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What in the world have we done to ourselves? Our CRE Securitization business, or at least the conduit part of our business, continues to shrink:  $800 billion in outstanding principal balance in 2007 and now, $400 billion?  Maybe, right now, we’re at a run rate of $50 billion per year.  Is that enough?  Does that deliver critical mass?  Are we a going concern?

Maybe.

As the business shrinks, the CMBS share of the Lehman Index (Bloomberg Index) continues to dwindle.   That imperils liquidity and the diminishment of liquidity itself becomes yet another reason to abandon the sector.  As that happens, some investors drop out, some “right size” their CMBS teams and as fewer analysts follow the space, the business again dwindles.  Net/net, investors lose interest as there are fewer and fewer reasons to buy CMBS bonds.  As the business gets smaller, less attention is paid by the mortgage banking community, fewer opportunities find their way to the CMBS window and other service providers are stressed. Wash, rinse and repeat until someone shuts off the lights and locks the door on the way out.

Okay, I’m overstating it a bit, but you get the idea.  We’ve got a problem.Continue Reading It’s Time to Bring Back the Square State Conduit:  If We Build It, They Will Come.

Since my earliest days in the CRE capital markets biz, there has always been a drumbeat of grumbling from the borrower community about the annoying complexity, expense and delay of having one’s loan serviced in a capital markets transaction.  It’s been going on forever.  Like noise, like listening to Brits complaining about their weather; it’s ubiquitous, apparently personally gratifying, but largely inconsequential for outcomes.  The business goes on.  Data indicates that as many as 60% of all new CMBS loans come from refinancing non-CMBS loans, so it’s  not like a structured finance ghetto here.  The sell side takes comfort from the old saw that no sensible borrower would go to the CMBS window except as a last resort… like, three basis points or five bucks in extra proceeds.  Ok, that’s a tad too harsh and dismissive.  But going to the capital markets window for lower rates, more proceeds or less recourse is entirely rational.  On the other hand, the narrative about the pain through servicing in the capital markets is also real.
Continue Reading The Dilemma of the Really Annoyed Borrower

The doctrine of substantive consolidation (generally- the power of a bankruptcy court to consolidate the assets and liabilities of affiliated entities in bankruptcy) is a recognized remedy exercised by bankruptcy courts – one that strikes fear into the hearts of many lenders. Justifiably so. The doctrine can be employed to order the substantive consolidation of related-debtor entities in bankruptcy and it can also be employed to substantively consolidate the assets of a debtor in bankruptcy with those of a related entity that is not a debtor in bankruptcy. Picture this: A parent entity files for bankruptcy and all the goodies are in a series of subsidiaries and the companies have never respected corporate niceties. The bankruptcy court presiding over the bankruptcy of the debtor-parent entity orders that the non-bankrupt SPE borrower will be dragged into bankruptcy and its assets used to satisfy the creditors of both the SPE borrower and the parent. Ta da.
Continue Reading Substantive Consolidation: It’s Alive and Well (or Maybe Just Alive)

Your correspondent is fresh from the front-lines of the risk retention wars where great armies of lawyers, bankers and advisers are fixedly staring at each other, staring out of the redoubts of their respective defensive crouches in a complex, multidimensional chess game.  All are fervently hoping against hope that something or someone does something to create clarity and allow our business to pivot around this new set of rules so it can continue to thrive.  I think all of us in the finance world are justifiably proud of the fact that if we are given a set of rules, we’ll figure out how to conduct business.  But the uncertainty here is freezing everyone in place, a giant front court pick that we can’t seem to get around.  But one thing is certain and that is that Christmas Eve is coming and with it this Rule will become effective.  After having obsessed about the Risk Retention Rule for years now, we are broadly no closer to clarity about how one should play in the soon to be upon us risk retention world.
Continue Reading A Report From the Risk Retention Front-Lines

I’d like everyone to go out and buy a copy of Professor Paul Mahoney’s slender new book, Wasting a Crisis – Why Securities Regulation Fails.  Paul is a brilliant guy.  Until this spring, he was the dean of the University of Virginia School of Law where he is the David and Mary Harrison Distinguished Professor of Law and the Arnold H. Leon Professor of Law, teaching securities laws.  This is a great book and an important read.  Paul argues cogently that:
Continue Reading Why Regulation Fails

Risk Retention QA BLOGDechert, together with the three other leading law firms in the CMBS securitization space, Cadwalader, Wickersham & Taft LLP, Orrick, Herrington & Sutcliffe LLP and Sidley Austin LLP, published a position paper entitled “Selected risk retention questions and answers for CMBS securitizations.”
Continue Reading Dechert Co-authors CMBS Risk Retention Position Paper

Closeup of a seismograph machine earthquake

Returning to our theme that nothing’s easy and everything keeps changing, here is one out of left field. Let’s talk Probable Maximum Loss (“PML”) and seismic risk. ASTM International, the market standard setting organization for everything from toilet bowls to condoms, has just issued an amended seismic standards: Standard Guide for Assessments of Buildings (E2026-16) and their Standard Practice for Probable Maximum Loss Evaluations for Earthquakes (E2557-16) (the “Standards”)[1]. These Standards establish an industry norm for the requirements to evaluate the financial risk for real estate in zones with seismic activity. Each investigation of real estate is “graded” between a Level 0 investigation (high uncertainty) and a Level 3 investigation (very low uncertainty) based on the qualifications of the assessors and the work done during the investigation. The Standards refer to a Level 0 investigation as a “desktop” investigation, maybe (in a completely subtle way) to imply something about the proximity of the assessors to the potentially shaking site.Continue Reading “Shaking” Things Up: Seismic Risk Assessments

And now to return to our commentary a few weeks back about the stultifying impact of ill-thought through rules and regulations (at best) (Brexit has intervened).  This is our Regulatory State which broadly attempted to pick winners and losers and modify market behavior, to get an engineered outcome by using the blunderbuss of proscriptive rules and regulation.
Continue Reading A Trip Through the Labyrinth – The Regulatory Man in Full

The slow start to 2016 did not dampen the enthusiasm at CREFC’s Annual Conference, held last week in New York City.  The conference saw record attendance, with standing-room-only crowds at virtually every panel.  As with the Industry Leaders Conference in January, the hot topics on people’s minds were risk retention (and the rest of the regulatory headwinds), liquidity and the competitiveness of the CMBS market.

The conference made very clear that we are at an inflection point in the current cycle.  The general mood of the conference, in our view, was the confluence of nervousness and cautious optimism.  The gloominess of the first quarter, and fears over the “sky is falling,” has yielded to mild bouts of enthusiasm (at least if the parties were any indication).  The capital markets have settled down over the past few months, spreads have tightened, and borrowers have begun to trickle back into the CMBS market.

Clearly our industry faces headwinds, and nobody is betting on a record second half, but we also did not hear anyone ringing the death knell for our business.  We left the conference with more questions than answers.  Here are some:Continue Reading CREFC Annual Conference 2016: Headwinds or Head First Into the Wall?

With apologies to George Dangerfield, who published The Strange Death of Liberal England in 1935 chronicling the collapse of the British Liberal Party prior to World War I, I’m borrowing his title for this commentary.  Okay, bear with me.  Regrettably, we may be witnessing something happening to our banking system which is somewhat reminiscent of the death throes of one of England’s great political parties. The Liberal Party expired in the years leading up to the Great War not because of some single momentous and metamorphic event, but because of a series of modest crises, each in its own right small bore which, at the time, was not viewed as terribly consequential.  It failed because of the stultifying, dismal and confused responses of the Liberals to these events.  In the end, the party became untenable as a party of government.  Let’s hope no one writes that book about our banking system in the years to come.

Our enormously complex, interdependent, vibrant, entrepreneurial, adaptive, world girding and dynamic U.S. banking system has played a seminal and still critical role in making this economy succeed.  It is now under assault by large segments of our political elites and their attendant and enabling (self-identified) intelligencia.  This fraternity inspired by the twin idee fixe that the Great Recession was caused by the failures and failing, economic, structural and ethical of our banking system and a fabulist conviction that banking can be “fixed.”  This is a chimerical crusade to overturn the business cycle.  Fruitless and dangerous.Continue Reading The Strange Death of the Modern Financial System