The trend of putting ever-smaller pieces of the same com­mer­cial mort­gages into mul­ti­ple se­cu­ri­ti­za­tions re­quires in­vestors to be ex­tra care­ful.

National Mortgage News - - Contents - By al­li­son bis­bey

Large CMBS loans are be­ing carved up to spread risk

risk-retention and other reg­u­la­tions un­der the Dodd-Frank Act have led to sub­tle but sig­nif­i­cant changes in the way com­mer­cial prop­er­ties are fi­nanced in the se­cu­ri­ti­za­tion mar­ket.

Large tro­phy of­fice build­ings, shop­ping malls and ho­tels are typ­i­cally funded in this mar­ket be­cause the ex­po­sure would be too big for any one bank or in­sur­ance com­pany. Their size dic­tates that these mort­gages ei­ther serve as col­lat­eral for a sin­gle bond of­fer­ing or be split into mul­ti­ple notes col­lat­er­al­iz­ing two or more trans­ac­tions on a pari passu, or equal-foot­ing, ba­sis.

But the Dodd-Frank rules in­creased the cost of fund­ing, re- sult­ing in lower over­all is­suance of com­mer­cial mort­gage-backed se­cu­ri­ties, as well as a de­cline in the av­er­age size of CMBS deals backed by mul­ti­ple loans, known as con­duits.

As a re­sult, even some not-so­large loans are in­creas­ingly be­ing carved up into smaller, bite-size pieces. Last year, $26 bil­lion of loans tracked by the credit rat­ing agency DBRS were split into close to 500 pieces and bun­dled into col­lat­eral for var­i­ous mort­gage bonds.

“It used to be there was no prob­lem putting a $100 mil­lion loan into a con­duit,” said Erin Stafford, a manag­ing direc­tor at DBRS. “But the av­er­age con­duit trans­ac­tion is now around $1 bil­lion,” lim­it­ing the size of loans that can be used as col­lat­eral with­out in­creas­ing con­cen­tra­tion risk of a given pool.

One prob­lem with the trend of pari passu is­suance is that when these loans go bad, as some surely will, work­outs will in­evitably be more com­pli­cated than they would be for a whole loan.

In the mean­time, pari passu loans have be­come so en­demic that in­vestors putting money to work in more than one CMBS con­duit need to pay close at­ten­tion, lest they end up plac­ing big­ger bets than they want.

“When a large loan is split into so many deals, you can eas­ily end up with too much ex­po­sure to that prop­erty when you buy tranches of sev­eral con­duits,” said Teresa Wal­ters, a vice pres­i­dent in port­fo­lio man­age­ment at Amundi Smith Bree­den. “In some re­cent trans­ac­tions, more than half of the top 10 loans are pari passu loans.”

The prob­lem is acute for in­vestors buy­ing a lot of CMBS in a short time.

“If there’s a deal with a por­tion of a large loan, maybe the next five deals are go­ing to have ex­po­sure to that loan as well. So you have to be par­tic­u­larly care­ful,” Wal­ters said. “But if you buy one deal now and then wait a few months to buy an­other, the like­li­hood is that the rest of the loan will al­ready have been put into other deals.”

In one ex­am­ple, a $325 mil­lion mort­gage on the Fresno Fash­ion Fair Mall, in Fresno, Calif., was split into six notes, rang­ing in size from $39 mil­lion to $80 mil­lion, placed in as many con­duits be­tween Oc­to­ber 2016 and March 2017, ac­cord­ing to DBRS. The loan, which the prop­erty owner Mac­erich Co. ob­tained from JPMor­gan Chase and So­ci­ete Gen­erale, is backed by 536,093 square feet of the 957,944-square­foot shop­ping cen­ter.

Very large loans, those over $ 250 mil­lion, can still be se­cu­ri­tized on their own. Gold­man Sachs re­cently com­pleted two of these trans­ac­tions, which are known as sin­gle- as­set, sin­gle- bor­rower CMBS: a $465 mil­lion mort­gage backed a port­fo­lio of 10 of­fice

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