Doug Marshall
Market Assessment
Published July 28, 2009
In our daily business of mortgage brokering and facilitating commercial real estate loans, we have been hampered by large holes in our lender list.
I’m constantly reminding borrowers that sectors of the lending market that would have aided them in past years are gone – just gone – and we don’t know if they’re coming back.
One of those lending sectors, lost to us at this time, is the CMBS (commercial mortgage-backed securities) market. Shoddy securitized lending practices have been one of the primary causes of the entire credit crisis.
Its lack of oversight, furious pace, and too aggressive underwriting criteria, has driven CMBS investors to lose all faith in the process. It is no longer an option for a sane, rational investor.
But what of the future? Does the CMBS market stand a chance of returning? Yes, unequivocally, says Adam Klingher of Johnson Capital. “Lending has gotten too big to do it the old way with banks and insurance companies taking in money and then lending it out the back door…”
As long as the issuer can show they are really underwriting their loans and making “good investment decisions, the security investors will return,” says Klingher.
But how will it re-emerge with any credibility? That’s the real question. How will the CMBS market convince security investors that it has learned its lesson, so to speak, and can be trusted not to occasion a similar crash and crunch in future years? What changes to its customary ways will it have to make?
Correcting the present CMBS approach to financing commercial real estate will require a sharing of the financial risk between the issuer and the investor. “The huge bonuses Goldman Sachs will soon hand out shows that the financial industry high fliers are still operating under the system of heads they win, tails other people lose,” says Paul Krugman at the New York Times.
Under the present system if a bank generates big short-term profits by securitizing and selling their loans, they get lavishly rewarded – and they don’t have to give the money back even if the investors get bilked out of their life savings. That’s just plain wrong.
As Adam Klingher puts it, there is a real need for the “economic interests of the banks or originators to align with the security investors.”
The issuer needs to leave “skin in the game” so investors know that the CMBS issuer will feel the financial pain just as much as the investor if something goes horribly wrong.
Market Assessment
Published July 28, 2009
In our daily business of mortgage brokering and facilitating commercial real estate loans, we have been hampered by large holes in our lender list.I’m constantly reminding borrowers that sectors of the lending market that would have aided them in past years are gone – just gone – and we don’t know if they’re coming back.
One of those lending sectors, lost to us at this time, is the CMBS (commercial mortgage-backed securities) market. Shoddy securitized lending practices have been one of the primary causes of the entire credit crisis.
Its lack of oversight, furious pace, and too aggressive underwriting criteria, has driven CMBS investors to lose all faith in the process. It is no longer an option for a sane, rational investor.
But what of the future? Does the CMBS market stand a chance of returning? Yes, unequivocally, says Adam Klingher of Johnson Capital. “Lending has gotten too big to do it the old way with banks and insurance companies taking in money and then lending it out the back door…”
As long as the issuer can show they are really underwriting their loans and making “good investment decisions, the security investors will return,” says Klingher.But how will it re-emerge with any credibility? That’s the real question. How will the CMBS market convince security investors that it has learned its lesson, so to speak, and can be trusted not to occasion a similar crash and crunch in future years? What changes to its customary ways will it have to make?
Correcting the present CMBS approach to financing commercial real estate will require a sharing of the financial risk between the issuer and the investor. “The huge bonuses Goldman Sachs will soon hand out shows that the financial industry high fliers are still operating under the system of heads they win, tails other people lose,” says Paul Krugman at the New York Times.
Under the present system if a bank generates big short-term profits by securitizing and selling their loans, they get lavishly rewarded – and they don’t have to give the money back even if the investors get bilked out of their life savings. That’s just plain wrong.
As Adam Klingher puts it, there is a real need for the “economic interests of the banks or originators to align with the security investors.”The issuer needs to leave “skin in the game” so investors know that the CMBS issuer will feel the financial pain just as much as the investor if something goes horribly wrong.
Otherwise, according to Paul Krugman, they will once again have “every reason to steer investors into taking risks they don’t understand.”
This is what it’s going to take to get the CMBS market back on the road to doing business with integrity.
Sources:
"CMBS Lending – Will it Ever Come Back?" July 14, 2009 by Adam Klinger of Johnson Capital
"The Joy Of Sachs," Paul Krugman at The New York Times, Oregonian article.
This is what it’s going to take to get the CMBS market back on the road to doing business with integrity.
Sources:
"CMBS Lending – Will it Ever Come Back?" July 14, 2009 by Adam Klinger of Johnson Capital
"The Joy Of Sachs," Paul Krugman at The New York Times, Oregonian article.
1 comment:
Every investment has risks and drawbacks. The important thing is to recognize them, to be aware of what can happen to your investments, and to make sure you aren't exposed to risks you can't afford.
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