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The Outlook_ MBS and Securitized Products
Thoughtworks·2024-10-01 12:42

Summary of Deutsche Bank Research Conference Call Industry Overview - Industry: Securitization, specifically focusing on Commercial Mortgage-Backed Securities (CMBS), Asset-Backed Securities (ABS), and Collateralized Loan Obligations (CLO) [18][20][46] Key Points and Arguments 1. CMBS Market Dynamics - Lower Rates Impact: Lower interest rates are expected to improve the backdrop for Commercial Real Estate (CRE) and CMBS credit [18] - Delinquency Rates: Suburban office delinquencies are accelerating, with CMBS suburban office 60+ delinquencies at 7.4% compared to 6.5% for Central Business District (CBD) offices [18][34] - Conduit Refi Success: The conduit refinancing success rate has declined to 65% [22] 2. Securitization Volume and Forecast - 2024 Forecast: ABS issuance is forecasted at 310billion,CLOat310 billion, CLO at 185 billion, and Non-Agency RMBS at 105billion[3]−∗∗CurrentIssuance∗∗:Asof2024YTD,ABSissuanceisat105 billion [3] - **Current Issuance**: As of 2024 YTD, ABS issuance is at 252 billion, CLO at 136billion,andNon−AgencyRMBSat136 billion, and Non-Agency RMBS at 96 billion [3] 3. Economic Perspectives - US Economic Outlook: Economic consensus expects Fed Funds to be at 3.6% by year-end 2025 and 3.2% by end 2026, with the 10-year Treasury expected to be around 3.9% by the end of 2025 [20] - CRE Transaction Volume: CRE transaction volume rebounded by 3% in Q2 2024 compared to a 59% decline in Q2 2023 [21] 4. Interest Shortfalls - Accumulated Interest Shortfalls: Conduit accumulated interest shortfall is approximately 900million,whileSASB′sisaround900 million, while SASB's is around 380 million [28][30] - AAA Shortfalls: SASB Class A bonds originally rated AAA have experienced interest shortfalls totaling 29million[31]5.RegulatoryDevelopments−∗∗LocalLaw97inNYC∗∗:IncreasedenforcementforLocalLaw97aimstoensurecompliancewithclimatelegislation,potentiallyimpactingpropertyvaluationsandinvestmentstrategies[48][50]−∗∗SanFranciscoRentControl∗∗:Proposition33couldsignificantlyexpandrentcontrol,affectingupto100,000additionalapartments,raisingconcernsamongdevelopersandlandlords[51]6.NotableTransactions−∗∗MorganStanleySecuritization∗∗:MorganStanleyissettosecuritize29 million [31] 5. Regulatory Developments - **Local Law 97 in NYC**: Increased enforcement for Local Law 97 aims to ensure compliance with climate legislation, potentially impacting property valuations and investment strategies [48][50] - **San Francisco Rent Control**: Proposition 33 could significantly expand rent control, affecting up to 100,000 additional apartments, raising concerns among developers and landlords [51] 6. Notable Transactions - **Morgan Stanley Securitization**: Morgan Stanley is set to securitize 490 million in multifamily mortgages from Signature Bank, which could serve as a template for banks to de-risk CRE [46][47] Additional Important Insights - Market Sentiment: The overall sentiment in the CMBS market indicates a cautious optimism due to lower rates, but challenges remain, particularly for floating rate loans and office spaces undergoing "obsolescence reset" [20][21] - Delinquency Trends: The rise in delinquency rates, particularly in suburban offices, suggests a shift in market dynamics post-COVID, with implications for future underwriting and investment strategies [34][37] This summary encapsulates the critical insights from the Deutsche Bank research conference call, highlighting the current state and future outlook of the securitization market, particularly in relation to CMBS and regulatory changes impacting the real estate sector.