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)

It looks like our recap on covered bonds came not a moment too soon. Representatives Scott Garrett (R-NJ) and Carolyn Maloney (D-NY) teamed up this week to co-sponsor the bipartisan H.R. 940 (pdf), the United States Covered Bond Act of 2011. The new bill is much in keeping with the recently distributed discussion draft (examined in a recent Dechert OnPoint (pdf)). Currently, it is in committee before both the House Committees on Financial Services and on Ways and Means.Continue Reading Covered Bond Update: Rolling the Boulder up the Hill?

Recently, while visiting my in-laws, I took a break from college basketball and the Daytona 500 and caught up on the latest developments in the quest for covered bond legislation in the United States.  Not surprisingly, I quickly found that the quest for covered bond legislation is, well, still a quest.

We have discussed the possibility of covered bond legislation numerous times on this blog (see here, here, here, here, here, here, here and here).  As you may recall, 2010 ushered in optimism for proponents of covered bond legislation, as both the House and Senate at least entertained the possibility.  Representative Scott Garrett (R-NJ), who has long been a strong proponent, led the charge in the 111th Congress pushing a bill out of the House Financial Services Committee and in front of the full House for consideration.  The Senate Banking, Housing and Urban Affairs Committee even went so far as to hold a hearing on the topic.  Despite the attention, the elections and then other distractions took priority, and a lame-duck session came and went without further movement on the topic.  However, the bells ringing in the new year also rung in a new round of this fight, as all interested parties are gearing up for yet another attempt to pass this legislation.Continue Reading Covered Bond Update: Inching Closer?

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

Last Wednesday, Laura Swihart and I attended CREFC’s after-work seminar on the new model set of representations and warranties, which the group is set to release in coming weeks. The model set is the product of a patchwork committee of 50-odd individuals representing the full gamut of industry types – securitization issuers, bond investors, rating agencies, servicers, wall street banks, life insurance companies, law firms, third-party providers and other interested parties. As a member of the committee, I’ll second CEO John D’Amico’s statement applauding the hard work of the committee. It takes a special group of people to stay energized through 90 minutes of heated discussion on the phrasing of property insurance requirements; the enthusiasm so many of my fellow committee members brought to each meeting and conference call was astounding.

The initiative is, in large part, a response to the SEC’s new Exchange Act Rule 17g-7 (initially proposed last October and final rule released in January), which, among other things, requires that the rating agencies identify, on a deal-by-deal basis, deviations from industry-standard reps and warrants. CREFC hopes that the model set will serve as the basis upon which all deals will be judged. It’s not necessarily clear whether the model reps will be widely utilized by the market, or how the SEC rules will be implemented – deals have obviously been selling for over a year without industry-wide agreement on a form of reps and warrants.Continue Reading TriBeCa 2.0: CREFC Prepares to Release Model Loan Seller Reps and Warrants

2500 of my best friends and I spent three days at the MBA’s annual CREF meeting in San Diego last week. By now, it’s old news, but, indeed, the mood was very upbeat. Just like the days of yore, everyone spent every working moment in lender-mortgage banker meet and greets, exchanging braggadocio over pipelines, products and relationships. People even had the energy to return to old fights and grudges: portfolio lenders vs Wall Street squaring off after sharing a fox hole these past three years. Most heartwarming.Continue Reading Tales From The Conference Circuit: Can I Be Both Giddy and Anxious?

A colleague and good friend of mine is house shopping. She spent last weekend touring a home in Hingham – a popular, picturesque waterfront suburb south of the city where many travel to Boston’s financial district each morning by ferry (the trip across the Harbor shaves 40 minutes off the commute). The listing caught her eye because of the size of the home and the price – a little too big, a little too well-maintained for the asking price. Turns out the home was being offered by a developer that had acquired the property from a foreclosing lender – something commonplace throughout the country as the national housing market desperately seeks to achieve stability. But in post-Ibanez Massachusetts, where home ownership can rest on an (unelected) judge’s determination that mortgage assignment documentation was defective, buying a home that has been subject to foreclosure (at any point) is a risk that perhaps no reasonable purchaser can take.
 Continue Reading The Defeasance of Mr. Bevilacqua: Fallout from Ibanez Decision Continues in Massachusetts

ASF 2011 kicked off yesterday, February 6, at the Orlando World Center Marriott.  Dechert attorneys Malcolm Dorris, Ralph Mazzeo, Patrick Dolan, John Timperio, Cindy Williams, Andrew Pontano, Lorien Golaski and I are hosting a cocktail party for clients and friends here this evening.

Congressman Scott Garrett (R-NJ), Chairman of the House Financial Services Subcommittee on Capital Markets and Government-Sponsored Enterprises (GSEs), delivered the featured address this morning, February 7. In his new role as Chairman, Congressman Garrett will be a key player in the debate over the future of the GSEs, the implementation of the Dodd-Frank Act and the continued development of a legislative framework for a covered bonds market in the U.S.Continue Reading ASF 2011 Kicks Off in Orlando, Florida

On January 20th, the SEC finalized its first batch of many rules to come under Dodd-Frank, requiring issuers to perform reviews of the assets underlying their ABS securities and requiring them to disclose fulfilled and unfulfilled repurchase requests for alleged breaches of representations and warranties.  These have effective dates beginning with 2012 issuance so, to a certain extent, we can kick the anxiety can down the road for a while.  Nonetheless, this is a pretty clear window into what may be a bleak regulatory future.  And that’s important now.  More on this later.

Rule 193 (release here (pdf)) requires an issuer to know something about the assets it’s securitizing.  The issuer is supposed to do diligence to understand the assets it securitizes and tell the investor about the nature of its inquiry.  Curiously, and I’m not complaining here, Rule 193 does not purport to define what disclosures need be made, just that there ought to be “robust" and "transparent” diligence behind them. Its inquiry must be “designed and effected to provide reasonable assurances” that the disclosures about the assets are correct.

Hardly shocking.  Call me silly, but that seems to be what we do in structured finance.  I guess more information about exactly what the issuer did to understand the assets it securitizes could be useful, particularly in asset classes in which the asset level data is sketchy and aggregate.  It’s just silly in CMBS when we already deliver vast quantities of granular data in every deal.Continue Reading The FinReg Sheriff Arrives in Town: Do You Feel Safer?

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