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Special Reports
Commercial Lending
Panel Debates Construction Loan Securitization
By Poonkulali Thangavelu
NEW YORK -- Construction loans could be making it to the capital markets as early
as 2006, fueling further growth in the commercial mortgage-backed securities market, according to panelists at
a "Realshare" structured finance conference here.
Lisa Pendergast, managing director, CMBS Research, RBS Greenwich Capital, knows
of at least three Wall Street firms that are "setting up for construction loans." However, "it will
be a long time before a traditional conduit lender" gets into this sort of securitization, probably after
a market is established, according to her.
Kim Diamond, a Standard & Poor's managing director, said that "the thought
of securitizing construction loans gives me heartburn," considering that "it goes against the grain"
of the security provided by an asset backed by an income-producing property. There are also other risks in terms
of the cost and time associated with a construction project. She believes that there might be interest in this
sort of securitization from asset-backed securities generalist investors that are not aware of the risks associated
with construction loans.
Ms. Diamond believes that with all the slicing and dicing of CMBS loans that has
been going on in the last couple of years, there are a lot of pieces in a lot of places and a problem in any one
loan could reverberate. The theoretical structuring of the loan securitizations has not been tested in practice
and "investor panic" is possible if there is a problem.
Margie Custis, managing director, capital markets, Principal Global Investors,
sees securitization of construction loans as a concept that works. All it needs is time for people to figure it
out, she believes.
About whether the CMBS market is going to grow further and garner a bigger share
of the commercial mortgage lending market, Ms. Custis believes that insurance companies will hold on since lots
of borrowers don't want CMBS.
The CMBS lenders still have "a lot of lessons to learn", she said, and
sees a need for portfolio lenders for a long time to come.
Brian Lancaster, managing director, Wachovia Securities, and moderator of the
panel session on "trends in CMBS," wondered if lending will tighten in 2006.
Dan Vinson, managing director, capital markets, GE Commercial Finance Real Estate,
hasn't seen any recent tightening. Lending practices have been more aggressive in the last couple of years, he
observed, but it's not like the late '80s when savings and loans lent on "phantom income."
Nowadays, "B" piece lenders are kicking out loans and the capital markets
require more disclosure of information. Therefore, Mr. Vinson is not so pessimistic about the current climate.
Ms. Diamond, who sees everything that comes to market, is not as optimistic as
Mr. Vinson. There has been somewhat of a downward spiral in standards, she said, with increased volume feeding
the fire.
Ms. Custis believes that if interest rates go up further, underwriting standards
could decline further with the increased competition. If the pie shrinks further, she sees less of a share for
"B" piece buyers.
Ms. Diamond noted that "B" piece buyers don't have the same vested interest
they used to have, considering that they used to previously buy and hold and are now repackaging their purchases
into collateralized debt obligations. Consequently, "they don't have the same concern they once had to exert
discipline," as she sees it.
Ms. Pendergast believes that as long as interest rates stay where they are, it
is "very difficult" to see any tightening of underwriting standards.
She expects that as spreads widen, as perceived risk rises, that will affect the
levels and amount of lending that gets done and also give "B" piece buyers some additional leverage to
exert discipline.
Mr. Vinson noted that it's a more competitive situation now than when a few "B"
piece buyers were exerting discipline and made up an "unhealthy cartel." With the emergence of CDOs,
the "B" piece buyers have less skin in the game, according to him. He doesn't see any "magical credit
tightening" in the next year.
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