CMBS Lenders Focusing on Large Mortgages

Most of the re-emerging securitization shops are focusing their origination efforts on loans of at least $25 million, largely bypassing traditional conduit mortgages for now.

The lenders see that as the most-effective strategy for amassing enough loans for multi-borrower securitizations. The approach also reflects the fact that commercial MBS shops, after laying off hundreds of originators and underwriters in 2008 and 2009, now find themselves back in the game with bare-bone crews. So they can get "more bang for the buck" by focusing on relatively large loans.

"It's the same amount of work to do when you're underwriting a loan whether it's for $10 million or for $50 million," said one industry veteran. "It means there is less work they have to do on the pool overall."

What's more, traditional conduit loans - generally ranging from $2 million to $20 million - often are backed by poorer-quality properties in secondary or tertiary markets. Gun-shy CMBS shops are still leery of such business.

The emphasis on large mortgages is reflected in the first multi-borrower CMBS deal since June 2008 - a $309.7 million offering that RBS and Natixis were scheduled to price today. The transaction is backed by six loans ranging in size from $28.7 million to $77.7 million.

At the same time, CMBS programs are on the prowl for loans of $250 million or more that would be securitized in stand-alone deals. A number of borrowers are discussing potential transactions with CMBS lenders.

Even with the large-loan focus, lenders are having a hard time amassing enough loans for multi-borrower deals. The preference is to have at least $500 million of collateral for a deal, but two or more shops may have to pool loans to achieve critical mass.

A key problem is that many properties are overleveraged because of the slump in prices and therefore don't qualify for large enough loans to refinance existing mortgages. Some of the few loans that have closed recently were on properties previously unencumbered by debt - so existing leverage wasn't an issue. One example: J.P. Morgan wrote a $31.3 million mortgage last month on two shopping centers - West Oaks 2 in Novi, Mich., and Spring Meadows Place in Holland, Ohio. Ramco-Gershenson Properties of Farmington Hills, Mich., used the proceeds of the 10-year loan to pay down its credit line.

Securitization programs might supplement their collateral by acquiring loans - including ones smaller than $25 million - from recently formed finance companies and debt REITs that have parked fresh mortgages on their balance sheets. One possible seller: Ladder Capital of New York.

A number of shops besides RBS are amassing collateral for deals. Deutsche Bank and J.P. Morgan are working to launch transactions by midyear. Other players that are quoting loans for securitization include Bank of America, Bridger Commercial Funding, Cantor Fitzgerald, Citigroup, Goldman Sachs and Wells Fargo.

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