Commercial mortgage-backed security (CMBS) delinquencies fell for the fourth straight month in September, according to Fitch Ratings’ latest index results. Multifamily loan delinquency rates in particular fell to 9.95 percent, down from 10.18 percent the previous month.

Although the conduit sector presents competition to Fannie Mae and Freddie Mac, John Cannon, head of production at Freddie Mac, says the competition indicates a healthy market.

“We’ve clearly seen a reemergence of what I would call capital markets, the artist formerly known as conduit lending,” he says, expecting that competition will rise in the next 18 to 24 months.  

Vic Clark, managing director at Centerline Capital Group, says that conduits are winning more and more deals that fall out of the agencies' credit box. He recently quoted a complex portfolio deal with the agencies, but despite the pricing being lower with the agencies, the deal went to CMBS.

“The borrower just preferred the CMBS deal,” Clark said. “It had complications that resulted in heartburn for Freddie including things like fractured condos. There was a complicated ground lease on one of the properties; there was a huge military component on one of the properties.”

The transaction ended up going CMBS because its pricing was close enough to win the deal, and its underwriting flexability made it a smoother execution. “I won’t say agencies won’t ever do those deals, but they make it complicated,” Clark says. After closing that CMBS deal about 30 days ago, Centerline has about four or five others in process.

Spreads have come in significantly over the last two months, Clark says, in a range that makes traditional agency borrowers take notice. 

The slow return of the sector becomes more important in light of the uncertain future of Freddie and Fannie. Many industry watchers wonder if the next incarnation of Fannie and Freddie will have access to a government guarantee, but to Clark, it's not as big an issue given the agencies' increasing reliance on securitized lending.

"I think that Freddie Mac is already prepared to walk away from the government guarantee because they're basically a securitized lender," he says. "They have a three year-plus history and they've been successful, and with or without the guarantee, they're going to be sucessful."