I’m just about to do another CRE Finance Council (formerly CMSA) PSA after work tutorial. A couple of observations. As a lawyer who packed the sausage casings, it is startling to see how much uncertainty and, in fact, misinformation exists about how a PSA actually works in the community of people who buy and sell bonds and other financial assets. Perhaps not surprising, because who reads these things, except the lawyers who draft them and a few anal B piece buyers, who really need a life? 

It’s also extraordinary to see how much uncertainty there is in the actual mechanics of these, admittedly, highly complex instruments when tested in the crucible of a real live downturn. We are all going to learn a lot about how these financial machines work, and CMBS 2.0 should be better for that learning. In the meantime, if you own a bond or an interest in a financial asset, synthetically or directly, boy, it’s time sit down and read that PSA from cover to cover. OK, I know that is a mind-deadening experience, but remember that you don’t own a tangible asset here, something you can take home and lock in the front yard. You own a bundle of contractual rights which are no more or less than the sum of the words in that 300 page, single spaced Pooling and Servicing Agreement. If you’re not sure what ASERs is or how WODRA actually works, or what a special servicer can and cannot do, how cash actually flows through the waterfall or what a CCR is or can do, what happens to appraisal reduction and actual realized losses, then it is actually time to sit down and read one of these damn things.