Sign of Life for Commercial Mortgage Bankers?

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The commercial mortgage securities business came out of a coma Wednesday, providing a long-awaited vital sign for the near-term prospects of CMBS bankers.

Morgan Stanley and Bear Stearns priced the first CMBS deal of 2008. To place the paper with investors, they had to discount the security's AAA-rated tranche by the widest margin ever - 235 basis points over the 10-year swap rate, according to Bloomberg News. A year ago, similar securities yielded a mere 30 basis points more than swaps.

That leaves commercial mortgage professionals with this question: Will the patient gradually regain health, or fall back to flatline? The answer may rest on public policy actions in Washington and how well the economy responds. As of now, the prognosis looks poor: an RBS Greenwich Capital report last month estimated that U.S. CMBS sales will shrink 66 percent this year, to $80 billion, Bloomberg says. Last year saw a record $234 billion of new CMBS, including $62 billion during the first quarter.

Compensation for professionals who originate, package and trade commercial loans and securities is directly tied to deal volume. Base salaries are capped at about $250,000 and 75 percent or more of the bonus is transaction-based, notes Jeremy Banoff, senior director at FPL Associates, a Chicago-based recruiting and compensation consulting firm serving the real estate industry. For 2007, bonuses for all types of CMBS professionals shrank 20 percent to 40 percent as business dwindled late in the year, Banoff told eFinancialCareers.

"If you have a job, you should consider yourself lucky," Banoff adds. At most investment banks, he says, "There've been massive layoffs in the CMBS arena, across the board."

What's Next?

This year's compensation outlook rests on how the market fares from here. Banoff says compensation on the whole is expected to be flat or slightly higher than last year, depending how soon the market hits bottom and how rapidly it recovers. "Most people think that the first six months of '08 are going to be slow, but that things are going to pick up in the latter half of the year," says Banoff. Those expectations parallel the most popular scenario for the economy as a whole. Future fiscal and economic policy measures will help shape the outcome, he notes.

Until recently, commercial mortgage bonds were holding up far better than other mortgage derivatives caught up in the credit market meltdown. By this point, however, the CMBS market is clearly feeling the strain. Not one CMBS deal priced during January - the first month in its two-decade history that's ever happened, according to a Citigroup analyst cited by Reuters. Commercial mortgage bonds are trading at record high yield spreads over swaps and Treasuries, and an index of AAA-rated CMBS compiled by Merrill Lynch has posted a 4.7 percent loss so far this year. Stalled issuance and sinking prices reflect investors' reluctance to own anything but plain-vanilla bonds, along with concern that commercial property fundamentals - which still look strong on paper - are set to weaken in tandem with the U.S. economy.

According to Bloomberg, Morgan Stanley and Bear Stearns sold $1.2 billion of bonds this week in 2008's first CMBS deal. Half of it was in the top-rated tranche, which priced to yield 6.75 percent. Loans backing the securities include a Nebraska shopping center, a Hilton hotel in Indianapolis, a mall in a Washington, D.C., suburb, and a GE health-care facility in Wisconsin. Kara McShane, Morgan Stanley's head of CMBS syndicate, told the newswire "clearly it is unusual" for the bank to complete no CMBS deal until mid-February.

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