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Securitization Slowly Starts Rolling Again

One year later, securitization is making a slow comeback in the commercial markets.

The commercial bond market may be opening up slightly as Bank of America (BofA) prepares to sell $460 million worth of bonds collateralized by properties owned by Fortress Investment Group. The bonds that BofA is arranging are ineligible for TALF, another positive sign that the commercial mortgage market might finally be showing signs of improvement.

The transaction involves 44 properties, primarily Florida office and industrial buildings, with bonds rated in the AAA to BBB range.  Price ranges were not available.  This deal and the recent $400 million sale of shopping malls owned by Ohio-based Developers Diversified Realty represent the initial offeerings since securitization of real estate loans came to a halt in the middle of 2008.  Investors should be wary against being overly optimistic about these sales since commercial mortgage-backed securities (CMBS) are unlikely to be as significant a financing vehicle in the future.  Although financing is opening up for specific new issues, investors have little appetite to refinance the trillions of dollars of risky commercial loans that are coming due over the next few years.

“It is another baby step,” said Thomas Zatko, managing director at Babson Capital Management.

According to an index compiled by Moody’s Investors Service, commercial real estate prices have slid 43 percent from their peak in October of 2007.

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