Industrial Strength; A Review of the How the Commercial/multifamily Real Estate Finance Industry Is Faring One Year into the Storm

Article excerpt

Firms involved in commercial real estate finance have had plenty of experience with the ebbs and flows of capital. Many industry participants remember the savings-and-loan (S&L) crisis of the late 1980s and early 1990s; the Long-Term Capital Management-inspired crisis of 1998; the credit market shocks associated with the attacks on Sept. 11, 2001; and the current credit crunch of 2007 and now 2008.* A review of the industry shows that diversification has been critical to helping firms-- and the industry as a whole--work through the current period of market stress.*

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Diversification

Not long ago, commercial/multifamily mortgage originators were identified by their ties to a particular capital source. Firms were known to be a correspondent for one or more life companies, a Fannie Mae Delegated Underwriting and Servicing (DUS[TM]) ir Freddie Mac Program Plus[R] lender, a commercial mortgage-backed securities (CMBS) conduit or a portfolio lender.

But in recent years, commercial/multifamily real estate finance firms have taken steps to offer their borrowers access to a greater range of capital sources. This holds true for lenders as well as for intermediaries.

An expanded capital offering has generally been seen as a way to attract borrowers (through a greater selection of products). But expanded product offerings have also served to help firms and their borrowers work through times when one capital source is ebbing and others are flowing.

How successful have firms been in diversifying their capital sources? Quite successful.

In 2007, according to the Mortgage Bankers Association's (MBA's) Annual Commercial/Multifamily Origination Volume Rankings, more than one in four (28 percent) originators, representing almost half (47 percent) of the dollar volume of originations, sent at least half their originations to investor groups other than the investor group that received the greatest share of their originations (see Figure 1).

Figure 1 2007 Commercial/Multifamily Mortgage Originations,
by Share of Originators' Volume Going to Largest Investor Group

            Dollar Volume    Number of Firms

0-50%     $Millions  Share    Number  Share

50-75%     $136,779    20%        36    30%
75-85%      $66,157    10%         8     7%
85-95%      $40,722     6%         6     5%
95-100%    $117,791    17%        37    31%
TOTAL      $680,988   100%       120   100%

Note: The numbers used here purposefully double-count loans that are
intermediated by one firm and then closed in the name of another.

SOURCE: MORTGAGE BANKERS ASSOCIATION (MBA)

For example, according to the same survey, the largest originator, Charlotte, North Carolina-based Wachovia Corporation, reported more than $90 billion in total commercial/multifamily originations in 2007, of which $42 billion was intended for the CMBS market--its largest single investor group. But the firm sent more than half of its total origination volume to investor groups other than CMBS, including commercial bank and thrift portfolios; Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA); life insurance companies; real estate investment trusts (REITs), mortgage REITs and investment funds; and other sources.

Through the diversification of capital sources, most originators continue to be able to source and fund loans, even with originations for CMBS slowing dramatically.

MBA's quarterly survey of commercial/multifamily mortgage bankers originations shows that first-quarter originations for the CMBS market fell to levels not seen since the survey began in 2001; originations for life companies and for banks and thrifts fell to levels last seen in 2004; and originations for the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac hit record highs for a first quarter.

Originators with a variety of capital sources can and do (at least partially) offset the curtailed capital from one source with available capital from another. …