For this market, help hasn’t quite arrived yet

During the past 18 months, daily economic headlines have progressively worsened.

So much has happened that it is hard to focus on a single Treasury or Fed edict, much less try to understand its ramifications.

According to a recent UBS report, the Fed has taken 72 actions since August 2007 to blunt the impact of the faltering economy, and that count excludes interest rate moves. So the Fed, which usually focuses only on changing interest rates, has taken action about once a week since the third quarter of 2007 -- that by definition is unusual.

All the major moves seem to be accompanied by a statement about the necessity to protect against systemic risk. But if the commercial mortgage market is any indicator of what is going on in other parts of the economy, it is difficult to contemplate the risks we have been protected against.

The Commercial Mortgage-Backed Securities market continues to be shut down with AAA bonds trading at 49 cents on the dollar and yields pushing into the 18 percent range.

While many now look at AAA ratings with a jaundiced eye, current pricing borders on absurd. An 18 percent yield implies that the average loss on every piece of real estate securing the loans in a pool will exceed 60 percent of its original value.

Just as the subprime mess has brought to light improper dealings and evidence of overly aggressive underwriting, the commercial market had its share of atrocities that are starting to come to light.

The yields on AAA bonds spiked to historic highs after the revelation that several large loans had "been transferred to special servicing."

The two loans were a $209 million commercial mortgage for Westin hotels in Tucson, Ariz., and Hilton Head, S.C., and a $125.2 million loan for the Promenade Shops at Dos Lagos in Southern California.

Both were transferred this month to a special servicer "due to imminent default," analysts at Credit Suisse indicated.

Before the existence of the arcane world of securitizations, troubled loans (meaning future default candidates) were sent to the workout group of a bank, where specially trained personnel could focus on restructuring the troubled asset.

Today, the workout group has become special servicing, and loans getting transferred are on the rise.

According to Realpoint, a credit rating agency that analyzes commercial real estate and CMBS, $7.2 billion of loans were transferred in 2008 to special servicing through October, up from $3.4 billion for all of last year.

While that number seems large, what is amazing is that the increased number of loans in special servicing amounts to only 0.97 percent of all securitized loans. That is still much lower than the record set in late 2002 of 3.2 percent of loans. At that time, there were no losses to AAA bondholders.

In Richmond, one loan was dubiously noted as being over $20 million and transferred to special servicing.

The Communities at Southwood, a 1,286-unit apartment complex off Hull Street in Richmond, was listed as collateral for a $50 million loan that had been recently foreclosed upon.

GMAC originated the loan in August 2005 and recently foreclosed with a plan to sell the property for about $40 million, according to market sources. Given the difficult market environment, the $40 million could be a tough number to achieve.

While the Richmond property is a good example of just how bad underwriting got for some commercial loans, the value of the whole industry is based on worse assumptions, and that is making the return of conduit/CMBS lending a pipe dream at the moment.

So while it is comforting to know that the government is doing everything it can to make homes affordable and establish a safety net on the financial markets, help has not quite arrived yet for the commercial mortgage market.

However, a good comparison of free market versus government backing is playing out in new mortgage pricing for multifamily projects. Fiveand 10-year loans for multifamily properties financed through Fannie Mae or Freddie Mac will price somewhere in the 5.70 percent to 6.50 percent range.

On the other hand, according to the John B. Levy & Co. Commercial Mortgage Survey, fiveand 10-year commercial mortgages are pricing in the 6.80 percent to 8.00 percent range through institutional investors.

Banks also are lending on a select basis and pricing new threeand five-year money in the 5.00 percent to 6.50 percent range for loans guaranteed by the borrower, depending on the borrower's credit worthiness.