2010

Last Friday I moderated a panel at the 11th Annual IMN Real Estate Opportunity and Private Investment Forum in New York.  The two-day event consisted of about 40 separate concurrent panels and drew over 800 industry participants.  The topics covered revolved around distressed debt investing – loan workouts, exit strategies, tranche warfare and distressed asset sales. 

My panel‘s topic was “Loan -To-Own” strategies.  Our conversation began with the panelists discussing the common characteristics of successful loan-to-own transactions.  The common areas of focus included the importance of stringent property-level due diligence, exacting legal due diligence with respect to loan documents, a realistic understanding of foreclosure processes and timeframes, accurate modeling of acquisition and stabilization costs, and the importance of the local expertise that can be gained from local developers and operators.Continue Reading Distressed Debt Conference

There’s a headline to grab attention. It’s been reported that several Chinese and other non-domestic and non-traditional lenders are rushing across the American landscape looking for deals. Take a look at the WSJ article of June 2 about the International & Commercial Bank of China’s recent loan to GE. ICBC has over a trillion dollars of assets, it’s reported to be the most profitable bank in the world and it’s ready to lend. Maybe this is just a “no duh” moment, but what a terrific business strategy for any lender not damaged by the late unpleasantness (a Southern expression still in use about the Civil War but appropriate here)! If the gnomes of Basal get their way and require US and European banks to put up massive capital over the next couple of years, strong, unimpaired semi-sovereign banks may be the best ticket in town.Continue Reading Chinese Banks Lend in the U.S.

I can’t stand it. We now have skin in the game provisions proposed by the SEC, the FDIC, the House of Representatives and the United States Senate. 

On CNN the other day, Congressman Barney Frank said that the most important part of the House Financial Reform bill was skin in the game in securitization. Okay, I know we’re probably stuck with it and the world will not end. Capital formation will be modestly depressed and the geniuses on the Street will work overtime to mitigate the impact of all that excess capital sloshing around. But it pains me to give up the fight. Skin in the game is certainly an attractive slogan and, superficially, it makes a great deal of sense. But no one has really looked at the data.  The worst performing sector in the fixed income world was, without doubt, loans to developers, builders and the like. All of this lending activity was on book or, in the skin in the game parlance; the lenders had nothing but skin in the game.

Hello! Lehman failed. Bear failed. Merrill failed (more or less). The GSEs don’t even bear thinking about.   All of this carnage happened not because the institutions were brilliantly successful in laying off bad credit to dumb investors, but because they had skin in the game. In the CMBS sector, mortgage loan originators generally sold 100% of the risk of the loans they originated, and the sector is experiencing losses generally consistent or somewhat better than the performance of commercial real estate taken as a whole. Again, explain to me how skin in the game is going to fix this?Continue Reading Skin in the Game

CMBS 2.0 is coming, we hope (and pray). But boy, it’s taking its good time about it. Putting aside what our friends in Washington may or may not do to the structure of securitization, it’s remarkable to me how shy we in the industry (and its trade organizations) seem to be about putting a stake in the ground as to what CMBS 2.0 should look like. 

With CMBS 1.0, we built the airplane while flying it, so it’s hardly shocking that when tested, some things failed the stress test. On the other hand, we also did a great deal of fundamental work on an industry-wide basis in the early days, to make CMBS work. We created the IRP, the data dictionary and the like. Shouldn’t we do at least that much again?

Now that we’ve had a chance to observe the problems of CMBS 1.0 in the crucible of a wrenching recession, we seem mildly disinclined to take any dramatic action to address structural problems on an industry wide basis.Continue Reading CMBS 2.0

Last week marked the three-year anniversary of New Century Financial filing Chapter 11 bankruptcy, an event that I tend to point to as demarcating "the beginning of the end" and "the end" of the housing bubble, and representing the true beginning of the credit crisis.

Until first quarter 2007, New Century Financial stood as the second-largest US subprime residential mortgage lender (after Countrywide), having contributed significantly to the awe-inspiring $500-plus billion in subprime loans made in 2006. However, faced with a funding deficit when New Century’s lenders pulled back amid rising defaults on subprime loans, the company ceased lending operations in early March, 2007. The inevitable Chapter 11 filing followed quickly on April 2.Continue Reading Celebrating Three Years of Crisis

The Wall Street Journal and Bloomberg, among other outlets, reported last week that the Royal Bank of Scotland Group Plc is in the process of placing a multi-borrower securitization – the first such issuance to come to market since June 2008. Of course, RBS is facing several hurdles as it trailblazes once-familiar territory. The offering, variously reported to be between $300 and $500 million, would represent a significant tool for other banks in determining pricing for future multi-borrower deals. The offering will also serve as a measuring stick for investor demand in the post-TALF world.Continue Reading First Securitization Since 2008: No April Fooling

Note to File:

If you thought about it, when we take something as complicated as a pooling and servicing agreement and then modify it to do a work around changes to GAAP, it’s not going to be pretty. And it’s not. Welcome to the fair value auction. In a CMBS securitization, when a loan defaults, you’d figure the servicer would either work it out, foreclose it or sell it. That’s what we did until 2001 when the accountants concluded that, if the servicer had the ability to try to sell a mortgage loan, the trust would no longer be a qualified special purpose entity or a Q, and the securitization not a true sale. If it’s not a true sale, the mortgages stay on the issuer’s balance sheet and the transaction simply fails to work.Continue Reading Note to File re: Fair Value Auction

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? Continue Reading Time to Read that PSA