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of commercial real estate loans has been around for decades, but institutional buyers of bonds/securities
"backed" by commercial real estate loans/properties have shied away from these investments, because
they were perceived as risky. Because of a strengthening national economy and a relatively stable real
estate market, investors now see the "income stream" from commercial properties as more stable and
less risky.
Funds from Wall Street are directed through related subsidiaries or various loan servicing
companies, banks and S&L's directly to borrowers. These originating and servicing sources are
commonly referred to as "conduits". Loan terms are typically 20 to 25 year amortizations with 10 year
terms with debt service coverages of 1.20x for multifamily to 1.35x for commercial properties. Loans
are typically made on existing properties only with a loan amount based on historical/stabilized debt
service coverages, although some conduits are providing construction/mini perm loan programs.
Attractive features include: non-recourse liability, no maximum lending limit to one borrower, ability to
lend nationally, and rates that compete against those of life companies and are generally better than those
offered at banks and savings and loans.
Demand for securities backed by commercial real estate loans rose so high that spreads over
corresponding treasuries dropped to historic lows in the spring of 1998. Historically, average market
spreads over US Treasuries in 1996 ranged from 200 to 350 basis points over the corresponding U.S.
Treasury index. In 1997, spreads generally dropped to 110 to 250 basis points. In the Spring and
Summer of 1998 interest margins dropping to there lowest levels, ranging from 100 to 225 basis points.
In August 1998 the "bottom dropped out" of the commercial mortgage backed securities market,
with bond buyers demanding higher yields almost overnight, with margins between 200 to 700 basis
points, when several weeks prior bond buyers were investing at rates ranging from 100 to 300 basis
points. Bond buyers' concerns over a slowing U.S. economy and the results this would have on
commercial real estate markets resulted in conduits effectively having no market to sell to and with
billions of dollars in loans recently closed, resulted in large losses and some failures for many conduit
lenders. Other conduit lenders even refused to fund loan commitments or attempted to negotiate higher
margins in efforts to stem the tide of losses. During the remaining four months of 1998 conduits
dramatically scaled back loan commitments and took a wait and see attitude. Many alternative lenders
stepped up their lending activities during this time to offset the loss of capital from conduits, including
banks and life companies which resulted in forestalling a true "credit crunch". The bond markets
appeared to have stabilized during 1999 with many conduits lending again, but with increased margins
from 150 to 400 basis points, with 10 year fixed rates ranging from 8% to 9%. Margins have been all
over the board in the first eight months of 2000 due to volatility in U.S. Treasuries, but many conduits
now face a new problem. The major concern now is the dwindling number of buyers for CMBS,
especially, the "B" piece or higher risk portions of loan debt. This has lead again to tighter underwriting
and higher margins. Despite all this volatility, conduits continue to lend funds although at a higher cost
and with tighter restrictions than in previous years.
