Summary
The Federal Reserve Bank of New York, through president Richard Dudley has made restoring CMBS a key priority. This is really good policy while it seems to contradict some of the earlier actions of the Fed, especially in light of the decisions about the eligibility of certain loan terms for loan participation. The ability of owners to refinance their obligations is what is really at stake here and with the advent of $3,400bn in loans coming due, failure to secure a working CMBS facility and market could be a disaster. The Fed's TALF program, with approximately $1,000bn in capital, starting in July is going to be a determining factor in how well the program works.
Analysis
Capital markets are still in an uproar. The number of mergers and acquisitions of middle market and existing companies is down enough to keep the active part of Wall Street off the financial front pages. The necessity for a working CMBS process has never been more important. With loans coming up for re-negotiation and owners finding it hard, even with performing properties to refinance, the economy and in some respects, the very reputation of the Fed is at stake here.
The contributing factors that make originating new CMBS limiting include the uncertain levels of value in these instruments, the declining values as stated by rating agencies, the growing pressure for refinancing that pushes CMBS rates lower and difficulty in underwriting new issues, given the history of trades so far.
In my view, it is essential, and probably likely that Fed intervention will provide some way of dealing with CMBS because failure to do so would undoubtedly cause massive defaults on CRE and push out the bounds of the recession vastly beyond what is currently envisioned. It's interesting to me that the Fed has announced some shorter term initiatives to rein in current programs and this is a sign of poor coordination among the Fed bankers. The programs need to be extended for at least another year just to see how all of this plays out.
With Bernanke being roasted on the Hill recently, time is running out to provide answers. The administration has to stop the inter-agency bickering between Summers at Treasury and Bernanke's people and get CMBS moving again. All it will take is a few successful trades, at almost any level of value to get it started.
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
