By Paul McMorrow
Banker & Tradesman Staff Writer

Liquidity won’t return to capital markets until the government intervenes to restore the commercial mortgage-backed securities market, according to Gary Leach, a senior vice president at Eastern Bank.
 
“There has got to be government intervention, be it TARP or something else,” Leach told a NAIOP Massachusetts forum this morning. “We have to find a way to bring CMBS back. The spreads are so ridiculously wide that there’s no market.”
 
CMBS markets need to be revived because without an outlet for commercial loans, it’s not in banks’ economic interest to make new development loans, Leach argued.
 
“Capital is precious, and banks are deleveraging,” he said. Eastern isn’t doing much construction financing because “we’re saving our powder for existing properties that will need financing.”

Those properties are more attractive than new construction because they come with predictable income streams.
 
Leach predicted Eastern to grow in 2009 through acquisitions “as smaller banks have trouble surviving.”
 
He also raised eyebrows by suggesting a shift in benchmark loan rates.
 
“It may be that Libor will no longer be the benchmark to loan off of, because of the difference between Libor and Prime,” Leach said.

Kevin Lyons, a senior partner at Reimer & Braunstein, said he’s seeing more lenders looking for hard floors on interest rates. “I’ve had calls from one or two lenders who had loans out at prime who’re saying, ‘Prime plus the spread is less than what I’m borrowing the money for.’”
 
John McCullough, a senior vice president at HSBC Bank, seemed optimistic that federal intervention will restart the flow of capital.
 
“The government has done everything it can to inject capital,” McCullough said. “It’s using every approach it can think of. Which one approach will work, I don’t know. Whether it’s TARP or something else, the money will work its way through the system.”
 
Banks still standing on steady ground today are less worried about maintaining cash reserves than they are about “the ripples of what’s happening in the economy.” It’s that fear that’s holding up lending now, according to McCullough.