July 2012

I want to talk about structural complexity and innovation. Complexity has gotten a really bad name resulting from the collapse of many highly-structured transactions in the firestorm following the recession and Lehman’s collapse. That’s certainly an understandable reaction. Enormous losses were incurred on transactions barely understood by investors and perhaps by sponsors as well. And while I won’t go so far as to trot out the old saw, “Guns don’t kill people, people do,” the resulting hostility to complexity has conflated good complexity resulting from purpose-driven transaction structures and opaque, dysfunctional documentation and disclosure. The hostility toward complexity limits both risk mitigation and innovation, just at the time both are critically important to repair CRE debt capital markets.

Financial engineering is, in large measure, about risk transfer and the need to meet the needs of investors. It is a process of identifying risk, mitigating risk, and fine-tuning structure to do very specific things. Structures which can reduce deal risk and deliver solutions to very specific investor requirements will grow liquidity. With the growth of liquidity comes transactional efficiency and that way lies market growth.Continue Reading Complexity is Not the Enemy

It’s no secret that California has been hit harder than most states by the housing crisis. Just east of Los Angeles, the county of San Bernardino has cities with some of the highest foreclosure rates in the U.S.

On July 18, the San Bernardino City Council declared a fiscal emergency and voted to file for Chapter 9 bankruptcy protection.

Attempting to stimulate the local economy, the county of San Bernardino entered into an agreement with two of its cities, Fontana and Ontario, to create the Homeownership Protection Program Joint Powers Authority (“JPA”) “to explore a variety of proposals to assist homeowners within their jurisdictions who are underwater on their mortgages.” Currently, the JPA is considering a controversial eminent domain plan put forth by Mortgage Resolution Partners (“MRP”), a San Francisco-based venture-capital firm, whereby (based upon publicly available information) underwater performing residential mortgage loans held in private-label securitizations would be seized, refinanced or restructured and sold to third-party investors, with the government recovering administrative costs and MRP earning a fee on each transaction (the “Program”). On July 13, the JPA held its first organizational meeting where it created the structure for moving forward and heard a handful of public comments from opponents of the Program. The next meeting of the JPA is planned for August 16. The Joint Exercise of Powers Agreement states that the Homeownership Protection Program established by the JPA “may include the Authority’s acquisition of underwater residential mortgage loans by voluntary purchase or eminent domain and the restructuring of these loans to allow homeowners to continue to own and occupy their homes.”Continue Reading California Authorities Consider Seizing Mortgages Secured by Residential Properties

We previously covered the Massachusetts Supreme Judicial Court’s decisions in Ibanez and Bevilacqua on these pages, in which the court gave Massachusetts lenders agita when it upheld lower court decisions invalidating residential mortgage foreclosures.  In a recent decision in Eaton v. Federal National Mortgage Association, the SJC set the record straight by clarifying foreclosure requirements in Massachusetts. Continue Reading Massachusetts Lenders Can Find Solace in Eaton v. Federal National Mortgage Association

Back to Europe and the Euro.

To misquote President Clinton, it’s the math, stupid. OK, that’s a bit of an exaggeration, as there are political prescriptions that could change the outcome of this tale of woe. As I write this, everyone continues to celebrate the result of the most recent Summit and the alleged breakthrough for the European Union and the Spanish and maybe Italian banks. The announcement that the European Financial Stability Facility, or the European Stability Mechanism, will actually lend directly to the banks in Spain and Italy was a bit of an overachievement for this body and, as I write this, stock markets are surging across the world on the news and spreads are coming in a smidge on the periphery. But, as usual, no details, and I’m not buying it. My bet is that the bloom will come off this rose just as it’s come off following other Summits, promising coordination of fiscal policies leading to a mutualization of the debt. Continue Reading It’s the Math, Stupid