CMBS 2.0

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Here in Boston, we’ve had a busy but productive week since the CREFC June Convention culminated –punctuated with more than a million hockey fans witnessing a parade of Duck Boats waddle through the Back Bay. The Convention itself saw a smaller (albeit similarly excitable) parade of lenders, borrowers, servicers and other industry participants descend on Manhattan for two days of networking, learning and discussion.

Continue Reading CREFC Convention Recap and Making Way For Duck Boats

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?

Early last decade, two Dechert partners, Tim Stafford and Dave Forti, published Mezzanine Debt: Suggested Standard Form of Intercreditor Agreement (pdf) in CMBS World. The article proposed a standard form of mortgage-mezzanine intercreditor that provided a portion of the bedrock upon which the architecture of CRE mezzanine lending would be built for the years to follow. At the time of its publication, burgeoning demand for mezzanine debt (and mezz lenders’ desire to create liquidity in their positions) had created a tension among mezz lenders, bond investors and rating agencies – the absence of a form ICA resulted in mezz debt being an inconsistent and pricey financing alternative. The CMSA (now CREFC) form ICA made mezz lending more predictable, less expensive and easier to trade. Continue Reading CMBS 2.0: Has the time come for an industry-form A/B Colender?

Writing from the Acela again, en route to Back Bay Station after a short trip to New York to attend a CREFC After-Work Seminar we hosted. The space at our Bryant Park offices was full – I took a seat in the last row next to interim CEO John D’Amico (he seemed really pleased with the turnout). The meeting was the latest in a series of after-work seminars that CREFC is holding throughout the country (next stop is Dallas). The topic – “A Case Study in Lending from the Perspective of Both Portfolio and Conduit Lenders” – was moderated by Whit Wilcox (HFF) and included panelists Michael Shields (ING Real Estate Finance), Mike Doyle (CIGNA) and Schecky Schechner (Barclays Capital). The panel explored their thinking on loan applications from the perspective of the three corners of the CRE banking world – life insurance companies, bank balance sheet lenders and CMBS conduit lenders.Continue Reading Dechert Hosts CREFC After-Work Seminar

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

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

The industry descended on our Nation’s Capital this morning for the 2011 CREFC conference: "Commercial Lending: The New World Order". It was -2 at Logan when my shuttle took to the air – needless to say I’m more than happy for the opportunity to spend a few days with friends, clients and colleagues in a warmer climate. (Current DC temperature is 24 degrees – not quite Stone Crabs at Joe’s, but I’ll take what I can get.) Continue Reading CREFC Day 1: Penn Avenue Freeze Out

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

I am on a Halloween kick right now – it’s the elections. I hear Zombies are popular this year.  Zombies indeed.  Do you ever think this could be a deeply sophisticated and sly commentary on our GSEs?  How droll.  They are scary.  How about that for a segue.

The private securitization market for residential mortgages is still dead (like Generalissimo Franco) and the GSEs, attached to a fire hose of taxpayer money, continue to fuel 90% of the United States housing market.  But they are insolvent. What apparently worked so brilliantly for twenty-five years is breathtakingly broken.  Call me silly, but I don’t think we’ve got a sustainable model here.  The good news is that no one else seems to think we have a sustainable model either.  There was a symposium at the Federal Reserve last week on the future of housing finance.  I don’t think a lot of progress was made.  I was passingly concerned to see that almost all of the talking heads were academics.  That demographic may be really good at some things; my guess is not so much at rebirthing a functional housing finance market. It struck me as more can kicking.  When in doubt, talk.  Wonk-filled symposiums give birth to papers, not markets.Continue Reading GSEs: The Night of the Living Dead