMBS professional.