Kieran Quinn: 'Things will be fine in 2009'

To sum up where the real estate finance markets are today, Kieran Quinn, chairman and CEO of Column Financial, Credit Suisse's Atlanta-based mortgage lending subsidiary for commercial properties, relied on a poetic quote from an associate: "Things will be fine in 2009." Quinn was speaking at the Risk, Reward and Real Estate Conference in Phoenix, sponsored by the Center for Real Estate Theory and Practice at the W. P. Carey School of Business.

To sum up where the real estate finance markets are today, Kieran Quinn, chairman and CEO of Column Financial, Credit Suisse's Atlanta-based mortgage lending subsidiary for commercial properties, relied on a poetic quote from an associate: "Things will be fine in 2009." "We are in an intractable market," said Quinn. "As good as things looked this time last year, that's how bad it looks now."

As an example, he referred to the spreads (difference between securities' yield and those on interest-rate swaps) on commercial mortgage-backed securities (CMBC). BBB-rated CMBS that sold for 85 basis points over [swaps], now sell for something like 1,200 basis points over. There is "no confidence" in the paper, he added.

Quinn, speaking at the Risk, Reward and Real Estate Conference in Phoenix, sponsored by the Center for Real Estate Theory and Practice at the W. P. Carey School of Business, has a unique perspective on the real estate universe. He now serves as chairman of the Mortgage Bankers Association, the first time that slot has been filled with someone from the commercial, and not the residential, sector.

However, since the MBA focuses equally on commercial/multifamily and residential, Quinn often addresses issues affecting both disciplines. What he sees today is a parallel universe. Prior to 2001, he noted at the conference, the record for single-family originations never exceeded $2 trillion.

Then along came the boom years and from 2003 through 2006, "the market averaged well in excess of $3.5 trillion, almost reaching $4 trillion," reported Quinn. "We think the number of originations this year will be $1.8 trillion, right back where we were in 1999-2000. We will lose 40 percent of the capacity to originate single-family homes from peak years."

Over on the commercial side, the market saw a record CMBS issuance of $240 billion in 2007, noted Quinn. "We will lose 60 percent of that capacity in 2008." Although the numbers are down in the residential sector, Quinn said he was optimistic. "The good new is, we are out there making loans. We will continue to work our way out of this."

Short term: more pain

For the short-term he is not so sanguine about commercial real estate. "Someone came up with the number $100 billion for CMBS issuance in 2008. So far [end of February] we have originated just $1.5 billion. The conduits originated few loans after August 1 last year. We have the capacity, but every loan we make has to be sold into the secondary market. At the moment there is no secondary market."

Some of the slack in commercial real estate financing will come from portfolio lenders such as life insurance companies that keep the loans on their books instead of repackaging them into CMBS. But, said Quinn, "they are only good for about $50 billion and will probably do only $40 billion in 2008."

One reason is that since the portfolio lenders are about the only game in town for the financing and refinancing of commercial real estate, they can "cherry pick what they want" and underwrite even more conservatively than they usually do. The portfolio lender generally underwrote loans at 75 loan-to-value.

Now, they are doing 65 percent loan-to-value, said Quinn. Multifamily is in a unique situation because those loans can be sold to the GSEs, Fannie Mae and Freddie Mac. Unfortunately, Quinn observed, "the GSEs are overwhelmed with requests."

Commercial valuations

Asked what he thought would happen to commercial property valuations, Quinn noted there will probably be a general 10 percent correction just because of the liquidity factor. "You just can't get a loan," he exclaimed.

Being a bit more specific, he added, "In the bigger cities, the better properties will probably experience no more than a 5 percent to 10 percent drop in valuation. There's tremendous capacity [to do deals] from pension funds and other institutional investors that were shut out of being able to buy real estate over the past few years, as private equity funds with access to Wall Street capital overpaid better than anyone. They did a better job overpaying for real estate than the Japanese."

The real problem will be in the second- and third-tier cities where there will be a real absence of financing. As Quinn noted, if you own property in that situation and you have a loan coming due sometime in the near future, your best option is to go to your local bank and cut a deal early.

Residential: no docs, no down, no ask

In residential, homebuilders were on a construction tear to meet buyer demand. The problem was a demand for new homes was not based on actual need. "Excess," or "artificial," demand was created by speculative investors who were not going to be living in the houses they were buying. Unfortunately, even when it became clear that the demand for single-family properties was artificial, homebuilders couldn't turn off the spigot. They owned land so they continued to go about their business of construction.

"The builders continued to build all through 2007," said Quinn. "And the builders are still creating supply." The lenders didn't help much either. With new technology called automated underwriting, the mortgage companies could process loans faster. It got to the point where it seemed anyone could get a loan in about five minutes. As Quinn said, "it was the New Age, no docs, no down, no ask."

On the buyer end, Quinn reported, there are 9 million adjustable-rate mortgages in the market, 6 million of which are prime and 3 million subprime. "Although subprime ARMs are just 7 percent of all loans, they are 43 percent of all foreclosures," he said. "We have got to reset those loans."

To help stabilize the single-family market, which Quinn says will show increasing delinquencies through 2008, the MBA is pushing to modernize the FHA; supporting the Hope Now Alliance, a program that tries to get homeowners in delinquency to work with counselors and servicers; and lobbying for higher loan limits for Fannie Mae and Freddie Mac.

The good news in all of this is that with falling prices, homes will become more affordable again, Quinn said. "Consumers will react to affordability and low interest rates." He surmised, the markets need "patience, time and real underwriting." In short, wait for better times next year, or according to Quinn's associate, things will be fine by 2009.

Bottom Line:

• Single-family mortgage originations will decline by 40 percent this year.
• Commercial mortgage-backed securities issuance will decline by at least 60 percent this year.
• Life insurance companies will pick up some of the slack in commercial real estate financing, but not enough.
• Investments in bigger cities will fare much better in these tough real estate times than second- and third-tier cities.