MICHAEL BERMAN is a card-carrying member of the Red Sox Nation. Raised in Provincetown, Massachusetts, on the tip of Cape Cod, he counts himself among the hardcore followers of the Boston Red Sox. One of the shared traits of these insanely loyal fans is the extent to which their devotion has been tested over the years. As Berman points out, the Red Sox endured an 86-year drought between World Series wins. It's kind of painful to even think about it.
Berman's ties to the team go especially deep. His Uncle Izzy (his dad's brother) was a bat boy for the Red Sox back when Babe Ruth was still on the team--before that fateful trade to the Yankees that brought on the "Curse of the Bambino." As baseball lore goes, that fabled curse conspired to deny Red Sox fans a World Series win for close to nine decades.
But Berman's team finally won Major League Baseball's title again in 2004 after last taking home the pennant in 1918. Berman recalls watching almost every game in 2004 with his 86-year-old father, who for the first time in his long life got to see his team finally win the World Series.
So Michael D. Berman, CMB, president and chief executive officer of CWCapital, Needham, Massachusetts, knows it takes patience for things to turn around sometimes. He says being a lifelong Red Sox fan requires you to be "especially resilient."
But Berman, today, has to be patient in other ways as well. His industry--real estate finance--is enduring a different kind of terrible drought. This time it's a liquidity drought. The credit markets for real estate shut down for much of 2008 and 2009, and are only now coming out of their coma.
The business environment for financing real estate (commercial, multifamily and single-family) has been made even more difficult because official Washington has embarked on a massive rewrite of the regulatory framework for real estate lending and for financial services of all kinds. The newly enacted Dodd-Frank Wall Street Reform and Consumer Protection Act created a whole host of new rulemaking projects. And next up, the administration is tackling an even more crucial task for the real estate finance industry--a wholesale restructuring of the future role of government in the secondary markets.
All of this will be on Berman's plate when he becomes chairman of the Mortgage Bankers Association (MBA) this month. He will be a key player at the table during these discussions, along with his fellow MBA officers and the association's government affairs team. He already took on a lead role in formulating policy over the secondary market issue when he was named chairman of an MBA group called the Council on Ensuring Mortgage Liquidity. The council issued recommendations in September 2009, spelling out ways to reform and restructure government support for the secondary market.
This debate over the future of the secondary market will cut to the heart of all future business prospects for MBA's diverse membership. Berman's company--CWCapital--itself is a microcosm of just about every kind of business configuration you can build around the secondary markets for commercial and multifamily housing, both government-backed and private. CWCapital is a lender and servicer for Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA), and also has its own balance-sheet portfolio products, private commercial mortgage-backed securities (CMBS) and collateralized debt obligation (CDO) securitization products, as well as special servicing of distressed assets and an investment management funds business.
The secondary markets boomed and cratered badly in recent years as global investors retreated en masse from mortgage-backed securities (MBS). So now it's time for some of that Red Sox resilience to kick in to help build them back up.
An early disciple of securitization
Berman was an early disciple of the potential of Wall Street conduits to help finance commercial and multifamily properties. The market for CMBS was essentially built from scratch during the early 1990s, and there were many skeptics wondering whether it would ever amount to anything.
He recalls being on a panel of speakers at an industry conference in January 1992, where he was talking about conduits. He says, "Of course, no one had heard of conduits in January of 1992. And I was trying to educate people about what conduit lending was all about." He says he was frequently asked then, "How is that ever going to amount to anything?"
Berman says, "Of course, five years later it became a dominant form of finance. And then, of course, it stretched too thin and then fell apart and went ... to virtually zero overnight because the capital markets collapsed."
Which brings us to where we are today. CMBS issuance numbers tell the story of how securitization gained traction and became a dominant source of financing before the recent collapse. While multi-family finance was done with the help of Ginnie Mae, Fannie Mae and Freddie Mac, the rest of the CMBS market was largely a private-sector invention. So when the financial meltdown hit, there were no government-sponsored enterprises (GSEs) to support continued issuance of CMBS. And the numbers show what happens when that's the case.
Commercial Real Estate Direct numbers illustrate that at the peak, in the second quarter of 2007, CMBS issuance had reached $77 billion for a single quarter. But by the first quarter of 2008 it plummeted to barely $6 billion and then flat-lined to zero for three straight quarters, from the third quarter of 2008 through the first quarter of 2009.
By the first quarter of this year, CMBS issuance was still only a tiny blip on a chart--coming in at perhaps $1 billion. Total issuance from the first quarter of 2008 through the first quarter of 2010-a...