2010

Last week, the Supreme Court of the State of New York handed down a decision in the battle between CWCapital, representing the senior mortgage debt as special servicer, and Pershing’s andWinthrop’s joint venture, who recently bought the mezz debt in this transaction at a deep discount.  Everyone knows what’s going on here.  The mezz debt was bought as a lever to attempt to get control of the property through, or in the shadow of, bankruptcy.  A successful workout would, by definition, compromise the senior debt.  To prevent that, CW sought injunctive relief to prevent the foreclosure of the mezz debt and they got it.  Unless this is reversed, it’s game over for the mezz because the foreclosure of the mortgage debt is coming up very soon. Continue Reading The Stuy Town Wars

The general theme of the American Securitization Forum Sunset Seminar held on Wednesday at Dechert’s NY office was the unintended consequences of the Dodd-Frank Act. Our largest conference room was packed with over a hundred securitization industry players all searching for the best predictions on the shape of the massive amount of regulations coming our way over the next few months. First on the agenda was a discussion of the repeal of Rule 436(g) and the resulting Securities Act liability for rating agencies. Dodd-Frank’s intent was to improve the value of ratings by making rating agencies more accountable to investors. Unfortunately, the rating agencies would not consent to their ratings being disclosed and the entire public securitization market was stopped cold. Not helpful for a market struggling to return to "normal.” We have the temporary fix issued July 22 of this year in the form of an SEC No-action letter green lighting the omission of ratings in registration statements, but what happens next? Most likely– the SEC will amend Reg AB Items 1103 and 1120 to not require ratings in registration statements. However, the SEC is considering requiring ratings in non-ABS registration statements, so how likely is this most likely solution really? Other ideas—in no particular order of likelihood: Congress will reinstate 436(g). Doubtful. The SEC will extend the No-action letter indefinitely. Perhaps. Ratings agencies assume the liability or are indemnified by issuers. Maybe. One panelist predicted that in the short run, we’ll have uncertainty; and in the long run, more uncertainty. Consensus is that there’s a long road ahead and harmonization amongst the regulators and applicable agencies is key. Also keep in mind as this unfolds that rating agency accountability is also to be achieved under Dodd-Frank by new private rights of action against ratings agencies (and other parties) leading perhaps to nationally certified class actions. As a result, the rating agencies will be seeking comfort and indemnity from issuers on the accuracy of data given to them in the course of their diligence.

The discussion turned to conflicts of interest and the prohibition against engaging in any transaction that would result in a material conflict of interest with respect to any investor for one year following closing (other than hedging activity or market-making/sales to provide liquidity for the ABS). An example of this conflict would be underwriting ABS then shorting the synthetic ABS that references the first ABS. One issue raised with respect to compliance is the problem of information barriers between departments at investment banking institutions.
 Continue Reading ASF Sunset Seminar: What to Expect from the Dodd-Frank Rulemakings

The gestation of CMBS 2.0 continues apace. A slow pace. The bulk of the deals look an awful lot like CMBS 1.0, but at least one, the Goldman/Citi deal, seemed to come right out of the playbook of the activist investment grade ad hoc committee that has been fulminating for fundamental change in the structure of CMBS. The Goldman/Citi deal saw a B buyer without customary rights to terminate the special servicer, bondholder voting mechanics to remove the special servicer, a consulting ombudsman for the investment grade classes, and constrained special servicer compensation. To say the least, the industry’s notion of what CMBS 2.0 ought to look like has not gelled and will probably continue to see innovation and tinkering for some time to come. Certainly, the industry has yet to absorb whatever risk retention FinReg will bring us as well as possible changes in the structure of representations and warranties and perhaps something to reflect enhanced underwriting.

The talk on the street is that the investment grade buyers responded very well to the Goldman/Citi structure. At the end of the day the structure will follow the money.

So it’s a good time to pause for a minute on the rush to the new structure. Is the new structure, so adamantly pursued by segments of the investment grade marketplace, really an unalloyed good?Continue Reading Careful What You Wish For…

As a follow up to my earlier post, we just issued this article (pdf) about the IRS’ recent Revenue Procedure (pdf) regarding the REMIC rules. The problems inherent in last September’s REMIC Regulations have been well-covered in this blog. In short, the IRS surprised the industry by requiring a mortgage loan to pass an 80% value-to-loan test as a condition to any lien release (the same test required upon initial contribution to the REMIC). While the existing REMIC Rules could have been read to only expressly permit releases of property in connection with a qualifying defeasance, the pervasive view among issuers and their counsel for years was that certain releases (outparcels, condemnation, and partial releases upon pay-down, to name a few) were permissible so long as the release was at the option of the borrower and was subject only to certain objective criteria.Continue Reading REMIC Rules Provide “Safer” Harbor for Releases

I know I return to this theme a lot in this column, but the Unintended Consequences Watch needs to be manned day and night. Today let’s talk about 17g-5. This esoteric sounding SEC rule is intended to diminish the perceived failings of the rating agency culture which has been fingered as one of the principal causes of the “Late Unpleasantness”. The notion was that the rating agencies, hired by the issuers, were mired in conflicts of interest and there were few, if any, structural safeguards to protect investors from bad ratings.

17g-5 provides that rating agencies must require a party retaining the agency to rate an asset backed security (including CMBS) to establish and maintain a password-protected website for all other rating agencies. The website must contain all information provided to the rating agency in connection with the rating. This pertains whether information is provided in writing or orally and to information provided by the issuer or by anyone on behalf of the issuer. The information must be loaded into the website simultaneous with its delivery to the retained rating agency. This was purported to provide a structural counterpoint to the pressure for continuously lower levels by issuer procured ratings.

This has some superficial appeal. To the extent that investors were concerned about conflicts of interest, unsolicited ratings seems an antidote to these perceived concerns. Indeed, on first blush, it’s hard to see an argument that unsolicited ratings are bad.

But on first blush I thought the financial crisis that began about three years ago last month, would be over by Thanksgiving. The story of 17g-5 is yet another reminder that financial systems are much more complex than rule makers perceive them and wish them to be. Welcome back, yet again, to the wonderful world of unintended consequences.

In this case, what has flowed from the desire to do good by providing multiple opinions of value to the investors is a system which is likely to degrade the quality of information and analysis available to investors.Continue Reading Unintended Consequences Redux

It seems that I use most of my time in this space to rail against an unthoughtful regulatory architecture that will certainly surprise and may ultimately do unintended and substantial harm to our nascent and uncertain recovery. While, from where I sit, it’s still fair to say this market continues to show little real conviction that it’s safe to get back in the water (hardly an irrational mindset) there is, periodically, some good news. So let’s make time for a bit of good news. Ta-da: It was reported recently that average consumer credit card borrowings have dropped below $5,000 per person for the first time since 2002.

This is terrific news. Perhaps not the stuff of rational giddiness, but combine that with the fact that corporate earnings are up, private cash savings rates are at recent highs, the de-leveraging is going great guns (everywhere, that is, outside of our government), house prices seem to be stabilizing in most markets even if sales continue to lag, interest rates are at ridiculously low levels and the reality of the re-set of the valuations of both the commercial and residential property stock has been internalized. A bit of optimism is not wildly inappropriate.Continue Reading Vacation Induced Optimism?

Covered bond legislation is once again a hot topic on Capitol Hill. Representative Scott Garrett (R-NJ) co-sponsored the latest iteration of his proposed legislation (United States Covered Bond Act of 2010 or H.R. 5823 (pdf)) along with Representatives Kanjorski (D-NJ) and Bachus (R-AL). The House Financial Services Committee recently voted in favor of reporting H.R. 5823 to the full House of Representatives for consideration, which hopefully will be taken up for a vote this fall shortly after the August recess.Continue Reading Covered Bonds Anyone?

Like a lot of homeowners this summer, my wife and I are looking to put new windows into our home.  We moved last October, leaving our downtown condo when the impending arrival of our second daughter promised to make things a little too tight.  A drafty winter and a number of windows that, well, just couldn’t be opened this spring demonstrated a need – and President Obama’s Energy Tax Credit cemented the deal. As I’ve learned, like almost everything associated with a new-old house, windows ain’t cheap – and the windows that qualify for the tax credit really ain’t cheap.  The increased cost takes 20 years (on average) to recoup based on the marginal energy savings (something to do with U-factors and Solar Heat Gain Coefficients according to Home Depot). But the government wouldn’t have to pay you to do it if it made good economic sense.Continue Reading Keeping PACE with Green Energy Movement

The commercial banks have largely paid it off, GM has paid it off, and even AIG says it will soon pay off the government’s emergency investment to save the Western world as we know it. As to the GSEs: not so much. We’ve got about $150 billion invested in these entities and no end in sight. In fact, as far as I can tell, there’s yet no plan in sight to ultimately come to an end in sight. Clearly, there are hard political questions about these enterprises which the political class have seen fit to dodge or kick down the road. Should they be private businesses? Conduits for subsidized housing? Both? We now know that both is the wrong answer, or at least not a very good answer. Someone said the GSEs are critical because the private markets have abandoned housing. But how can private markets compete with enterprises that have no need to make a profit, and whose debt is backstopped by the full faith and credit of the United States of America. Who’s going to compete in that market place? Moreover, you’d hope Washington is aware that many other advanced Western economies seem to do quite well without such quasi-public vehicles (not to mention without tax deductibility of mortgage payments, but that’s another story).Continue Reading The Intractible Problems of the GSEs