New York City—No one seems to be able to close a multifamily conduit loan.

“I have not closed a conduit loan since December 2007,” said Charles Foschini in CB Richard Ellis' Miami office. Over the last seven years, that office has averaged $1 billion a year in conduit lending business.

This summer, a few conduit lenders trumpeted that they are open for business, but it is very difficult to find an example of even one conduit loan that has actually closed.

Two major conduit lenders— Deutsche Bank and Wells Fargo—are still open for business, at least in that they are talking to borrowers. However, neither lender was able to name a conduit deal they had closed in recent months.

Column Financial re-opened its conduit lending business this spring. But as of mid-September, Column had only closed a handful of conduit loans over the summer. None of those loans were to apartment properties. Two office properties in Rochester, N.Y., received $5.3 million in 10-year, fully amortizing financing that covered 70 percent of the properties' value. Column did not disclose the interest rate except to say that it was less than 500 basis points over Treasuries.

In the meantime, Column focused on originating Fannie Mae and Freddie Mac program loans. In recent years, Column closed 80 to 100 loans per year through its Dallas office alone. But this year, the Dallas office expects to close just 25 loans to apartment borrowers, all through Fannie Mae and Freddie Mac programs.

To make up for lost business, Column has had to cut staff in several rounds of layoffs. Column had about 20 conduit loan officers before the credit crisis. That number has since been cut in half.

Why have conduits had so few takers? The best conduit 10-year loan Column could offer apartment borrowers would have had an interest rate of more than 500 basis points over the yield on Treasury bonds, for an all-in rate of around 9 percent in early September. That rate would be for a typical fully amortizing conduit loan covering 80 percent of the value of a property, with a debt-service coverage ratio (DSCR) of 1.25x.

Just to compare, Column also offers Fannie Mae and Freddie Mac 10-year loans to apartment borrowers. In mid-September, just after the government takeover of the government-sponsored enterprises (GSEs), Column quoted rates starting at 250 basis points over Treasuries, for an all-in rate of about 6.2 percent.

Bond trouble

The fundamental problem with conduit lending is that investors aren't willing to pay much for bonds backed by the loans. Commercial mortgage-backed securities (CMBS) yields have risen from 69 basis points over the yield on 10-year Treasury bonds in January 2007 up to 343 basis points Sept. 6, just before the government takeover of the GSEs, according to RBS Greenwich Capital.

Lenders can't originate conduit loans for less than the CMBS yield without losing money. Even if yields dropped back below 100 for a few weeks, lenders would have to be confident they could close loans and issue bonds before yields rose again.

“We wouldn't do a conduit loan in this market because there's no way we could be sure we could deliver,” said Bruce Viergever, managing director of the commercial real estate group for Centerline Capital Group.

In September, stability seemed a long way off for CMBS. Lehman Brothers filed for bankruptcy, and stock of Washington Mutual traded at less than $3 a share. Both institutions could potentially flood the market with bonds.

Meanwhile, innovators still work to re-ignite the market for CMBS. Centerline Capital, a major investor in B-piece CMBS, has been approached by life company lenders interested in securitizing commercial real estate loans on their balance sheets. The life company would then sell the unrated tranches to Centerline, if the buyer and seller could agree on a price. The life company would hold the rated CMBS on its own books.

The plan is similar to Freddie Mac's Capital Markets Execution program. Freddie is now originating apartment loans to eventually be securitized. Freddie would sell the unrated CMBS and hold the rated tranches on its own books.

The program offers conduit loans to apartment properties through a handful of Freddie Mac lenders, including Capmark Finance and Holliday Fenoglio Fowler. Interest rates will start around 6 percent for loans with loan-to-value ratios of up to 80 percent, and DSCRs that stretch down to 1.15x. The program also allows borrowers to take out supplemental financing after closing, providing unprecedented flexibility to conduit borrowers.

Freddie Mac hopes to have closed enough loans under the program to issue new CMBS by the end of 2008.

A new hope

With conduit lending still comatose, several of the innovators that helped create the conduit lending business have found new jobs.

Ethan Penner, one-time head of Nomura's mortgage business, joined CB Richard Ellis. Mark Finerman, former managing director for RBS Greenwich Capital, has launched LoanCore Capital, a fund to invest in commercial real estate debt. And William Green, who used to run Wachovia's conduit business, has joined Starwood Capital Group. Experts like these, with decades of experience in lending to commercial real estate deals, are likely to be planning some means to bring capital to the starved real estate markets.