CrunchedCredit : Capital Markets Finance and Real Estate Attorneys

Also not news: there remains substantial anxiety. Is there sufficient loan demand? The girls have decided to have a dance, have hired the hall, put up the bunting and blown up the balloons, the band is tuning up. No guys. Or not enough. What happens, that little voice natters on, if we re-built this sell-side edifice, put expensive rumps in seats, and the buy-side don’t come to the dance? That’s simply not acceptable. To a man with a hammer, everything looks like a nail. A rebuilt, robust sell side will lend or die trying. And what might that do to heretofore heartfelt pledges of discipline?

On fundamentals, the consensus was pretty positive.

Jamie Woodwells, MBA’s brilliant commercial real estate economist, said at the conference in his state of the union:

• We should see good GDP growth for the next several quarters, in the 3% range.
• Interest rates are still benign and, even if the long end of the curve creeps up 100-200 bps, risk spreads will come in, keeping coupons at acceptable levels. LIBOR will also be benign.
• Employment will remain anemic but grow.
• Housing will continue to “grow more affordable” (nice way of saying prices continue to decline) at a slower rate and slowly but surely the shadow inventory will be absorbed.
• There’s been precious little new stock built in any of the major real estate food groups in years.
• There is a modest but a growing sustainable demand for mortgage credit. Plenty of refis to do.

That’s all basically good.

On the other hand, there does seem to be too much retail, too much multifamily, and Corporate America really doesn’t even need the space it has. And, on employment, there’s precious little evidence of real growth yet. (Is the new normal 8% structural unemployment? If so, what’s that going to do to us?) QE3 is on the runway, deficits continue to balloon, the consumer is still overburdened with debt, housing is doing a double dip, 30% of homeowners are under water on their biggest investment. Oops, there I go, going negative again. Don’t worry, it will somehow all work out.

And maybe that’s the headline both for CREFC and CREF. Somehow, it will all work out. After three wrenching years of retrenchment and loss, growth simply must be back. Somehow it will all work out! I kinda think so too.

By: Rick Jones.
 

The reality is, the private markets would provide enough credit to support the housing market if they could. When and if the GSEs are scaled down, they will. Will that result in 65% of the adult population owning a house? Maybe not. But who says that’s the measure of success? Historically, it’s an anomaly.

I served on the MBA’s Committee to Enhance Liquidity, which developed a thoughtful white paper on the future of the GSEs. We will now weigh in to actually try to help our legislators and regulatory constituencies to craft a solution. On Tuesday, the Treasury, together with the Department of Housing, invited a cross section of experts and industry representatives, including the MBA, to talk about the future of the GSEs. Secretary Geithner kicked off the meeting with a speech that seems to support the notion that private capital should fundamentally fund the housing market, but that the federal government has an important ongoing role. That sort of sums up the tension at the heart of the debate. There are a lot of good ideas out there, both in the MBA and elsewhere, on what to do about these two wayward economic wards of the state, but some fundamental policy decisions need to be made before the hard work of developing an executable plan can follow.

Here’s a modest solution. Let’s do a test case and spin off the GSEs multifamily business into something new and see if it works. The multifamily businesses are small businesses in comparison to Fannie and Freddie’s single family business, but nonetheless significant. Create cooperatives for these businesses. There is a long history of cooperatives in this country and, in fact, the Federal Home Loan banks are cooperatives (OK, maybe that’s not a good example since they are mired in problems as well). But the multifamily businesses could be easily and simply spun into a cooperative in which the members are the existing GSE mortgage banking outlets as well as major depository institutions. In the cooperative structure, the members would provide capital support to the enterprise in proportion to their use of the enterprises. The co-op’s service would be as a conduit for securitization of these loans, and perhaps as a vehicle to provide warehouse financing to the members to accumulate loans on a modest scale in advance of a securitization. The co-op would not become a bloated hedge fund chock full of mortgages and thereby avoid the failed policies of the past. A government guarantee may still be necessary (though I personally wonder whether it really is), it could be bought at a fair price, and a guarantee fee would be paid to the Treasury. This would allow the business to size the value of that guarantee, engage in price discovery, and perhaps over time it could be weaned from that federal teat. There was a lot of talk on Tuesday at the Treasury / Department of Housing meeting about re-sizing the federal guaranty as some sort of backstop guaranty, with a layer of private insurance in between. The thinking being that government ultimately owns the tail risk of another complete and utter market meltdown. This may be a good idea too, and could easily be annealed to my cooperative idea, but let’s not let the perfect drive out the good. Let’s experiment with the multifamily business and see if we can begin to find a way towards a healthier and sustainable private enterprise based market place.

By Rick Jones.