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Thousand Oaks Mortgage Continues to Watch Commerical Real Estate

http://www.bloomberg.com/apps/news?pid=20601103&sid=app2K2WiOq0M 

By Hui-yong Yu and Sarah Mulholland

July 29 (Bloomberg) — Commercial property companies may sell about $3 billion of mortgage-backed bonds starting in September as part of the U.S. program to revive lending for shopping malls, skyscrapers and hotels.

More than a dozen real estate investment trusts are likely to participate in the Federal Reserve’s Term Asset-Backed Securities Loan Facility, or TALF, said Steven Wechsler, chief executive officer of the National Association of Real Estate Investment Trusts. Vornado Realty Trust may raise as much as $600 million, a person familiar with the matter said yesterday.

The transactions would be the first new issues in the $700 billion U.S. market for commercial mortgage-backed securities since it shut down in 2008 as credit markets froze. Commercial property values tumbled and defaults accelerated. REITs turned to the stock market to raise capital to pay debt.

“If the first deals are successful, we think we can get $10 to $25 billion done in the next six months,” said Kenneth Rosen, who runs a $310 million hedge fund in real estate securities and heads the University of California’s Fisher Center for Real Estate and Urban Economics in Berkeley. “The current pipeline is about $3 billion.”

The central bank started TALF in March to help thaw credit by lending to investors who want to buy securities backed by auto and credit card loans. The $1 trillion program was expanded to include bonds backed by commercial mortgages. Investors who buy the securities submit them to TALF as collateral and the government lends the investor a percentage of the purchase price, subsidizing the investment.

Colony’s Plans

Only top-rated securities will be accepted and loans on CMBS purchases must be repaid within five years.

Investors including Morgan Stanley and Colony Capital LLC are raising money to take advantage of TALF. Morgan Stanley completed a $600 million fund this month, mainly to buy auto, credit card and student loans rather than commercial property bonds. Colony Financial Inc., a new real estate finance company that will acquire, originate and manage real estate-related debt, filed to raise as much as $500 million by selling shares.

Brookfield Properties Corp. is “thinking about” using TALF, Chief Executive Officer Richard “Ric” Clark said today on the company’s second-quarter earnings conference call. The company may use the program to refinance 245 Park Ave., a Midtown Manhattan office tower with $224 million that comes due in 2011.

Tapping TALF

That building “has a very very low current loan-to-value loan in place on it,” Clark said. “You might even be able to take out some more funds by tapping into TALF.”

The Fed is expected to lend CMBS buyers up to 85 percent of the purchase price for TALF securities, said Nareit’s Wechsler.

That may limit the program’s effectiveness. Many landlords already owe more than their property is worth.

TALF may help restart the CMBS market “in a very modest way,” said David Twardock, president of Prudential Mortgage Capital Co. in Newark, New Jersey.

As much as $500 billion of commercial real estate loans mature this year and about $400 billion each year for the next several years, said Jeffrey DeBoer, president and CEO of the Washington-based Real Estate Roundtable July 9 in congressional testimony.

The spread on top-ranked commercial mortgage-backed debt relative to U.S. Treasuries has narrowed 2.47 percentage points to 5.18 percentage points through last week since the Fed said on May 19 it would finance the purchase of CMBS debt sold before Jan. 1, according to Barclays PLC data. The narrowing reflects investor perception that CMBS risk is diminishing.

Reasonable Spreads

“TALF has been an effective tool for bringing spreads in to reasonable levels,” said Randy Reiff, president of Spartan Real Estate Capital LLC, a New York-based firm that invests in commercial real estate debt. “That’s obviously a critical component in market recovery but by itself is not going to lead to the regeneration of securitized lending on a large scale.”

Investors sought $668.9 million in loans from the Fed to purchase commercial mortgage-back bonds on July 16, the first monthly deadline to finance such purchases. Those sales only included so-called legacy assets, mortgage securities that were sold before Jan. 1.

Securities backed by new commercial mortgages are another matter.

Saddled With Loans

Banks remain saddled with loans they can’t sell and are reluctant to make new ones. Until that changes, investors may see only single-borrower CMBS deals from REITs such as Developers Diversified Realty Corp. The Beachwood, Ohio-based shopping mall owner plans to raise about $600 million through sales of bonds backed by retail properties, the Cleveland Plain Dealer reported in June.

“Any meaningful effort to reinvigorate lending in that space will ultimately require that banks be prepared to aggregate debt again,” said Reiff. “It is unlikely that this will happen on an appreciable scale if they are unable to hedge.”

When the CMBS market was active, a bank holding commercial property mortgages it intended to securitize and re- sell could sell short a derivative tied to top-ranked bonds to hedge its loans. With the disappearance of newly issued bonds, that no longer works, said Reiff.

Reiff ran Bear Stearns Cos.’ global real estate/CMBS business and took over as head of CMBS business at JPMorgan Chase & Co. after the bank’s acquisition.

‘Out of Market’

Banks including bankrupt Lehman Brothers Holdings Inc. have exited commercial mortgage securitization and executives who worked in property lending have left banks to join private investment funds.

“The banks themselves I think are going to be out of the market, in terms of commercial real estate, for at least as far as I can see,” Boston Properties Inc. Chairman Mortimer Zuckerman said July 22 on a conference call.

TALF is set to expire at the end of the year, providing little incentive for banks to re-assemble their lending and securitization departments.

NAREIT wants the deadline extended and Fed Chairman Ben S. Bernanke said the central bank would do so if needed.

“We can’t let it die,” said Jan Sternin, a senior vice president at the Mortgage Bankers Association. “This is such a complex mechanism.”

To contact the reporters on this story: Hui-yong

    • This entry was posted on Thursday, July 30th, 2009 at 8:20 amand is filed under California Home Loan Rates. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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