Posts Tagged ‘quality of credit’

Real Estate Bonds More Attractive to Investors

Wednesday, September 1st, 2010

The two-year swap spread narrowed 1.43 basis point to 15.88 basis points, the lowest level since April 20.  Goldman Sachs and Citigroup are in the process of trying to sell their fourth CMBS package in 2010 with $788 million of debt from 48 properties as investor interest in these vehicles rekindles.  Although the Federal Reserve noted that commercial real estate is still slowing economic growth, bond investors believe that growth is strong enough for borrowers to meet debt payments.  According to Dan Castro, chief of structured finance analytics and strategy at BTIG LLC, “CMBS is an avenue that’s going to provide better returns.  There’s a lot of guys clamoring for these returns.”

Consider that corporate bond yields are only 177 basis points over Treasury, while CMBS yields are 100 bps higher.  According to Business Week, “The difference between the rate to exchange floating for fixed-interest payments and Treasury yields for two years, known as the swap spread, is a measure of investor perception of credit risk.  It serves as a benchmark for investors in many types of debt, including mortgage-backed and auto-loan securities.  The two-year swap spread narrowed 1.43 basis point to 15.88 basis points, the lowest level since April 20,” indicating increased confidence.  So while CMBS still has a ways to go to get back to previous levels, the market is in recovery which is great news for the rest of the industry which relies on CMBS for refinancing.

Happy 212th Birthday, Nykredit Realkredit!

Tuesday, March 31st, 2009

The CMBS market is anything but rotten in the state of Denmark. While the American mortgage securitization system crumbles, the Danes are successfully securitizing commercial and residential loans exactly as they have since 1797.  That’s when Nykredit Realkredit – Denmark’s largest mortgage bank – was established.  And, there hasn’t been a single Danish mortgage bond default since 1795.

American mortgage bankers could learn a valuable lesson from their Danish counterparts.  Even though Copenhagen’s home prices have fallen 14 percent over the last two years, Standard & Poor’s recently reissued its AAA rating on Nykredit’

$154 billion in mortgage bonds.  The Danish system is tightly regulated and extremely transparent; their bonds also earn minimal profit.  To illustrate, Nykredit earned a meager 2.1 percent on its new mortgages during 2008.  In hindsight, small risk and small reward have their appeal.

Denmark’s mortgage model is extremely simple.  Each mortgage bank handles the entire securitization process, from origination to servicing.  The difference with the American system is that the Danes sell the bond upfront, and then fund the loan.  The American process is the reverse of Denmark’s.

This way, the bank never gets caught short by a change in interest rates between the time the loan is issued and when it is sold.  Danish loan-to-value requirements are strictly enforced at 80 percent for residential and 60 percent for commercial properties.  Additionally, most Danish mortgages are long-term and fixed-rate.  The relatively few subprime borrowers receive governmental mortgage insurance support to maintain the quality of credit.