"Quiet Boom In Financing: Bundled Comercial Debt" CONTINUED...
Meanwhile, the Resolution Trust Corp. and the Federal Insurance Deposit
Corp. needed a way to dispose of portfolios of failed savings and loans
and banks. So they began bundling commercial real estate loans and
selling them as securities.
"Out of that came good performance," Cunningham said.
Growing investor interest, coupled with the strong demand for commercial
loans, drew others into the commercial mortgage-backed securities business.
Cunningham formed Liberty Mortgage in 1992. "It was primarily
due to the failure of the capital markets to accommodate the needs, he
said. Liberty Mortgage makes and pools commercial real estate loans for projects
through the country and participates in investment-grade bond offerings
about twice a year. Its first was for $128 million in 1993, and it's
now pooling loans for a bond offering of about $200 million later this
year.
As more institutions such as Liberty Mortgage jumped into the new market
in the last few years, the commercial mortgage-backed securities business
shifted from being a liquidation method to a new loan origination business.
And now it's playing a pivotal role in commercial lending.
"The advantages of commercial mortgage-backed securities to financial institutions
are significant," said Houston, senior vice president of capital markets/distribution
for Bank of America in San Francisco.
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Bank of America originates and warehouses commercial mortgages suitable
for sale in the secondary market through its Commercial Mortgage Service
Origination unit, which has closed $1.3 billion in commercial mortgages
since it was founded in 1994. The unit provides commercial real estates
loans in the $750,000 -to- $75 million range on a wide variety of completed
and leased commercial properties and evaluates the economics and timing
for securitizing and selling the loans.
The Money Store, Inc., which has dual headquarters in Sacramento and
Union, New Jersey, in 1992 became the first institution to bundle and sell
the unguaranteed portions of commercial loans made under a Small Business
Administration program. It earlier had used securitization as a financing
tool for consumer loans And in the last two years, it began securitizing
conventional commercial mortgages as well.
"As the opportunity developed to securitize commercial loans, it was
a natural extension of our growth," said Jeff Rogers, company spokesman
in Sacramento. "We're positive about the opportunity."
Sierra West Bank also securitizes the unguaranteed parts of the commercial
loans it issues through an SBA program. Its latest offering packaged
1,000 loans totaling $51.4 million. The bank also plans to build
a pool of conventional commercial mortgages and securitize them next year.
Although investor demand is high, Sierra West Bank treasurer McGaughey
expects increased activity. "An investor is able to receive a higher
rate of return on an investment-graded instrument than on other types of
corporate paper," he said.
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And banks can use securitization as a way to finance lending.
With more people putting their money into mutual funds and the money market,
banks have increasing difficulty building deposits.
"We're going to see a lot of activity (in this market) as it grows
harder and harder to grow a deposit base," McGaughey said. "Securitization
is a fairly inexpensive way to finance lending activities."
Banks can also use securitization as a way to manage their balance
sheets. When the bundled loans are placed in a trust, they are removed
from the bank's balance sheets for accounting purposes. That can
free equity capital that otherwise would have been required to support
the assets on the bank's balance sheet. The only drawback for financial
institutions, McGaughey said, is the transactions require a lot of technical
expertise. Sierra West Bank hired nine temporary employees to help
prepare documents once it built a pool of commercial loans. "It took
about 90 days to pull everything together," he said.
McGaughey predicts securitization could broaden to other types of commercial
debt, such as lines of credit.
Moody's predicts growing interest in the pooling of net leases, mostly
of retailers. It also foresees a growing number of deals with greater
diversity of location, property and borrowers.
Rising interest rates could slow activity in commercial mortgage-backed
securities, analysts say, but they won't halt growth. Most commercial
mortgages have balloon terms of 10 years or less, which provide a steady
stream of demand for refinancing. |