by Anthony Gramza

For the past month or more, you probably have been reading all the forecasts for the financial industry. Wall Street, independent Mortgage Brokers, the National Association of Mortgage Brokers and other organizations are looking into their crystal ball and arriving at their best estimates for 1994.

There is little doubt in today's marketplace that monies will be plentiful for commercial investment in 1994. From discussions wIth several lending institutions, including life companies, our company found that quotas for this investment year have been doubled, if not tripled, from their 1993 goals. As the months go by, we think that interest will increase. Whether they will be able to achieve their goals is another story. In our opinion, they will not.

Now all this sounds great, especially for the investor who is seeking to purchase, and the current owner who wishes to refinance. Money is plentiful, interest rates are low, terms (in the minds of a few) are more open to negotiation. Therefore, as the saying goes - let's charge forward.

As the existing lenders move forward, and as some other localized lenders re-enter the marketplace, we see other sources, who in our opinion, will challenge the marketplace and siphon business into their shops for 1994. A brief of each entity follows:

Real Estate Investment Trusts (REIT) - The raising of private monies. typically through a Wall Street firm, with the funds used to either finance a multitude of properties, or to be used in the wholesale purchase of commercial ventures, to be held in a private trust. Once all the funds are committed, bonds are issued with specific rates of return, secured by the proper ties in portfolio, and their specific cash flows.

Conduits - A securitization structure, with the issuance of various rated bonds, backed up with commercial properties as security. The mortgage process is somewhat the same, and the properties are rated by the lender, based on in their minds) the quality of the project. (Note: this allows investor/owners to secure funds on some B and C type properties that other lenders may not wish to finance.) Rate, terms and other conditions are based on the rating of the specific property to be financed. Once the transaction is closed, the lender sells the bonds based on the following:

Class A bonds - Properties receive a minimum AA rating, bonds have a preferential right to receive distribution of interest and principle, and the bonds are traded at approximately 200 basis points over the seven-year T's.

Class B bonds  - Typically, A rate properties, subordinated to the AA bonds, and should trade at 235 basis points of the seven-year T's.

Class C bonds - Type B rating, subordinated to the A rated bonds, and are traded at approximately 400 basis points over the seven-year T's.

Class D bonds - Often referred to as equity piece bonds, usually unrated, and sold in the junk bond market at rates of 15 percent. The primary buyers are investors seeking higher yields on investments with high risk factors.

FNMA (Fannie Mae) and FHLMC (Freddie Mac) Federal National Mortgage Association and Federal Home Loan Mortgage Corporation are two agencies that use various banks and mortgage banking firms to originate commercial mortgage paper. Once the lender is approved by the specific agency, they become a Designated Underwriter/Servicer (Dus) lender. The lender follows specific guidelines, underwrites, approves and closes the permanent loan. Shortly thereafter, the loan is sold to the agency, and the lender services the loan for a fee for the duration of the life of the loan.

The advantages are:

· funds are always available

· competitive rates and terms

· flexibility as to property type

· loans approved on nonrecourse basis

The disadvantages (to some mortgagors) are:
 

· fee structures can range 100-150 basis points higher than local lenders

· requirements as to escrows and replacement reserves may be higher than local requirements

· greater stream of paperwork from application through closing

Regardless, Freddie and Fannie will con tinue to be major players in the marketplace in 1994. From our personal experience we had more paperwork, some delay and additional follow up, but we closed the loans. Our clients received the additional funds they need ed, and most important, the rate on the mortgage was anywhere from 50 to 100 basis points less than quoted rates from local lenders.

We at the Galaxy Group feel that 1994 will be better than the previous three years, but are cautiously optimistic. Restraints will still be in place, and clients will need to un derstand that cooperation and patience will be required in order for brokers to secure the best terms and conditions for the client.