I just returned from the Mortgage Bankers Association's 23rd Annual Commercial Real Estate Finance Conference, known as the MBA CREF Conference. This is the Big Kahuna - the biggest trade show of the year for commercial mortgage lenders, commercial mortgage bankers, and their suppliers. And boy-oh-boy, do I ever have news for you.
First of all, this is a terrific time to be in the commercial mortgage business. An enormous wave of ten-year commercial real estate loans - commercial loans originated in 2005, 2006, and 2007 - are coming due in 2015, 2016, and 2017. The years between 2005 and 2007 were the all-time high water marks for CMBS originations, so this growing wave of maturing loans will be a a veritable tsunami. The next three years will probably be the most profitable 3 years of our 30-year careers in commercial real estate finance. As my golf buddies would say, "Yeah, baby!"
CMBS stands for commercial mortgage-backed securities, and refers to that part of our industry that originates very large ($3MM- $5MM minimum), very standard, (usually) fixed rate permanent loans on multi-family, office, retail, industrial, and hospitality (hotels and motels) properties. These big commercial loans get assigned to a special kind of trust that assembles between $1.5 billion and $3.5 billion worth of commercial loans. Bonds that are backed by these commercial mortgages are then sold to big-time investors, like insurance companies, pension plans, big endowment funds (think of the Harvard or Yale University Endowment Fund), and flthy rich private investors represented by family offices.
There is some question about whether or not the CMBS industry can even process this much volume. Last year's CMBS volume was around $94 billion. This tsunami of maturing CMBS loans will add an extra $70 billion to $80 billion per year to last year's CMBS volume. There are now 36 conduit loan (same as CMBS loan) originators preparing to handle the volume, and each of them is likely to be swamped. Smaller deals of less than $5 million will get passed down the food chain to commercial banks and commercial mortgage bankers, like you and me. Everyone is going to eat well.
I was amazed at how low interest rates on the very large commercial loans were. Large multi-family loans (apartment loans) were being quoted at less than 4%.
I learned a few new terms. Agency loans included multi-family loans insured by FHA (fancy way of saying HUD loans) and multi-family loans made by the GSE's. A GSE is a government sponsored entity, and usually means Fannie Mae and Freddie Mac, although there are actually one or two other GSE's.
During the Great Recession, the GSE's were in receivership, so FHA-insured multi-family loans were the only game in town. As a result, it was taking nine months to a year to close a HUD loan. Remember that FHA is now a part of HUD, so a FHA-insured loan and a HUD loan are the same thing. The term "FHA-insured loan" is considered more precise and more politically correct than HUD loan; but a HUD lender is a multi-family lender making FHA-insured loan. Just remember to hold your little finger out when sipping tea or when saying FHA-insured loan. Ha-ha!
With Fannie Mae and Freddie Mac now profitable again and returning money to the U.S. Treasury, HUD's multi-family loan volume is declining. Fannie Mae and Freddie Mac compete head-to-head for multi-family loans, and their loan production volumes are pretty close - around $25 billion annually each. Both Fannie Mae and Freddie Mac now have multi-family loan production caps by the Federal government of around $30 billion and $25 billion annually.
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An elderly couple had just learned how to send text messages on their mobile phones. The wife was a romantic type and the husband was more of a no-nonsense guy. One afternoon the wife went out to meet a friend for coffee. She decided to send her husband a romantic text message and she wrote: "If you are sleeping, send me your dreams. If you are laughing, send me your smile. If you are eating, send me a bite. If you are drinking, send me a sip. If you are crying, send me your tears. I love you." The husband texted back to her: "I'm on the toilet. Please advise."
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Fannie Mae has a Delegated Underwriting and Servicing ("DUS") program where an approved DUS mortgage banker can, under certain circumstances, actually approve a loan on its own without taking the loan to Fannie Mae. That's the good news. The bad news is that if there is a loss, the DUS lender has to split the loss with Fannie Mae, at least as to the first 30%. As a result, Fannie Mae DUS lenders distrust appraisers and greatly prefer purchase money loans. Purchase money loans have values that have been establsihed in the open marketplace, and they have real cash downpayments. Investors are far less likely to walk away from real cash downpayments.
As a result, you can usually get greater leverage on a purchase money multi-family loan from Fannie Mae. Freddie Mac, on the other hand, usually offers greater loan proceeds on refinances than Fannie Mae.
I learned other new finance terms this trip. The Big Boys at the conference used the expression "L plus 350" or "L plus 425" a lot. I was confused until a kindly banker sitting next to me explained that "L plus 350" meant LIBOR plus 350 basis points (3.5%).
Another guy mentioned that a big loan he did was very granular. Granular? I finally raised my hand and asked the nice Chief Lending Officer for Blackstone Capital, "What does granular mean?" Granular apparently means lots and lots of small income-paying tenants, as opposed to a single-tenant building. In this case, the gentleman was talking about a $50 million blanket loan he had made on a portfolio of self storage projects.
My last point today is another Wowie-Zowie at how low rates have fallen. The last panel of the four-day conference contained four guys who headed up High Yield Debt Funds. The guy from Blackstone, the largest hedge fund in the world ($6 billion in loans last year), a big honcho from Bank of America ($8 billion in loans last year) was there, as well as two other pikers whose high-yield debt funds closed only $2.4 billion and $3.2 billion in commercial loans last year.
Okay, so at what rate were these High Yield Debt Funds closing deals? Would you believe L plus 375 to L plus 425? Guys, LIBOR is only around 0.25%! Do the math. Wowie-Zowie, huh?
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Although I am an attorney, the only client I have ever taken on is my own company. Since getting my law degree 18 years ago, I have collected for my company over $1 million in fees and loan servicing fees from borrowers who tried to cancel. And I have never sued a borrower who you wouldn't agree just unjustly breached my plain English contract. And guess what? I personally haven't been to court in a dozen years. I just send intelligent laymen from my company. Arbitration is soooo cheap, fast, and easy.
I've gotten a ton of compliments on this course:
A ton of new commercial lenders joined C-Loans.com at the show.
