Editor's Letter

Jilted by Global Capital

By BENDIX ANDERSON

APARTMENT FINANCE TODAY • July/August 2008

Apartment borrowers are still waiting. Conduit loans, everyone’s favorite highleverage financing, have been unavailable since the capital crisis began last fall. When will they come back? Experts now say it will be six months to a year.

That’s about what they said last fall. The finish line in this painful marathon keeps getting pushed further back.

Whose fault is it? Blame bond speculators who made a bubble out of the conduit business. Speculators pour cash into promising investments they don’t fully understand, inflating prices and encouraging increased supply.

In the world of commercial mortgage- backed securities (CMBS), the role of speculator was taken by hedge funds and opportunity funds—the same set of investors who bet heavily on subprime home loans. Think Bear Stearns, Lehman Brothers, and an alphabet soup of structured investment vehicles (SIVs), asset-backed commercial-paper (ABCP) conduits, and enhanced cash funds.

They roared into the market after 2002 and became the leading buyers of AAA-rated CMBS bonds.

At the recent Commercial Mortgage Securitization Association conference in New York City, the people that seemed to be hiding under rocks, who steered sharply away from reporters, and in many cases didn’t even come to the conference were executives from SIVs and ABCP conduits and opportunity funds that had made big bets on AAA-rated CMBS back in the boom.

Those were the capital markets players who borrowed heavily to squeeze developer-sized 20-plus percent yields out of bonds that on a normal day are about as risky and as highyielding as Treasuries. They got hammered when the hype about CMBS turned negative in the subprime mortgage crash. Their losses were magnified by leverage, and they were forced to sell off huge CMBS positions as they fled, wrecking the business for everyone else.

“Everyone else” includes apartment borrowers, conduit lenders, and traditional investors in CMBS. The conduit lending business won’t recover until traditional investors recover their will to invest.

Conduit experts hope stability is coming soon, especially considering that conduit foreclosures continue to stay low and CMBS speculators have been chased off. Of course, no one complained when the dumb money from speculators pumped up CMBS during the boom, pushing interest rates for conduit loans lower than even Fannie Mae and Freddie Mac rates and pushing leverage up.

Instead, we only heard positive things about how access to the global capital markets would help borrowers make deals.

Now we’re learning how fickle the capital markets can be. The dumb money is gone, leaving the CMBS business that came to depend on it a wreck.

Bendix Anderson is a senior associate editor of APARTMENT FINANCE TODAY and can be contacted at banderson@hanleywood.com.