Lenders expect conduit loan volume to climb as the year continues. However, the market's comeback in the multifamily world isn't expected to reach boom-era levels, at least not in 2013.
Between the third and fourth quarters of 2012, commercial mortgage-backed securities (CMBS) loan volume grew 141 percent, according to a Mortgage Bankers Association report. And with each passing month, more and more CMBS loans are made for apartments: Lenders are reporting a growing pipeline in the first quarter.
Most of the progress and gain for conduits comes from swooping in on deals the government-sponsored enterprises (GSEs) and life companies don’t necessarily want to fight for. And it’s paying off.
Constantine Scurtis, CEO of SL Capital, said an advantage of choosing a conduit is being able to go anywhere in any market, when the GSEs won’t. For instance, Fannie Mae designates some areas as "pre-review" markets, which means they offer less favorable underwriting terms, such as lower leverage and higher debt service coverage ratios.
“They have much more stringent criteria on areas,” he said of the GSEs.
But besides competing with the GSEs, conduit loans are being executed with more finesse in 2013 than ever before--- mostly because of the Great Recession looming in the minds of lenders.
“We’re a lot more cautious on the loans as far as asset quality,” Scurtis said. “The majority of being more conservative is also how the underwriting is on these loans. There’s no pro forma.”
Indeed, the idea of trending rents, or forecasting aggressive rent growth as part of the underwriting process, caused much of the stigma surrounding bad CMBS deals in the past. But Scurtis said he’s hopeful the industry has learned from being burned.
“I think everyone is a lot smarter this time around,” he said.
And the appetite for CMBS loan volume is picking up as 2013 chugs along. But Scurtis said he doubts the industry will go overboard. “CMBS as a whole has been making a pretty relevant rebound,” he said. “Obviously though, we’re not going to be doing any business close to the levels we did pre-crisis.”
Richard Flohr, a managing director with Prudential Mortgage Capital Company, said he also believes the sting of the downturn is still fresh enough to keep lenders from falling victim to taking bad deals. But the competition between conduits, life companies and the GSEs is what will keep the market healthy and fuel the through the rest of this year, Flohr said.
“Having that many options can only be good,” he said. “Three or four years ago, you might have only had one option. More options create competition, which creates better pricing.”