Notes

The "Securitization Slowdown"
It's as though the Market has been "holding its breath" for the last several weeks... basically because the Bear Stearns collapse. (You could have noticed this in your neck of the woods)

The nationwide market for Multifamily Properties continues to be strong in the face of the residential real estate collapse. Occupancies are stable in most markets and rents are keeping pace with inflation. But not very many properties are increasingly being bought and sold this quarter.

This is actually the reason... I call it the "Securitization Slow-Down"

Used to be that a lender would write a loan and quickly get that loan off their books through Securitization. The Securitization process bundled a bunch of loans right into a larger "Security" and sold those to other entities as a safe way to make good income. Things just didn't quite workout that way once the underlying loans went sour.

Securitization allowed lenders to create more money by writing more loans and shift the chance to other entities. Because the loans started to go south it was the owners of the securitized loans which were left holding the empty sack ... not the ones who originated the loans. So now nobody trusts a Securitized Investment. No-one wants to take on problem loans that another institution originated.

According to the Wall Street Journal ... In just the last year total assets in US Banks have risen by $1.2 Trillion ... mostly as a result of Securitization Slow-Down. Lenders cannot securitize ... therefore the loans stick to the books.

How come this Important? Well ... whenever a lender writes financing they plan to keep, they go concerning the process differently than if they intend to Securitize it. They are more careful at every stage of the loan process. This new caution includes a negative affect on your Return on Investment.

The Lenders are doing two basic things differently now

1) Lower LTV's - Average LTV's have fallen from the 80% of the last several years to the current 75% or less. So, buyers need to put more cash in to the deal.

2) More Conservative Underwriting - The Lenders are moving expense estimates up and income estimates down over the board. This "new math" lowers the Net Operating Income (NOI) projections from your property ... Which lowers your debt Coverage Ratio ... Which lowers the total amount they will lend to the customer. So, buyers need to put more cash in to the deal.

MORE MONEY Please ... The Double Whammy of lower LTV and lower NOI from more conservative underwriting ... means it will take a significantly larger pile of cash to get the same building now than it did only a few short months ago.

Less Leverage = Lower Returns - With an increase of cash into the deal ... any Buyer's Return on Investment is lowered.

This naturally lowers the purchase price any Buyer is ready to pay. Sellers who have been used to top dollar for his or her properties are holding off on the sale because top dollar is significantly low in this market than prior to the Credit Crunch.

The New Old - This new, more conservative environment isn't "New" at all. That it is a return to what's historically normal. Similar to the way Price/Earnings Ratios returned to more normal following a DotCom bust. What has been distinctly abnormal may be the superleveraged environment of the last many years. Lenders writing loans willy nilly realizing that they would have them Securitized and sold to someone else in just a matter of weeks.

So check here is not a new phase. It is more like the style world ... what was old is now new again. The bell bottom jeans of my high school days are back in style.

Look for properties to begin coming back in the marketplace and seller flexibility to return in the next almost a year as we all get accustomed to this New-Old situation. Ultimately everyone - even the Sellers - will realize the times of easy credit and fat underwriting are over and prices will see a new level which makes sense in today's environment.

Won't be long before the marketplace starts to breathe again.

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