After institutional investors bought up billions in commercial property loans from failed Signature Bank in 2023, a $490 million bundle of them is being readied for a commercial mortgage bond offering.
The deal is unique to mortgage-backed securities in that Morgan Stanley, which is contributing the loans to the offering, did not originate them. Notably too, Morgan Stanley did not acquire the loans directly from the Federal Deposit Insurance Corp., which oversaw the selling of Signature Bank’s assets. It acquired them from a previous buyer and is now recouping some of the cost of that acquisition.
The loans going into the offering called MSC 2024-NSTB consists of 149 commercial real estate loans secured by 146 predominantly multifamily properties with a balance of $489.9 million. Signature Bank originated the loans between 2013 and 2023.
Signature Bank had $110.36 billion in assets and $88.59 billion in deposits as of December 2023, according to New York’s Department of Financial Services. Following Silicon Valley Bank’s failure in March 2023, Signature Bank also failed. Both banks suffered from a so-called run on deposits, heightened by an outsize exposure to deposits from the cryptocurrency sector.
The selloff of Signature’s assets and loans attracted institutional investors Blackstone, Goldman Sachs, Rialto Capital and the Canada Pension Plan Investment Board, as well as banks including Santander, PNC and New York Community Bank.
Morgan Stanley Mortgage Capital Holdings acquired a portfolio of still-performing loans from one of those buyers for cash in March. Terms of the sale nor the seller were disclosed, according to Morningstar DBRS, which, along with Fitch Ratings, is rating the upcoming offering. Subsequently, Morgan Stanley selected a portion of the loans from the initial transaction to serve as collateral in the upcoming offering.
Representatives of Morgan Stanley Mortgage Capital declined to comment to CoStar News.
About 90% of the loans are backed by multifamily properties with all but one of them located in New York, Northern New Jersey or Long Island, according to Morningstar. Loans backed by properties in dense urban areas benefit from increased liquidity driven by consistently strong investor demand, even during times of economic stress.
There are 131 loans comprising 91.3% of the pool that are secured by 100% market-rate multifamily units. The remaining 18 loans account for 6.8% of the pool and are secured by rent-stabilized units.
Typical of the loans in the pool is a $14.5 million loan on the 60-unit 74 Pollock Apartments in Jersey City, New Jersey.
The unique offering presented some challenges to the bond rating firms.
“Given that the loans were not originated with the intent of securitization, there are some structural components commonly seen in conduit transactions within the individual loan agreements that are not present in this transaction,” Morningstar said in its analysis.
For example, only 11 loans have a special-purpose entity borrower structure. A special-purpose entity reduces the likelihood the borrower’s financial condition will be negatively affected by factors unrelated to the given mortgaged property and loan. Morningstar included a penalty for each loan that lacked such a structure.
The loans in the deal also generally have weaker insurance requirements than loans originated for securitization. Eight loans in the pool are also no longer insured as of this month, according to Morningstar. Morgan Stanley is seeking to obtain renewed policies.
In addition, the majority of loans in the pool feature interest rate adjustments that will have to be reset at rates higher than their original rate. The increase poses additional risk to loans through higher debt service burdens, according to Morningstar.