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CMBS May Be Grinding To A Crunch

CMBS liquidity is disappearing rapidly

By Joel Ross | joelross | Updated on March 12, 2016

It appears that the CMBS market may be headed to a rough period and may be contracting substantially. I am told the 25 small shops which primarily originate and sell paper to the 7 big banks who issue the bonds, have run out of liquidity because the banks are not buying anymore paper at the moment. This is because the market for the bonds has become very limited and they already have inventory of paper to sell. If the banks are not buying  paper form the originators, then the small shops can’t issue new loans and the system grinds to a halt, or contracts materially. This situation is not likely to be mitigated anytime soon, and may get worse if the bond market volatility does not end soon, which it is not likely to do. Given the world economic uncertainty, the continuing decline in the prospects for a sustainable recovery in Europe and China, and the near term collapse of Brazil and Venezuela, there is nowhere around the world to look for stability and growth for quite awhile.

Now we add to this the implementation of the retention rule and the confusion of how this will really work and how to price the risk, and the originators and banks are at a loss as to pricing this risk and cost of the added 5% capital. If the originators cannot price the paper, and the buyers of the paper cannot price it, the system grinds down or pricing becomes much wider than it already has to account for the uncertainty. So even if loans do get issued and closed, pricing will most likely get wider even without a Fed increase in June. Leverage is also likely to be reduced where issuers do not feel they have a good handle on the risk and pricing. The risk premium has to increase.

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