LIVINGSTON, NJ—When the broker says he has a better deal than the one you quoted, issued an application or even committed on, take heed. The market is moving very fast as competition intensifies.
The loan caveat, accommodation or extra dollars another lender may have said no to last week, can now become attainable. Borrowers are walking from deals they agreed to just weeks before when they thought they had the “best quote possible,” and “squeezed the last bit of accommodation out of a lender.” Two, three weeks later, another lender will be bettering the deal you just agreed to.
It’s crazy, and will become even more competitive in the New Year as lenders seek to fill their 2015 allocations. Today is a borrowers market. The market has quickly shifted as CMBS 2.0 has expanded greatly in 2014. CMBS volumes are on par with 2013 levels, with over $77 billion in production through October. The difference, however, is that the economy is somewhat better, but the real driver is that there are now over 40 CMBC conduits versus less than 25 last year. More investment bankers are fighting for a similar level of product, which equals a borrowers market.
As we move into the latter part of the year, we’ve seen a very competitive marketplace with a great deal of bidding. In recent months, loan spreads have widened but new, lower Treasury levels have brought down rates. While certain lenders have hit their budget, a number have yet to do so. Government Sponsored Enterprises Fannie Mae and Freddie Mac have not hit their targets and are aggressively putting out money, in addition to some life companies. As a result of the heated markets, lenders should listen to a seasoned mortgage professional in order to get the best execution.
In the distance however in 2016 – 2017, an impediment on this torrid CMBS growth is on the horizon. The FDIC’s risk retention rules, which may slow the continued recovery in the CMBS market, and may slow or reduce risk and competitive lending by conduits. This when CMBS 1.0 product is mushrooming in maturities.
In late October, six federal agencies approved a final rule requiring sponsors of securitization transactions to retain risk in those transactions. The final rule implements the risk retention requirements in the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).
The final rule is being issued jointly by the Board of Governors of the Federal Reserve System, the Department of Housing and Urban Development, the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, the Office of the Comptroller of the Currency, and the Securities and Exchange Commission. As provided under the Dodd-Frank Act, the Secretary of the Treasury, as Chairperson of the Financial Stability Oversight Council, played a coordinating role in the joint agency rulemaking.
The final rule largely retains the risk retention framework contained in the proposal issued by the agencies in August 2013 and generally requires sponsors of asset-backed securities (ABS) to retain not less than five percent of the credit risk of the assets collateralizing the ABS issuance. The rule also sets forth prohibitions on transferring or hedging the credit risk that the sponsor is required to retain.
As required by the Dodd-Frank Act, the final rule defines a “qualified residential mortgage” (QRM) and exempts securitizations of QRMs from the risk retention requirement. The final rule aligns the QRM definition with that of a qualified mortgage as defined by the Consumer Financial Protection Bureau and also requires the agencies to review the definition of QRM no later than four years after the effective date of the rule with respect to the securitization of residential mortgages and every five years thereafter, and allows each agency to request a review of the definition at any time. In addition, the rule does not require any retention for securitizations of commercial loans, commercial mortgages, or automobile loans if they meet specific standards for high quality underwriting.
The final rule will be effective one year after publication in the Federal Register for residential mortgage-backed securitizations and two years after publication for all other securitization.
It is still a Borrowers market. Lock in those loans.
Mark Scott is Principal of Commercial Mortgage Capital, based in Livingston, NJ. He can be reached at email@example.com or 973-716-0006. The views expressed in this column are the author’s own.