The older I get, the more I think “new paradigm” is the most dangerous phrase in the English language.
In early 2007, as the CMBS industry was marching to a record year, I attended my first Mortgage Bankers Association CREF conference. I had just started reporting on the multifamily world, and the headlines in my first two stories read, “CMBS Market Gains Momentum” and “Cap Rates Reach Historic Lows.”
The 2007 CREF was an absolute circus—throngs of conduit lenders packed the hallways. And in retrospect, it was a conference rife with irony, though nobody could’ve known it at the time.
At the morning keynote session, Mike May from Freddie Mac was being teased about how Fannie and Freddie had become dinosaurs, how they couldn’t keep up with the conduits. Daryl Carter, executive managing director at Centerline Capital at the time, said CMBS liquidity was “worldwide, deep, and virtually endless.”
Conduit lending was a new paradigm, transformative, infinitely scalable: a rocket that would take this industry to new heights. And Fannie Mae and Freddie Mac were a horse and buggy.
Fannie and Freddie only months before had loosened their underwriting standards in a race to the bottom to compete with the conduits. But the government-sponsored enterprises (GSEs) were still only about a third of the multifamily market back then, and that was viewed as something of a disappointment.
Fast forward to the 2008 CREF. May surprised the audience with news that Freddie Mac would start its own securitization program, even as dark economic clouds were forming on the horizon.
Six months later, the GSEs were seized by the federal government, and the CMBS industry was slouching toward obsolescence. And at the 2009 CREF show, GSE lenders were making money hand over fist, and the conduits were making excuses.
It turned out private-label CMBS was a game-changer after all—it was the rain that cancelled the ball game.
Why this stroll down memory lane? Because, “History is a nightmare from which I’m trying to awake,” in the words of James Joyce.
After five years in limbo, Fannie and Freddie are now being forced to reduce their market share, preferably to about a third of the market. We have to let private capital—the CMBS industry—take over, the prevailing wisdom goes.
And even after a colossal collapse that made it seem like “CMBS” stood for “Crazy Money Bull Shit” (an alternate name for Jim Cramer’s show), conduit lenders are now returning with guns blazing. And Mike May is now helping to build one of the biggest private-sector CMBS shops in the nation. Yet, the CMBS industry hasn’t seen any meaningful reform. Despite the comprehensive complexity of Dodd-Frank, no new safeguards have been enacted, no further regulation, just the same old same old.
Some people say this is an industry with 10-year cycles and two-year memories. That’s difficult to dispute. Two of the articles in this issue could’ve had the very headlines I used six years ago: “CMBS Market Gains Momentum” and “Cap Rates Reach Historic Lows,” but maybe I’ll use them when I cover the 2014 CREF.