Mortgage-backed debt sales stay low

Source : Business Times – 21 Jan 2010

Borrowers are still struggling with declining property values, analysts say

Sales of commercial mortgage- backed securities will likely remain below US$15 billion in 2010 as borrowers struggle with declining property values, according to analysts at Barclays Capital and JPMorgan Chase & Co.

Debt sales backed by skyscraper, hotel and shopping mall loans may be as low as US$10 billion this year, according to Alan Todd, a JPMorgan analyst in New York. Aaron Bryson, a Barclays Capital analyst also in New York, forecasts more transactions, reaching about US$15 billion during the period.

The US government has committed to reviving the US$700 billion commercial-mortgage backed bond market amid plunging property values and a lending pullback. A record US$237 billion of the debt was sold in 2007, compared with US$12 billion in 2008 and US$1.4 billion last year, according to data compiled by JPMorgan. New issuance is not likely to pick up until the second half of this year, Mr Todd said.

‘The banks would like to lend,’ Mr Todd said during an interview at the Commercial Mortgage Securities Association annual conference here. ‘There are fewer properties to lend against.’ Many owners went heavily into debt during the boom years and find it hard to locate properties not already encumbered to lend against, Mr Todd said.

The lack of new loans chokes off funding to borrowers with maturing debt. Two-thirds of loans bundled and sold as securities, amounting to US$410 billion, may require more cash as property values plummet and underwriting standards tighten, according to Deutsche Bank AG data.

US commercial real estate prices are 42.9 per cent below October 2007 peaks, Moody’s data show.

Debt sales dried up in 2008 as the credit crisis sapped demand and the high price investors sought to hold the obligations was too great for Wall Street banks to profitably underwrite and bundle new loans for sale.

The gap, or spread, on top-rated commercial-mortgage backed securities over Treasuries has fallen to about 3.49 percentage points, compared with 9.63 percentage points a year ago, according to Barclays data.