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S&P: Low Interest Rates Could Sustain US CMBS Volume

NEW YORK, Jan 8, 2002 /PRNewswire via COMTEX/ -- Some of the lowest interest rates in decades helped the U.S. commercial mortgage-backed securities sector achieve issuance volume last year of some $70 billion, a 44% increase year over year, with similar levels possible for 2002, said David Fallick, managing director for CMBS at Standard & Poor's.

"For 2002, we believe total issuance could be flat or perhaps slightly higher than last year's volume, which exceeded almost all predictions made by industry participants," Mr. Fallick said.

Of the four main CMBS transaction types (single-borrower, conduit, fusion, and floating rate), the increase in single-issuer transactions overwhelmingly surpassed gains for the others, in large part because of billion-dollar-plus deals involving Rockefeller Center and General Growth Properties, which was a $2.55 billion single-borrower transaction closed during the fourth quarter of 2001.

But Mr. Fallick sees more of a balanced playing field in terms of transaction types for 2002. There will likely be less volume generated from single-borrower transactions, while conduit issuance may rise above year-ago levels. "I think the conduits will make up the difference in the sector, representing a greater percentage of the issuance than in 2001," said Mr. Fallick.

Interest rates are the backbone of the commercial mortgage industry's success, given their relationship to borrowers refinancing their loans. But there were other contributing factors, such as burnoffs of lockouts, contributing to the sector's current gains.

Typically, fixed-rate commercial mortgage loans have terms that are seven to 10 years in duration with a balloon balance due at the end. There is usually an initial period during which early prepayment is prohibited or penalties are applied if a borrower refinances earlier. After this initial lockout period, borrowers are free to refinance without penalty, explained Kim Diamond, managing director for CMBS at Standard & Poor's.

Those borrowers that had taken out mortgages during the mid- to late-1990s are now able to refinance without penalty. "CMBS issuance peaked in 1998, and as these loans come out of their lockout periods and/or reach their maturity dates, if interest rates remain low, volume will continue to rise steadily as these loans refinance," commented Mr. Fallick.

Several factors could prevent the sector from seeing volumes similar to 2001. Most notable would be another terrorist attack. "In the wake of the Sept. 11 events, owners are having difficulty obtaining insurance coverage that does not exclude acts of terrorism at all, or in obtaining this type of insurance at reasonable premiums," said Ms. Diamond. Further attacks would only exacerbate an already difficult situation.

For example, Mr. Fallick said, any central business district, trophy asset would be difficult to securitize without the requisite terrorism insurance. Another reason why the volume of single-borrower transactions is likely to taper off in 2002 is that, "investors have less tolerance for concentrated exposure, given the events of Sept. 11," said Ms. Diamond.

Securities backed by single-borrower transactions are currently trading at a premium, Mr. Fallick explained. "So investors, because of the risk they perceive, require a higher yield for those securities collateralized by single-asset deals vs. securities collateralized by 100 diversified mortgage loans. We think that is indicative of the investors' perception of the event risk associated with mortgage loan concentration."

Standard & Poor's

David S Fallick
or Kim S Diamond
both of Standard & Poor's
URL: http://www.standardandpoors.com/ratings
hosted by USANow.net

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