Multifamily Financing: CMBS 2.0

Multifamily Financing: CMBS 2.0

This guest post is written by David Garfinkel exclusively for Multifamily Insight.

Welcome to multifamily financing in the 21st century. It's a brave new world! CMBS 2.0 is here as twenty-five shops have recently set up for Commercial Mortgage Backed Securities (CMBS) lending. The forecast is for $40-$60 Billion of CMBS loans this year.

It is time to start thinking again about Life Insurance Companies and CMBS 2.0. In 2007, CMBS loans exceeded $225 Billion Dollars. This dipped to $3 Billion in 2009. That is a huge amount of capital that left the lending market and was part of the multifamily financing challenge over the last few years.

CMBS loans underwritten in 2007 will be very different from a CMBS loan underwritten today, and this is a good thing. Gone are the days of the 10-year interest-only loans, underwriting pro forma rents and a lender waiving reserves, escrows, etc (except in the case for low leverage loans). The CMBS loan of 2011 (now referenced as CMBS 2.0) will be underwritten diligently, the way it was intended when CMBS was first introduced.

Maximum Loan-to-value is currently 75%, while some CMBS shops are sticking to 70% LTV. Now, I won't be surprised if this eventually pushes back up to 80%, but I don't see this happening in the near future. I think everyone is waiting to see how many loans can get done by CMBS and how the paper sells.

There is less negotiation in the loan document process, as CMBS shops need to paper the transaction appropriately to make sure it sells. Borrowers will still have challenges talking to a loan servicer or getting a friendly voice on the phone should issues arise. But the fact that 25 firms have set up shop is good news.

Today, they are actively competing with Freddie and Fannie and are getting their share of multi-family loans. Don't get me wrong, CMBS lenders and Life Insurance Companies will still underwrite and scrutinize a loan, and they will still analyze borrower strength, the market, the competitive set and do everything that a smart lender should do.

Finally, Freddie Mac, Fannie Mae and HUD are also still lending, so there are more options for loan opportunities. All of this is good news for potential borrowers. Yes, there are still problem loans. Yes, lenders are still foreclosing on assets. But for the right borrower, with the right property, with good stable history, there are loans to be had again in 2011.

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