Securitization of Retail and Shopping Center Properties’ Mortgages

Abstract

Securitization is the process of transforming an illiquid loan agreement into a marketable security that is sold to investors in the secondary market. Its purpose is to create, from a single asset or pool, high-quality new asset classes that both reduce the cost of capital and increase the availability of capital. Securitization provides improved access to and more efficient pricing of capital, greater liquidity, better rates and terms in the financing of certain types of debt, opportunities to spread the risks of real estate, higher long-term valuation of equity interests, reduced transaction costs of investing and lending, and better matching of real estate to investors’ risk-return-equity preferences. Also, the process allows institutions to earn fees on the packaging and servicing of such mortgage portfolios. Over the period 1980 through mid-1991, commercial mortgage debt outstanding increased from $425 billion to $1.08 trillion; therefore, the potential for commercial mortgage securitization (CMS) is enormous.

Rating agencies such as Moody’s Investors Service, Standard and Poor’s, Fitch Investors Service, and Duff and Phelps investigate the credit quality of commercial mortgage-backed securities (CMBS’s). These ratings provide unbiased opinions as to the riskiness of each issue, thereby satisfying some investors’ (pension funds) requirements for third-party evaluations.

CMS has not enjoyed the success of residential mortgage securitization because of heterogeneous underlying assets, the complexity of the instrument, no standardized underwriting and documentation, unclear accounting issues, tax and regulatory constraints, and a move toward nationwide banking. Slowly, however, CMBS issuers are overcoming many of these obstacles, and commercial mortgage securitization is gaining acceptance as an alternative method of providing liquidity to an otherwise highly illiquid market.