Not so long ago, meaning a year ago, when an established company wanted to a buy a building, a bank committed to the loan and sorted out the details of cutting it up into smaller pieces later.
But now that the credit crunch has scared lenders, many banks will only commit subject to syndication, the term for chopping up big loans into manageable portions. Today, a deal is only as good as its ability to be parceled out to others to share the risk. If other banks can’t be brought in, the deal won’t close (see Divvying up lending).
The emphasis on syndicating deals illustrates how the city’s real estate industry is adjusting to the drought in the securitization market. This month, The Real Deal looks at this and other ways real estate finance is reacting to the squeeze on credit and the faltering mortgage market. First, we investigate some of the macro issues facing the industry, then we zero in on how these constraints are shaping deals in New York City.
Next, we take a look at the collapse of the market for RMBS, residential mortgage-backed securities (see Experts see little future for residential mortgage-backed securities issued by banks). At the height of the real estate boom, massive amounts of these structured securities were peddled, about $105 billion in March 2007 alone. Now their sale has slowed to a relative trickle, only about $743 million in July.
We also look through the derivatives to the underlying assets themselves. It’s hardly news that around the world, banks have been writing down billions in losses in subprime assets. Yet as grisly as this bloodletting has been, analysts warn that the market for Alt-A loans portends even further and deeper losses (see Worries about Alt-A loans spread).
Economist Robert Shiller of Yale University has been warning for years about the dangers of housing bubbles. The recent subprime crisis, he says in a new book, was caused by a perception that home prices can’t come down. We sit down with Shiller and discuss his book, “The Subprime Solution: How Today’s Global Financial Crisis Happened and What to Do,” which suggests some possible ways out of the morass (see Sit down with Robert Shiller: A dark look ahead).
The subprime-fueled downsizing occurring at banks around the city is also pushing up commercial vacancy rates. Some of these laid-off bankers are finding a silver lining for themselves while doing their bit to lower vacancy rates: They are teaming up with colleagues to create hedge funds — and they are renting their own desk space, necessity being the mother of invention (see Hedging for office space).