After crashing and burning with the Great Recession, conduit lending is recovering and gaining steam throughout the market, but with more caution and finesse than before, creating an environment for a vibrant, stable revival.
Vic Clark, managing director at Centerline Capital Group, believes an uptick in commercial mortgage-backed security (CMBS) loans will put the pressure on the government sponsored enterprises (GSEs).
“The B buyers are cautious and continue to be involved in the acceptance of each loan that goes into a pool, hands on,” Clark says. “They know the quality that is going on. They’re dictating what goes in and what doesn’t, which results in solid, stable underwriting.”
Between the third and fourth quarters of 2012, CMBS loan volume grew 141 percent, according to a Mortgage Bankers Association report.
HFF executive managing director Gerard Sansosti agreed that CMBS loans are much more stable today compared to those made during the height of the last upturn.
“I don’t think we will return to the 06-07 era,” he says. “And when I say that, I mean that the underwriting was extremely aggressive,” such as leverage levels of 85 and 90 percent being routinely offered, he said.
But Sansosti is cautious of what the future could bring.
“The hope is that we don’t go back there,” he says. “But, to say never in this business is a mistake.”
Sansosti’s team recently closed a CMBS deal in December. The development, which a client was acquiring, is an older property in Youngstown, Ohio. The HFF team was able to shop around and found CMBS to be competitive with the GSEs.
“It’s a 6 million dollar loan,” he said. “It was in a market where Freddie wouldn’t loan any more than 65 percent value.”
So, the deal went to a conduit, a 10-year loan with a 30-year amortization and 75 percent leverage—exactly what the borrower was looking for.
Most of the progress and gain for conduits comes from swooping in on deals GSEs and life companies don’t necessarily want to fight for and it’s paying off.
Richard Flohr, a managing director with Prudential Mortgage Capital Company, said the biggest advantage to having strength in various CMBS loans is that it provides more options for borrowers and brings competition to the market.
As for history repeating itself, Flohr said it’s less likely for CMBS lenders to fall victim again.
“We’ve learned from our mistakes,” he said. “That doesn’t mean there aren’t natural things happening in the market. When credit markets have hiccups, it reverberates through all the markets.”