I'm trying to get a better understanding of the CMBS market and how it works.
Does the market essentially act similar to Famnie and GSEs, where they buy pools of mortgages, only these are in office, industrial, and development, and the buyers are investors not the Gov?
I'm reading on it now, from what I can tell it looks like there is a ton of CMBS debt maturing in the next two years. At first glance, this shouldn't be a problem to refinance because banks offer low rates and are in the business of lending. But what I'm understanding is that banks will not refi CMBS loans this time around, BC
A. There are new regulations in HVCRE loans B. Investors require more return than CMBS currently offers, and banks don't want to hold the whole thing on their books because of this lack of investor appetite, making the only option left a default or restructure
So, does this mean CMBS loans at risk of default have shitty underwriting, bc HVCRE regs block banks from the refi? Also, do investors not want their low returns, bc there is no market appetite for the bonds compared to other bonds making banks not want to touch them either?
It sounds like a lot of gloom and doom from my elementary understanding, but it also sounds like the natural cycle of a free market where developers took too much leverage in a shitty area, NOIs and DSC can't support this natural uptick in interest, and now the investors who bought that risk will lose from the default.
Is my understanding close, or am I completely off mark?
There is a lot of CMBS debt coming due at the moment and will be doing so for the next year and a half. This is the result of huge amount of CMBS done in 2006 and 2007.
There will be some legacy CMBS 1.0 loans that will not be financeable. I have seen some 80% LTV loans with full term IO cross my desk; this will not be refinanced. These loans will not underwrite because the credit of these loans do not work. Since most of these loans will be taken out by new CMBS loans, regulations won't matter that much.
I don't fully understand your bond investor logic, but bond investors are buying CMBS bonds.
Do you have a specific question or topic you're trying to gain knowledge about?
From what I'm reading there is a new wave of capital retention and RM regulation hitting the industry on Dec. 24th. The capital retention alone is going to require CMBS lenders to hold 5% of each security on their books for the duration of the product's life or pass that retention requirement on to B-buyers.
I view investor appetite for the product as a function of the implied risk in buying CMBS. The pricing on the security is going to fluctuate relative to the risk that investors see as apparent in the current market. If CMBS looks good a product will price well and spreads will be low. If the market looks like it did in February/March, spreads will blow up and pricing on these deals will suffer. If investors don't have an appetite for the product for any reason (lax underwriting, risk factors, bond market volatility) it doesn't make much sense for CMBS shops to be underwriting a ton of loans, especially when life cos and banks are able to beat CMBS shops on pricing lower risk deals. One of the main benefits of the product is earning a AAA-rated risk for a decent return over swaps. If that low risk evaporates, the investor will be comped with a lower price. Remember that a low spread (low "yield") is generally a good sign.
The "wave" of CMBS maturities anticipated in 2016/2017 has turned out to be more of a ripple, and a good deal of legacy CMBS loans have already been refinanced. Also, whether you look at DSCR or D/Y the UW standards applied to current CMBS loans are far more conservative than CMBS 1.0. Many loans simply won't qualify this time around.
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