At the Mortgage Bankers Association's (MBA's) Commercial/Multifamily Asset Administration and Technology Conference in May, we presented case studies showing how a selection of commercial/multifamily servicers are facing the ever-increasing challenges of managing their shares of the $3 trillion in commercial/multifamily mortgage debt outstanding. [??] What we found was a heterogeneous industry in which companies serve different mixes of investor groups, play varied servicing roles and even have different business objectives. Not surprisingly, the way in which each firm chooses to address its set of circumstances is also unique.
The evolving market
Over the last two years, the commercial/multifamily finance market has been experiencing a perfect calm (see "The Perfect Calm," by James R. Woodwell, Mortgage Banking, January 2007). Those benign market conditions have been shaped by a confluence of improving property markets, widely available capital and real estate finance innovation, which together have fostered an unparalleled strength in commercial real estate finance.
During this period, origination volumes, property values and mortgage debt outstanding have all hit record highs. At the same time, mortgage delinquencies and cap rates have seen record lows. The result has been exceptional growth in both the size and sophistication of the servicing business.
According to MBA's Annual Origination Volume Summation 2006 report, dedicated commercial/multifamily originators closed $406 billion in commercial/multifamily loans in 2006, a 10 percent increase from 2005 levels. This is on top of a 2005 level that was 50 percent higher than that of 2004. Significantly, both 2005 and 2006 levels saw increases in originations for nearly every investor group--from commercial mortgage-backed securities (CMBS) conduits to commercial banks and thrifts to life companies, Fannie Mae and Freddie Mac.
Strong origination volumes manifest themselves directly in increasing loan balances being serviced. At the end of 2006, MBA's analysis of the Federal Reserve Board's Flow of Funds Accounts of the United States data report showed $2.95 trillion in outstanding commercial/multifamily mortgages, an increase of $333 billion or 12.7 percent from the end of 2005.
Almost half of this increase was in commercial bank portfolios, and nearly one-third--$108 billion--came through growth in the balance of loans held in commercial mortgage-backed securities (CMBS), collateralized debt obligations (CDOs) or other asset-backed securities (ABS). The Fed data show that other investor groups also saw increases: life companies' mortgage holdings grew by 6.5 percent; Fannie Mae, Freddie Mac and Ginnie Mae multifamily mortgage pools grew by 7.6 percent; and mortgage real estate investment trusts (REITs) increased by 36 percent.
The Fed data show that approximately 80 percent of the $2.95 trillion in commercial/multifamily mortgages outstanding were held as whole loans by banks and thrifts, life companies, Fannie Mae and Freddie Mac (or their multifamily mortgage-backed securities), state and local governments and others. It also shows that, for the first time, more than one of every five dollars of commercial/multifamily mortgage debt outstanding was held in a CMBS or other private-label, asset-backed security.
The evolving industry
The changes taking place in the commercial real estate finance market have fueled changes in the structure of the industry itself. While the market has been undergoing changes in volumes, in sources of capital, in performance and in structures, so too have the firms that originate, process and service the loans.
A key driver of change within the industry has been a desire by firms to offer a full product suite. Until somewhat recently, commercial/multifamily finance firms tended to represent one or two investor groups. A firm was generally known as a life company lender or correspondent; a Fannie Mae Delegated Underwriting and Servicing (DUS[TM]) or Freddie Mac Program Plus[R] lender; a CMBS conduit; or a bank or thrift portfolio lender. …