The ARRC Consultation on Spread Adjustment Methodologies for Fallbacks in Cash Products Referencing USD LIBOR is finally here.  How the spread adjustment from LIBOR to a SOFR index will be calculated is one of the more consequential open items on the ARRC’s to-do list.
Continue Reading Quick Note: The ARRC Spread Adjustment Consultation

It is time to start originating Single Asset Single Borrower (SASB) large loans priced on SOFR.  There, I said it.  Not just LIBOR indexed loans containing a SOFR fall back when LIBOR inevitably goes away, but new loans indexed to Compounded SOFR, implementing all the necessary tweaks to documents, systems and processes to make that work now!
Continue Reading It’s Time to Originate a SOFR Loan! Really!

One of the good things about the 24/7 news cycle, perhaps one of its few positive externalities, is that it’s a boon for the pontification business. It enables all sorts of otherwise serious people to make fools of themselves day in and day out predicting generally gloomy stuff, as sunshine doesn’t sell.  As a card-carrying member of the chattering class, this empowers me to publish periodic outlooks about the future with little risk of any fundamental embarrassment.  It’s sort of a no risk undertaking, isn’t it?  If you happen to get something right (think blind cat finding dead mouse), you can claim to be a star.  If you get it wrong, well, everyone else got it wrong, too – and often on national television.

The other thing we’ve got going for us in the bloviating business is that we remain in fraught and friable times.  We are running short of good synonyms for shock and outrage and struggling to describe what might actually be viewed as extraordinary.  What really does extraordinary mean these days?  These make good times for the prediction biz.  It’s not much fun making predictions when not much changes.  Imagine that poor sod, talking to the Pharaoh during the Old Kingdom after reading many entrails,  I foresee…nothing really changing for 2000 years; more news at 11.

Unburdened by much of the way in data and little in the way of anxiety about getting it wrong, I’m ready to tell you all about 2020:Continue Reading 2020: An Outlook

‘Tis the season and I think it’s way overdue to put in a good word for sunny optimism.  It’s been a while since the Golden Turkeys, and I apologize for being offline.  This having to work for a living gets in the way of serious bloviating.  Here is what is bothering me.  The overall tone of the national dialogue as mediated through the mass media seems overly dark and bleak.  The Sunday talk shows and the business press seem to deliver day in and day out an entirely untoward and, in fact, largely data free bias toward pessimistic outcomes and gloom.  I think that’s wrong (so I’m really writing about how stupid and obdurately mule-headed, faux sophisticated pessimism about virtually everything really can be, but ode to that made for an awkward title.)
Continue Reading Ode to Optimism:  I’m Proudly Bullish (and not embarrassed to say so)!

As is our tradition here at Crunched Credit, each year, about this time, we award our Golden Turkey Awards.  Once again, I must say that we are utterly blessed with so many worthy candidates. The truly deserving have once again wrangled with vision and astounding persistence to earn a spot on our acclaimed list.  To…

Back in the febrile, hyperventilated times that birthed the Dodd-Frank Wall Street Reform and Consumer Protection Act (blessedly known simply as Dodd-Frank), one of the issues that energized the activists’ intent on “fixing” what was wrong was the notion that the ratings agencies were complicit in the overpricing of financial assets.  In a “want for a nail, a shoe was lost” sort of way, overpricing of financial assets caused asset bubbles which led to or exacerbated the apocalypse.  The culprit?  The issuer pay model by which the issuers which retained the ratings agencies to rate their securities paid the ratings agencies’ fees from the proceeds of the related securitization.  From a certain perspective, this was having the prisoners hire the guards.
Continue Reading Ratings Agencies in the Crosshairs

Just when you thought the regulators had forgotten about HVCRE ADC, they issued a new notice of proposed rulemaking like they were Beyoncé surprise-dropping a new album. And then…they disappeared again! We were waiting for more news before alerting our readers but nothing has come to date. To bring those not in the HVCRE ADC-hive up to speed, the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) reformed the capital rule for acquisition, development and construction loans (HVCRE ADC exposures or loans) back in May 2018, but the regulations have yet to be conformed to the statutory regime.

Under the current statutory framework, an HVCRE ADC loan is a credit facility secured by land or improved real property which (A) primarily finances, has financed, or refinances the acquisition, development, or construction of real property; (B) has the purpose of providing financing to acquire, develop, or improve such real property into income-producing real property; and (C) is dependent upon future income or sales proceeds from, or refinancing of, such real property for the repayment of such credit facility. Among other exceptions, the current statutory regime includes an exemption for loans that finance the acquisition, development, or construction of one- to four-family residential properties (the paragraph 2(i)(A) exemption).

On July 12, 2019, the Federal Reserve, FDIC and OCC released a Notice of Proposed Rulemaking (2019 NPR), in response to comments submitted to their September 2018 Notice of Proposed Rulemaking (2018 NPR). The 2018 NPR was meant to conform the regulatory capital rule to the updates brought about in EGRRCPA and the 2019 NPR supplements the previous proposal to narrow the paragraph 2(i)(A) exemption.
Continue Reading HVCRE ADC Update: Regulators Propose Eliminating Exemption for Land Development Loans

Last week, the U.S. Department of the Treasury released proposed rules providing tax guidance around various LIBOR replacement issues.  Long anticipated.  The defenestration of LIBOR will leave considerable broken glass in its wake.  Perhaps just so the tax professionals wouldn’t feel left out, the end of LIBOR will create a series of tax problems.  Very briefly, changing the price index of a loan, and certainly a mortgage loan, might be a significant modification under the so-called 1001 Rules.  The result of that?  Without a fix from our friends at the IRS, that change may be deemed an exchange of an old financial asset for a new one, creating potential gain or loss, violating the REMIC requirement that pools be static and violating the provisions of the REMIC rules.  Obviously, those adverse consequences under the tax code were not intended by anyone and it would seem that we ought to get a simple fix.  Changing the index is not a significant modification and therefore none of the other follow-on bad things happen.  The end.

While, as we’re sure everyone knows, it’s not that simple and the IRS, instead of saying, “you got it fellas, we’re good,” has given us 50 pages of new regulatory code speak. We suggest that you read our OnPoint and we certainly invite you to read the release, which is subject now to public comment, because it is critically important that we get this right.  Here’s a spoiler alert, while the proposed rules basically work, they do create problems and issues which we urge the industry to address to see if we can get this right before the proposed rules go into effect.Continue Reading Proposed Tax Rules on LIBOR Replacements Answer Some (But Not All) Questions

The LIBOR transition process is an affair of headache-inducing complexity.  Amidst the thousands of gallons of ink spilled on the subject, we thought it might be useful, from time to time, to give you some important information in  bite-sized servings (don’t worry, we will continue to publish lengthy, irreverent commentaries on the subject that our long-time readers have come to expect).  So here’s your first Quick Note.  What will the Alternative Reference Rates Committee (“ARRC”) recommend for the spread adjustment?
Continue Reading Quick Note: What Will the ARRC Recommend for the Spread Adjustment?

Long ago, I read a book by a man named Herman Kahn, one of the founders of the Hudson Institute and a well-known public intellectual.  The book was entitled On The Year 2000.  (He was more famous for that truly uplifting missive, On Thermonuclear War.)  I suspect I didn’t understand a lot of it, but I was jazzed by this apparently serious effort to peer into the future.  How cool!  Mr. Kahn was an interesting character; think of a banal-looking, rotund academician, who talked about nuclear annihilation like I discuss box scores.  He was, in fact, an inspiration for Stanley Kubrick’s Dr. Strangelove and for General Jack D. Ripper’s famous line in that wonderfully dark comedy, “Casualties?  50 million…tops!”  A father of US nuclear deterrent strategy and a considerable intellect, he actually got much of what he thought of the Year 2000 wrong, but in a fun way.
Continue Reading Welcome to the Future