09/11/2001: Fallout in the marketplace

(1) The World Trade Center tragedy hit several Investment Banks, rating agencies and market makers (such as Cantor Fitzgerald) very hard; (2) Resilience: Everyone in the area we've spoken to indicated they are hurrying to get back in business as soon as possible-- rebuilding computer networks with back up systems, finding temporary office space, renting hotel rooms for use as offices, moving in with their attorney's office (in one case), etc; (3) Cantor Fitzgerald: The tragic loss of the Cantor Fitzgerald trading office has an incredible effect on the fixed income markets (Note: The Cantor Fitzgerald donation help line is 800 446 0500). They are the pre eminent "market maker" for Treasuries and CMBS (both primary and secondary trading); (4) Secondary Trading: The trading of existing CMBS bonds from seasoned pools has become extremely critical to the fixed income market. This year, CMBS reached a "critical mass" with over $250 billion of existing bonds in the marketplace. The market liquidity rivaled that of the corporate market. This has been demonstrated by the narrowing of the bid/ask gap on AAA's to 5 bps. among the majority of trading desks. The institutional holders of all these bonds must regularly "mark to market" the value of their portfolios for accounting and strategic planning purposes. They do this by "real time benchmarking" the secondary trading market. Virtually all holders need to do this at the end of each quarter. The near shut down in trading will make it difficult to value their portfolio and to buy new issues, which may result in a serious liquidity crunch. (5) More on liquidity: Insurance companies are one of the principal buyers of CMBS bonds. Their appetite will be affected as they gauge their exposure to last week's events. Not only will their ability to buy be affected, they may have to convert large chunks of their existing CMBS portfolios to cash. Massive selling could further widen spreads. (6) 1998 vs. 2001: The meltdown in 1998 over the Russian debt crisis was due to an exogenous event, this time the event is at the heart of the market with ripple effects throughout the USA. However, originators are much better capitalized today than then (remember Criimi Mae and others were operating on lines of credit and subject to margin calls). Now virtually all originators are operating off of substantial balance sheet allocations. (7) What is happening now? Spreads have widened across the board 10-25 bps. in secondary trading (AAA was Swap +45-48 most of the year, now app. Swap +55 and up), but trading is extremely thin. The market is trading at only 5-10% of average volume. Originators are unable to estimate where new issues will trade with so few buyers and sellers active, so they are unable to price new loans with any kind of certainty. (8) New Issues/Pipeline: No standard fixed rate conduit pool has come to market since 9/11/2001. Over $10 billion was expected to be securitized in September, much of it is on hold. With approximately $7 billion in product scheduled for October, a major "overhang" will occur. The rating agencies are not yet fully functional. Standard and Poors expects to be up and running Monday, September 24.

(9) What are we hearing from our lenders? What should our borrower's know? Most are processing transactions in the pipeline while reminding borrowers that the MAC clause (Material Adverse Change) may be invoked. Managing expectations: Don't expect lenders to "stretch" on loan proceeds, spreads, or "story deals". President of Real Estate Operations for major Inv. Bank: "Deals must fit right in the box, and the box is getting smaller." Inv. Bank VP/Loan Officer: "We are taking in deals and estimating pricing at 10-25 bps. over our old matrix, but we don't really know where things are going to price. But the spread widening is being offset by the treasuries." Another VP: "We funded one loan since Sept. 11, but only because it was approved and rate locked." Inv. Bank CEO in a letter to the mortgage banking community: "(We) remain committed to providing financing for the commercial real estate industry. We are fully operational and remain ready to serve our clients." We've seen lenders do the following: (a) Stop quoting altogether for the time being; (b) Offer to close time sensitive transactions as portfolio floating rate loans until markets stabilize and then convert to fixed rate; (c) Take applications with no rate mentioned, with the understanding that the rate will be set at commitment/funding based on market conditions at that time. (10) Rate Locks and Spreads: Some originators are not allowing rate locks at this time due to market fluctuations. However, one major originator is encouraging borrowers who are well into the process to rate lock at an all-in coupon-they are setting rates at app 7.15-7.20% for apartments and upward to app 7.5% for C&I; this implies a disconnect between treasuries and all-in rates may be setting in as spreads become less relevant. Industry consensus: real estate loans should yield at least 7% (regardless of the Treasury) or else bond buyers will look elsewhere within the capital markets. (11) Product types: The hotel industry is expected to take a hard hit by a drop off in travel on top of an already weakening economy. Many are not quoting hospitality. Single asset securitizations (a popular trend in recent years) may be seriously effect: "Event risk for a single property has now been defined very dramatically. Watch for tighter insurance requirements and definitions regarding terrorism and acts of war". Retail is also being watched closely: major chains have already lowered their ordering for the Christmas season. Who knows what consumer's mood will be in the aftermath of last week. Layoffs will affect retail and office. Will "trophy" office property rents slide as tenants become averse to locating in high profile properties?

Fannie Mae is quoting, processing and funding. Our pipeline with Fannie stands at over $200 million in process. Their pricing remains very competitive and several borrowers are rushing to lock in historically low fixed or floating rates.