Finding a Roadmap: A Veteran of the Commercial Mortgage-Backed Securities Business Offers His Unique and Time-Tested Perspective on the Current Credit Crunch and How It's Affecting the Commercial Real Estate Finance Business

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Along-time veteran of the commercial mortgage-backed securities (CMBS) market--indeed someone instrumental in its founding--Tom Wratten, CMB, reflects on what the CMBS market needs to do to wrestle free from the current credit-market logjam. * This former Air Force fighter pilot, who flew 130 combat missions in Vietnam, is better known in the mortgage world for his critical early work in moving the commercial real estate finance business into the world of securitization. The accolades are many, and go back to the early 1980s. Wratten was the founding chair of the Commercial Real Estate Finance Council for the Mortgage Bankers Association (MBA) and served on the group's board of governors from 1982 to 1992. * Along the way, Wratten chaired the first MBA Commercial Real Estate Finance/Multifamily Housing Convention and was chair of MBA's commercial mortgage securitization committee. He also served as a founding chair of the precursor organization to what is now the Commercial Mortgage Securities Association (CMSA). Wratten was also founding chair of the securitization committee for the American Council of Life Insurance (ACLI). On top of all that, he served as the founding chief executive officer for Midland Loan Services, Kansas City, Missouri.

Mortgage Banking interviewed Wratten recently to get his thoughts on the current state of the CMBS market and the credit crunch.

Q: What is happening now in the capital markets, and how is it impacting commercial real estate finance?

A: A collapse in investor confidence has roiled capital markets and precipitated a credit crunch. Much of this considerable distress is the washout of residential mortgage markets. [Those events] are well-documented at this point. Obviously, the subprime meltdown spilled over and fomented a broad investor apprehension of all mortgage investment vehicles, which was further amplified by the financial crisis at Bear Stearns & Co. Inc., New York.

Homeownership is a cornerstone of the consumer-driven American economy. The other cornerstones are job growth, profitable industry and capital formation--each of which help propel commercial real estate. However, residential markets, our larger sibling, are tethered to commercial real estate in ways that often make it difficult to distinguish their woes from ours.

The homeownership rate spent 50 to 60 years in the 60 percent to 65 percent range, following the creation of the Federal Housing Administration [FHA], the Department of Veterans Affairs [VA] home loan program, Fannie Mae, Freddie Mac and, later, the residential mortgage-backed securities [RMBS] vehicles. It worked well until we pushed it to unsustainable levels. Now we must pay the price for that excess.

Q: Have similar market excesses happened before, and what has the industry learned from them?

A: Yes, excesses have occurred several times in various sectors, and often crash the party as unwelcome guests. For example, with barrels of oil now trading hands for more than $110, one might be inclined to forget the early 1980s, when Penn Square Bank, a small lender peddling energy loans from an Oklahoma shopping center, lit the fuse for a banking industry meltdown. And there were the construction and development real estate investment trusts [REITs] of the early 1970s.

Also recall the aggressive CRE [commercial real estate] syndications and junk bonds of the 1980s, and the savings-and-loan [S&L] crisis of the early 1990s. Let's also not forget the technology meltdown at century's end. And, of course, every student of history can recite the granddaddy of them all--the 1929 stock market crash, which, less well-known, was preceded by a real estate crisis in 1926.

I've just touched the surface of past excesses, some of which have led to national recessions or worse. Only time will tell, but the subprime crisis, higher energy prices and other factors may well have landed us in a recession at this very moment. …


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