Formerly active conduit lenders are quietly reopening their platforms in anticipation of the government’s TALF program for CMBS.
Wells Fargo and Prudential are two lenders working behind the scenes to partially re-open their dormant shops, according to mortgage bankers who spoke on the condition of anonymity.
Wells Fargo is selectively looking for bigger deals—$60 million and up—that would max out at about 55 percent or 60 percent leverage, according to industry watchers. But Wells Fargo is mostly looking for office and retail properties, since it’s difficult to compete with Fannie Mae and Freddie Mac for multifamily deals. Meanwhile, the buzz on Prudential is that it will soon open a $1 billion equity line dedicated to originating loans for TALF. When asked about the re-opening of their conduit line, a spokesperson for Prudential would neither deny nor confirm the possibility.
It’s too early to say whether these conduit lenders really plan to open for business. They’re only opening their conduit lines for favored, larger clients, cautiously dipping their toes into the water with an eye on the TALF program.
TALF, which provides low-cost loans to CMBS investors in hopes of reviving the securitization market, is still just beginning to get off the ground. Given that these lenders are only now beginning to originate loans, it would take about 90 days before they could be pooled, sold, and securitized.
But TALF could also make an immediate splash through a single-borrower issuance, wherein a large REIT raises financing for multiple properties, for instance, creating an instant pool. Indeed, the lending industry is buzzing that such an issuance is being worked on behind the scenes.
“You might have a very high-quality REIT, for example, that could have a very geographically diverse portfolio as well as diverse property types,” says Tom Graf, managing director of Boston-based Standish Mellon Asset Management, which aims to invest in TALF CMBS. “That could potentially be one of the first deals that come to market.”
Indeed, REIT Developers Diversified Realty raised its hand for such an execution in a second-quarter conference call. Referencing TALF, the company’s chief investment officer David Oakes said, “We're in the queue with one of the major investment banks to do a significant self-financing when that becomes available.”
Retail, office, hospitality, and industrial properties seem to be the best fit for these early conduit executions, since those sectors don’t have the government-sponsored enterprises to turn to. But for multifamily properties that don’t qualify for agency financing—perhaps because they are located in markets where Fannie and Freddie are overexposed and therefore less inclined to lend—there might be a fit.
These early rumblings are just the opening salvo in what figures to be a long effort toward re-establishing a market many believed was dead this year. While the consumer asset-backed securities (ABS) side of TALF has been successful in lowering spreads on auto and student loans, for instance, the CMBS portion of TALF isn’t there yet. “In the ABS world, it’s had a dramatic impact on spreads and has gotten it to a position where that type of conduit origination makes sense,” says Steve Miller, director of debt research and risk management at Boston-based market research firm Property and Portfolio Research. “I don’t know if it will be as quick as what happened in the ABS world, but I’m sure that’s what they’re trying to emulate.
“There is still a big gap between the implied spreads for securitized products versus what lenders who are now lending are doing,” Miller continues. “Until that gap gets minimized, its hard to see it making sense to do a new securitized lending platform.”
For a basic primer on the TALF and TARP programs, click here.