A bright future.

Author:Greenland, Kingsley
Position:Executive Essay
 
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THE SECONDARY MARKET FOR COMmercial real estate mortgages has grown an amazing 35 percent annually over the past five years, and if current trends are any indication, it's not about to let up anytime soon.

The reason: Growing liquidity in the secondary market is enabling mortgage lenders, banks, credit unions, pension funds and others to sell loans at higher prices to meet the growing demand from institutional buyers seeking quality assets that were previously a scarce commodity.

For mortgage lenders and institutional investors, higher proceeds from loan sales are leading to improved profitability and are also having strategic implications for how lenders manage their balance sheets going forward.

More liquidity, more profitability

The continued rapid growth of the secondary market for individual loans means that mortgage lenders will have far more flexibility in deciding which loans to sell and which to keep--an option that has been available traditionally only to large securitizers of real estate loans.

A liquid secondary market allows lenders to look at each loan--regardless of size--to determine whether it fits with their diversification and risk strategies. This includes an opportunity to sell performing loans in addition to nonperforming loans, which have dominated secondary market loan sales in the past.

A vibrant secondary market leads to enhanced profitability by providing lenders more strategic options. Leveraging the liquidity in the marketplace today, lenders can sell loans quickly to respond to changing market conditions where they couldn't before. Likewise, the secondary market can help lenders originate more loans for sale to boost fee income. Equally important, the secondary market can be used to free up room on the balance sheet to pursue growth opportunities.

This discipline of assessing and selling loans regularly, known as active portfolio management, is the emerging paradigm inside many leading institutions for the simple reason that it has proven so successful in a relatively short period of time.

While it's dangerous to forecast that any market will continue expanding 35 percent per year, that kind of growth is not without precedent in the recent history of the debt market. In the 1990s, the corporate debt market benefited from a similarly rapid increase in liquidity. That experience may be a useful comparison when looking at the future of the secondary market.

A market transformed--with plenty of room to grow

The growth of the secondary...

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