JPMorgan Chase is currently marketing a $716-million CMBS offering, JPMCC 2010-Cl. The deal is backed by 36 fixed-rate commercial mortgage loans secured by 96 properties.

The offering is significant because there has not been a new multiple-borrower, multiple-mortgage issuance of any great size available to bond purchasers in nearly two years. While time and the economic recovery have helped get the commercial mortgage industry to this point, the Federal Reserve's Term Asset-Backed Securities Loan Facility had some hand in the reinvigoration of the market. But how much of a hand?

TALF was established initially to support the asset-backed securities market, and it was extended to include new issuances. Though TALF revitalized the ABS market by offering liquidity, it had less of an effect on CMBS. In total, the Fed provided $11.4 billion of funding for purchases of 507 legacy bonds, not a huge sum by any means. The availability of the financing did help spreads tighten not only for eligible CMBS, but also for legacy CMBS generally, particularly at the investment-grade level. But despite the Fed's attractive financing rates, what stopped many investors from participating in TALF was the uncertainty of the program's eligibility determinations. The Fed rejected 44 bonds as ineligible for funding and was not very transparent as to why. Perhaps investor appetite was just as responsible for tightening spreads on legacy CMBS as the Fed TALF program. TALF is widely considered as having a positive effect on new CMBS issuances but, in fact, only one CMBS deal was TALF-eligible. However, it's important to note that it was the first CMBS deal done in over a year. Late in 2009, the Cleveland-based shopping center REIT, Developers Diversified Realty Corp., came to market with a $400-million offering of mortgages secured by some of its shopping centers. Regardless of the huge effort on the part of the Fed, the borrower, the issuer and all of their attorneys to structure the deal in a manner that would make it attractive and be TALF-eligible, only 22%, or $72.2 million, of the bonds were purchased with TALF financing. Subsequent 2009 deals from Flagler Development Group ($360 million) and Inland Western Retail Real Estate Inc. ($500 million) sold out, with pricing similar to that of DDR, despite the fact that neither was structured to be TALF-eligible. Probably more important to investors was the low leverage placed on the assets and the fact that those deals were single-borrower transactions that had established operating and credit histories.

The 2010 market should see significant expansion in CMBS transactions even without the availability of Fed financing. So far this year, secondary market-traded CMBS AAA spreads have been tighter than last year. While some pricing volatility continues, it seems to be more of a reaction to world and market news than to the asset class itself. New CMBS TALF financing effectively ended in March, yet the absence of the Fed program does not seem to have had any effect on investors' desire to own CMBS. On the new issuance side, one deal has been completed, an RES transaction that, although it was a multi-borrower deal, had only six borrowers with mortgages aggregating only about $310 million. Again, no below investment-grade bonds were sold, and pricing compared favorably with that of the Flagler and Inland deals. Investors will likely watch the new JP Morgan transaction closely to gauge demand. Its pricing will also be studied carefully because the deal will undoubtedly have an effect on pricing of both new issuances and secondary trades. JPMCC 2010-C1 is the first real structure that takes a shot at creating what industry participants are calling CMBS 2.0, and it could become a template for new issuances and may affect the desirability of legacy bonds. In retrospect, it appears that although TALF had some positive effect on the CMBS market and helped stabilize prices, one has to wonder whether it was worth it. The old adage, time heals all wounds, may have worked just as well.

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