Securitization

Subscribe to Securitization via RSS

I just can’t schedule enough time in my day to worry about all the things that seem to demand to be worried about. As I write, this week the Dow closed 630+ down one day and bounced 600 points the next. Yikes.  Between that, the debt ceiling and downgrades, Dodd-Frank, the interminable drumbeat of hostility towards Wall Street and business coming out of the White House, the mess in Europe, the falling dollar, insanely low interest rates, high unemployment, the fact that somehow corporate America seems to still be earning bucket loads of money, and, in general the discomfiting disconnect between our still positive every day deal world and the angst, anxiety and drumbeat of awful news in the macro market, what should we think?  It makes my hair hurt.

But, drawing on my deep and boundless reserve of existential anxiety, I’ve now found a few free moments to worry about the SEC’s new re-proposal on shelf eligibility for asset-backed securities. This missive was released (pdf) on July 26, 2011, and comments are due by October 4, 2011. Continue Reading It Just Gets Better and Better: Reg AB Redux

A new kid showed up on the CMBS block in 2010: the operating trust advisor, sometimes also referred to as, among other things, the senior trust advisor (the “OTA”). During the great recession and credit interregnum, investors dreamt of an independent third party who would represent the interests of investment-grade investors to protect them from the conflicted and potentially nefarious behavior of special servicers who were considered by some to be in bed with the B-piece buyer and to facilitate an improved flow of information on a real-time basis. Someone who would somehow be there for bondholders when pools began to wobble. When the New York Fed was rooting around for a structure for TALF that would not only execute well but would also provide a learning opportunity for the market, they listened to the IG bondholders, and the OTA was born.

For the regulatory community and some elements of the investor community, it was love at first sight. But by late 2010, some thought that the OTA was going the way of the Edsel. A one-hit wonder. Then, in April 2011, the regulators embraced the OTA in their proposed risk retention rules. And now the OTA may be here to stay. Perhaps bowing to the inevitable, most recent 2011 CMBS conduit deals (and some single asset deals) have utilized some form of an OTA. Continue Reading The Operating Trust Advisor: Here Today, Here Tomorrow

Greetings. What ever happened to those REMIC rules regarding property releases that we blogged and wrote about in 2009 (pdf) and 2010 (pdf)? The REMIC rules were revised in September 2009 to add flexibility to facilitate certain types of servicing transactions. However, under the new rules, if a property release occurs, the loan had to be retested to determine whether it continued to be principally secured by real estate (e.g., secured by no more than 125% loan-to-real property value ratio).

Quite a price for a bit more flexibility! This caused enormous consternation as it was promulgated during a massive cyclical downturn in real estate values which resulted in many properties not being able to pass the new “principally secured” test if a release occurred. And many loans contemplated such a release. In a bold recognition of reality, something not entirely common in regulatory circles, the IRS issued Revenue Procedure 2010-30 (pdf) establishing a safe harbor for certain “grandfathered transactions” and “qualified paydown” transactions. Under the Rev Proc, a loan would not lose its status as a REMIC “qualified mortgage” even if the “new” loan-to-real estate value ratio was in excess of 125% (i.e., if the loan was less than 80% secured by real property) so long as the loan was “grandfathered,” meaning that it was closed on or before December 6, 2010 (and not amended after that date).Continue Reading REMIC Rules Revisited: Got Compliant Property Releases?

On May 5, SIFMA hosted a Spotlight Series: Risk Retention and Qualified Residential Mortgages.  It was immediately apparent that unintended consequences of the proposed risk retention rules (pdf) abound.

The panelists acknowledged that the regulators had a very tough mandate, and that the rules are way more complicated than anticipated.  It was estimated that approximately 60% of the proposed rule will make its way to the final rule, and that while feelings of annoyance with respect to the drafting of the proposed rule may linger, it is up to the securitization market participants to help the regulators provide us with a clear, workable final rule.

Under the proposed rule, calculation of the amount of required risk retention would be based on a percentage of the par value of the ABS interests in an issuing entity.  The discussion began with a couple questions some of us have already been asking …

What do regulators mean by “par value”?  What is an “ABS interest”?Continue Reading SIFMA Spotlight Series: Risk Retention and Qualified Residential Mortgages

Last Thursday evening, Dechert partners in our Finance and Real Estate Group and Bankruptcy, Business Restructuring and Reorganization Group hosted a cocktail party for our clients at our New York office.  The main item on the agenda for the evening was simply to take the opportunity to learn more about what’s on the minds of our clients and to discuss the outlook for the remainder of 2011.  Also on the agenda for the night – wine, sushi, taking in the view of the Empire State Building and catching up on the latest activity in the Major Leagues.

With well over 100 people in attendance, we had the chance to hear from a wide variety of clients in commercial and residential loan origination, mortgage servicing and securitization (CMBS, RMBS, ABS and CLOs).  Across the board, I would say the mood was upbeat and optimistic.  Lending is ramping up.  Term sheets are being drafted.  Bankers are talking more about securitization as a viable take out strategy.Continue Reading Dechert’s FRE and BRR Groups Host Clients

Earlier this month, the New York Supreme Court issued a decision upholding the enforceability of a springing recourse guaranty given in connection with a commercial real estate loan that provided for a full "blow-up" upon voluntary bankruptcy. [Author’s Note: the decision can still be appealed: New Yorkers tend to call their trial court the "Supreme Court", their supreme court the "Court of Appeals", their front steps the "Stoop" and their minor league team the "Mets".] Most of our readers are, at this point, intimately familiar with the "bad boy" guaranty and the leverage it provides a lender once the loan hits the fan. Conversely, our readers are also keenly aware of the degree to which sponsors were able to erode the scope of recourse carve outs and isolate liability in poorly capitalized shell entities during the go-go years. The most famous example, of course, being GGP’s ability to run an end-around the bad boy guaranty by filing borrowers and gurantors alike into bankruptcy in 2009 – leaving the holders of $ billions of CMBS paper without practical recourse.Continue Reading Bad Boys: New York Supreme Court Upholds Recourse Guaranty

A few weeks ago, I wrote that it was manifest destiny that the CRE CDO would return to the commercial real estate space.  A lot of people took the time to tell me that I was delusional, at best. I thought I would take a moment to return to the topic and try to establish my bona fides as something other than a knave, a fool, or a foolish knave.

Let’s start with the question of need.  Do we really need this?  Portfolio lenders in need of yield and securitization lenders in need of warehouse capacity are in a day-in, day-out search for leverage. The problem, of course, is that almost all leverage available in the commercial market tends to be short term, creating a durational mismatch against the underlying financial assets.  That situation is bad.  That mismatch killed a lot of players last time.  The CRE CDO addresses this problem with durationally matched financing.  It is also blessedly bereft of the repo mark-to-market.

So that’s the need. It’s real.Continue Reading How I Learned to Live With the CRE CDO. And Love It! (With Apologies to Stanley Kubrick)

Near the epicenter of the late unpleasantness was that wonder of complex engineering, the CRE CDO. It has been blamed for near everything that went wrong or was wrong in the commercial real estate space. It probably is responsible for the winters of 2010 and 2011.

The CRE CDO, as it was initially designed, was an on-balance sheet term financing facility which was designed to be free of the vicissitudes of traditional bank warehousing restrictions and, of course, the dread mark to market of the repo market. The transactions were often dynamic and had substantial term, often up to 7 years. Whole loans (as well as other stuff) which met the elaborate and complex (more on this later) eligibility criteria could be financed on a rolling basis with the proceeds from the disposition of assets reinvested for a substantial portion of the term. CRE CDO paper was customarily rated. The average cost of funds was substantially lower than what could be obtained on a straight bank facility. Continue Reading The Impossible Dream: It’s Time to Bring Back the CRE CDO

Although there is renewed optimism for a vibrant CRE lending market in 2011 (or at least a significantly better market than the prior 3 years), many lenders and servicers continue to face challenges in dealing with delinquent or defaulted commercial mortgage and mezzanine loans (whether held on balance-sheet or securitized). The volume of these “scratch and dent” assets are expected to increase this year and are responsible for continued misfortune by masking positive returns and causing realized losses. Despite this misfortune and the associated headaches, there is appetite in the industry to acquire or aggregate large portfolios of these loans on the cheap, and make a buck or two in the process of restructuring the loans or exercising remedies.Continue Reading Liquidating Trusts: Let’s Detoxify the System at Last

Leading with the good news, the commercial mortgage finance market is back and growing at a brisk pace.  From a few standalones in the fourth quarter of 2009, we’ve gotten to a remarkable place.  Even during the first half of 2010, while lenders were hesitantly starting to lend, precious few lenders actually had real balance sheet availability for securitization.  That changed.  We’re back!  

Almost as soon as these markets began to function again, complaints about the quality of the loans began to bubble up.  OK, LTVs remain modest and, broadly, we’re not  underwriting pro forma income, but structural rigor and simplicity did not long endure.  Give me a break.  The joke has always been that our business had a seven year cycle and five year memories so that once in every cycle we’d recapitulate the errors of the last.  But five months?Continue Reading Seven Year Cycles and Five Month Memories