The commercial conduit market has been dead for the past two years. Self-inflicted abuse caused an implosion among the market makers, and the investors who traditionally bought the paper have turned their attention elsewhere. There have been virtually no new originations for some time.
This lack of permanent financing is causing problems for investors with conduit loans coming due who find themselves without a comparable source for refinancing, leading to an increased delinquency rate in the sector.
But we’re working on the problem.
Fannie Mae and Freddie Mac, the two government-sponsored enterprises dealing in multifamily properties, have begun securitizing portfolios of loans and found interested purchasers for the paper in the capital markets. We need to get investors focused on commercial real estate paper again and this might be the best way to start.
The current administration is also working on new structures for loan originators that would have them leaving “skin in the game” to cover future losses, a practice that would add discipline to the process. This would restore investor confidence in the quality of the paper.
A lot of things need to fall back into place for the conduit market to come back, and it will not be the free-wheeling process that we witnessed in the years leading up to its demise, but the sense is that it will come back.
The big question of course is when. My best guess is that it will be at least two years before the conduit market is ready. I just hope we can make it until then.
(Brian Andrews is a certified mortgage banker specializing in the financing of commercial real estate. His business is Andrews Commercial Mortgage and he can be reached at brian.andrews@acmla.com.)
