CrunchedCredit : Capital Markets Finance and Real Estate Attorneys

The image of the cresting wave looming behind the dais in the Loews' Americana Salon during Douglas Holtz-Eakin’s keynote address posed a central, if unintended, question that was addressed by more than one speaker during the three-day conference.  Are we riding a wave to recovery or facing a deluge of maturing debt?  For most of the 1,200 industry participants that occupied Miami’s South Beach for CREFC’s annual January conference last week, there seems to be no certain answer (other than almost unanimous agreement that South Beach is a better Winter destination than our Nation's Capitol).

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Recently, the Wall Street Journal highlighted the arrival of “bad loan securities.” If this is a trend, and I both hope and think it is, we clearly have to get a better deal name for these than “Insert Bank Name”, Bad Loan Securities 2012-1. Securitization of less than ideal conduit product has been with us since the birth of securitization, but reached its apogee in the RTC series, for non-performing loans, in the early to mid 1990s. That transaction architecture is being revived, and it’s about time. Both Fitch and DBRS have published criteria, or at least guidance and the other agencies are beavering away, busy working with bankers to come up with workable ratings technology.

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Over a thousand lenders, borrowers, servicers, lawyers and other service providers have descended on Miami for three days of networking, meeting and doing things you just can't do in DC. After a Sunday spent checking in, catching up and Tebowing, the conference kicked off in earnest this morning. I started my day with a PSA Task Force meeting - an important industry initiative. The committee is working hard to develop a standardized format for the more mechanical aspects of a pooling and servicing agreement, with an eye toward making loans work for borrowers and servicers alike (Rick offered some prescient comments regarding the importance of emphasizing the exercise as something that will, at the end of the day, make the servicing of securitized loans more efficient and user friendly). As I type, I'm listening to the opening general session, an overview of CRE fundamentals and where we are in the cycle (the common themes being the effect of the jobless recovery and the specter of $700 billion or so of debt maturing in the next 24 months). Tonight, Dechert will welcome over two hundred clients and colleagues for dinner at Asia de Cuba - we are looking forward to a great opportunity to talk to our friends. Tomorrow's schedule is similarly packed, highlighted by a keynote address by Douglas Holtz-Eakin. We will continue to blog from the conference.

By Matthew Clark.

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It’s that time of year when we’re forced to think about budgets and business plans. The pointy headed types from the accounting department want to know exactly what we’ll be doing the second week of next May and, as I’m sure every one of you have said (or thought) when confronted with such bureaucratic insanity: If I knew exactly what I’d be doing and what the business environment would look like next year, I would (A) not tell you, and (B) stop doing this. But with that said, and notwithstanding my crystal ball is as opaque as the bottom of a Stygian cave, we need to plan.

So, I’ve been thinking. What the heck are we going to do next year? Is the CMBS market irrevocably broken? Was Credit Suisse trigger happy or prescient, stepping away from the market? Will investors buy bonds? Will European banks sell assets like it is the last hour of a bake sale? How about the US banks? Will banks make loans? Will we pare down the list of eager CMBS lenders to 10? Will the life companies replicate their boisterous 2010-2011? Will we finally see the bubble of refinancing we have been predicting to occur in two years for the past five, actually happen in 2012?    Will investors commit enough money to the high yield sector and will the mezzanine market really be hot? Will we ever do a covered bond? Will we ever do a CRE CDO (like I’ve been prattling along about for quite a while now)?   Live in hope; die in despair, as my daddy-in-law used to say. Will real estate people actually build new stuff and launch new projects? Do you think China would lend us a construction crane or two just for a while? Will risk retention arrive? Reg AB 2.0? What about the Volcker Rule? Will the rating agencies continue to conduct business as usual? What will the elections bring? Will the Greeks sell the Parthenon? Will the Italians sell the Tower of Pisa? Will haughty France play the poodle to Mrs. Merkel? What ultimately about Germany? Will the Europeans continue to support their champion national banks while they compete for a starring role in the next Night of the Living Dead movie? Forever?

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While Europe is sorting through Dexia’s assets, it is worth exploring Dexia’s fall in light of Basel III. As mentioned here previously, Dexia had been reporting Tier I capital of roughly 10%. Well done! That would clearly meet the proposed capital requirements to be phased in over the next year. So what went wrong?

Dexia had pursued a strategy of aiming to be the largest player in municipal financing. It owned gobs of sovereign debt. Down-grades and write-downs of that sovereign debt have now left Dexia well short of its Tier I capital requirements (to the tune of 1.7 billion Euros).

This is hardly a man bites dog story. The Gnomes of Basel, and pretty much everyone else, misjudged the perceived credit risks of sovereign debt. Basel I (and, to be honest, II and III) encouraged the holding of sovereign debt by assigning the lowest risk-weight to such assets, meaning a reduced capital requirement. So, the banks bulked up and then: Off the cliff we all go! Is there still a warm glow of knowing one had met international norms?

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In August I wrote about an amendment to a Chicago vacant buildings ordinance that I thought (and I was one of many) was crazy, despite being sympathetic to the plight resulting from the city’s blight. The City of Chicago subsequently passed a less onerous, yet still problematic, vacant buildings ordinance effective as of November 19, 2011.

In a nutshell, the ordinance requires mortgagees to pay registration fees for vacant residential properties, requires monthly inspections of mortgaged properties to determine vacancy status and imposes maintenance requirements on mortgagees, as if such mortgagees were property owners, even when such mortgagees do not own the property because they have not yet foreclosed on the related mortgage loan and therefore have not obtained title to the related property. Fines and penalties of up to $1000 per day could be imposed for failure to comply with the ordinance.

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While wrapping your holiday presents, don’t forget about another regulatory gift that springs to life as of the new year: Rule 193 and the accompanying joys of Items 1111(a)(7) and 1111(a)(8) of Reg AB. The final rules for Dodd-Frank’s Section 945 – which we at CrunchedCredit.com have addressed before - are almost a year old and their effects are coming to a public transaction near you by requiring “issuers” (1) to perform (or have a third party perform) a due diligence review of a deal’s underlying assets with the aim of reasonably assuring that disclosure included in the related offering documents is materially accurate and (2) to disclose in offering documents the nature of the review, any findings or conclusions of the review and any details regarding assets that deviate from the disclosed underwriting criteria. And this is a gift that keeps on giving.

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Senators Kaye Hagan and Bob Corker’s co-sponsorship of Chuck Schumer and Mike Crappo (who says we all can’t get along) filed “The United States Covered Bond Act of 2011.” I almost think this bill gets support because no one can figure out a compelling reason to be for or against it, so why not show a little whiff of bi-partisanship? The new bill broadly tracks the bill that Congressman Garrett introduced into the House earlier this year, HR-940. We’ve written about this before (it is getting to be quite a list, see here, here, here, here, here, here, here, here, here, here and even as a Golden Turkey), and, I gotta say, my views have not materially changed. This remains an answer to a question no one has. Please, someone, tell me why this is important and useful!? 

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With Thanksgiving approaching and the holiday season in full swing, we here at Crunched Credit would like to present our annual “Golden Turkeys”.

The Golden Turkey for the Most Confounding Regulation: The Premium Capture Reserve Account

Back in March, the credit risk retention NPR was released. Perhaps the most unexpected (and unwelcomed) part of the rule was the Premium Capture Cash Reserve Account (PCCRA).  The PCCRA provisions actually say that issuers may not profit from securitizations or recoup costs up front. The NPR says that a securitizer who monetizes either an IO or earns a premium on the sale of P&I bonds has to put that money aside to serve as a first loss reserve for any losses on the mortgage loans for the life of the deal--on top of the 5% risk retention requirement. Neither a PCCRA nor a reasonable facsimile thereof was contemplated in the Dodd-Frank Act. Needless to say, PCCRA has generally not gone over very well: Confound it!!

The Golden Turkey for the Best Self-Inflicted Wound: The “Bad Boys”

And by “bad boys”, we mean those who have violated the “bad boy” recourse carve-outs in their loan documents. Although most commercial real estate loans are non-recourse (i.e. the lender can only look to the value of the property securing the loan to settle the borrower’s obligations if there is a default under the loan), most contain certain “bad boy” carve-outs (for example, the borrower filing for bankruptcy or misappropriating funds) from the non-recourse nature of the loan, permitting the lender, in certain circumstances, to look to the borrower (as well as the guarantor) to satisfy the borrower’s obligations. Some borrowers, victims of the great recession, have opted to file for bankruptcy in an attempt to stop the bleeding and dam the "bad boys". Oops. Lenders confronted by misbehaving borrowers have enforced the “bad boy” provisions, and, shockingly, the lenders have been successful! The New York Supreme Court has, on 2 separate occasions in March and July, upheld the “bad boy” provisions. While putting the borrower into bankruptcy may seem like a good solution, if doing so will violate the “bad boy” recourse provisions, it will make a bad situation worse.

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Acting in response to last week’s removal  of the Occupy Wall Street, er, Occupants from, well, Wall Street, a Suffolk county judge ordered that the City of Boston obtain the court’s leave prior to relocating the current Occupants of Boston back to their dorm rooms.  The order is temporary, and the judge intends to hear arguments on the merits in early December.  While the Commonwealth has enjoyed a particularly temperate autumn, average temperatures dropped precipitously last week – a fact that, coupled with Dewey Square’s  proximity to the Harbor, may see to it that the issue becomes moot.  As one Occupant wrote: “Mom – protest’s gr8 but freeeeeeeeezing lol (^_^) – pls send fleece and UGG boots (check bedroom next to Xbox)!!!  GTG – c u at xmas :-)”.

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What’s with all these public CMBS offerings?  And what about all that rule-making?  The registered market has otherwise been frozen since the pre-crisis days, and the cloud of heavy-handed regulation looming over our heads is anything but an invitation to dust off your public shelf.  Moreover, given that some of those regulations may be (or have been) applied in the 144A context, shouldn’t one be concerned about the private market before we even think about re-entering the public space?  And all of that is without even considering the general mid-year market slump.  To address these critical questions and the state of the galaxy as we know it, CREFC held an after-work seminar recently, hosted by Dechert, entitled “Review and Outlook for Public CMBS Offerings.”

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The other week, I was musing in this blog about the likelihood of more AIB and Bank of Ireland type auctions of U.S. Dollar denominated assets by European banks. In the Wall Street Journal, on Friday, September 23rd, the headline was “Banks in France Cut Dollar Loans”. The article focuses on two of France’s biggest banks, BNP Paribas and Société Générale, jettisoning U.S. Dollar denominated assets.

And then, the news about Dexia broke on October 10th. Dexia is a huge French-Belgian bank, though with a lesser profile here in the States than its more famous Parisian and Brussels-based sisters. The French, Belgian and Luxembourgian governments immediately swooped in to guarantee deposits and provide credit support and began chitchatting about a good-bank, bad-bank fix. The reaction in the markets has been curiously muted. Dexia is huge. Its reported balance sheet is more than 500 billion euros. (And, of course, Dexia had been reporting Tier 1 capital of 10% a couple of months ago. How’d that happen? But that’s a different story.)

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The fallout from Ibanez continues in the Bay State.  As I (fearfully) predicted earlier this year, the SJC of Massachusetts (in its second foreclosure-related ruling of 2011) has affirmed a lower court’s decision in Bevilacqua v. Rodriguez.  The SJC ruled Tuesday that Mr. Bevilacqua lacked clear title to a home he purchased from U.S. Bank (which had obtained title via a challenged foreclosure proceeding).  The court was critical of the bank’s failure to adhere to the proper assignment procedure.  Which poses the question: Is Mr. Bevilacqua paying the price for the robosigners?  More analysis to come from the CrunchedCredit team in the coming days.

By: Matt Clark 

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Ahh, Miami. I'd say it's good to be back here at the Fontainebleau for ABS East 2011 but it's been pouring and exceptionally windy so my time outdoors will be limited.  Dechert attorneys Mac Dorris, Ralph Mazzeo, John Timperio, Cindy Williams, Larry Berkovich, Lorien Golaski, Andrew Pontano and I hosted a well-attended cocktail party Sunday night. It was great to catch up with our friends/clients in person.

Monday morning began with a general session where some blurbs about risk retention from this October 14 New York Times article were projected on two very large screens. I later attended the “Evolving Risk Retention Requirements” panel before lunch. It's been a while since the joint regulators released the credit risk retention NPR back in March of this year. In response, hundreds of comment letters were submitted. Click here for the ones posted by the SEC. We have blogged repeatedly on this topic here at CrunchedCredit.

Recently there has been chatter that the regulators may re-propose a new risk retention rule for comment in lieu of promulgating a final rule.

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