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I wrote a week or two back about my expectation that significant economic dislocation awaits us.  I still think that.  The morning after I published, hordes (ok, maybe not hordes) of PhD Villeins were outside my house with pitchforks and burning torches, loudly asserting that I had wildly overstated the likelihood of material distress in the marketplace.  “No, no, no, the White House has assured us of a soft landing and a soft landing we’ll have.”  (The Council of Economic Advisers, not surprisingly, if professionally embarrassing, seem to think so, too.)  And, while inflation is bad, it’s not that bad.  (I don’t yet need a wheel barrel to buy bread!)  No recession, they perorate loudly and insistently.  We’ll be back to 2% inflation, sub 4% unemployment and 2% GNP growth by Q4 of 2023!
Continue Reading Life (and Opportunity) in the Time of Considerable Government Malfeasance

I’ve been offline for a bit.  An amalgam of writer’s block caused by the enormity of the Coronavirus mess – what can be said that’s useful – and the consequence of being wildly busy as everyone across financial markets tries to pivot to the new reality.  Unburdened by any knowledge of science, medicine or epidemiology, I have been marinating in the output of such intellectually distinguished journals as The Sun, The Daily Beast, The Onion, The Mirror, The New York Post and Drudge on the daily ups and downs of our plague, its cost in blood and treasure and the disruption it has caused across all aspects of our life.  Consequently, I have opinions but I’ve concluded they’re pretty damn worthless.  We’re in uncharted waters, akin to those bits on a medieval map where the cartographers had no clue and wrote: “Here be Dragons.”
Continue Reading Playing with Broken Toys in Coronavirus Land

Here is something helpful that has surfaced amidst the fallout, pain and confusion of the global COVID-19 crisis.  The implementation date for the all-too-simple in theory but not-simple-at-all in practice CECL accounting standard has been pushed back by the passage of the CARES Act for banks until the COVID-19 national emergency declared by the president ends or December 31, 2020, whichever is earlier.  In addition, an interim final rule released by the FRB, OCC and FDIC on Friday, March 27th, now provides an option to delay the effects of CECL on regulatory capital for two years (in addition to the original three-year transition period for banks required to adopt CECL during their 2020 fiscal year).  Banks opting to use both forms of relief would be subject to a modified transition period which would be reduced by the amount of quarters CECL was delayed due to the CARES Act.  No relief was provided for non-banks who are otherwise required to follow CECL.
Continue Reading CECL: The Ugly Pig Running Out of Lipstick

The spread of COVID-19 has created a new reality for the hospitality industry. As of March 25, the CDC reported 54,453 confirmed cases in the U.S., and the number is expected to grow exponentially. In the hopes of slashing infection rates, governments have implemented international travel bans, shelter-in-place orders and other restrictive measures. The second-most popular tourist destination in the world, Spain, has ordered all its hotels and other tourist accommodations to be closed.
Continue Reading Beds without Heads: Hotels in the Era of the Coronavirus

Beany & Cecil was a cartoon.  The Current Expected Credit Loss accounting rules, better known as CECL, which the FASB is insisting will go into effect at the beginning of next year for publicly traded banks and lenders and a year later for all other GAAP reporting entities is not.  Now, heaven forfend that I suggest that the work of the Financial Accounting Standards Board is cartoonish, but there’s a parallel in this pairing of harmless and obscured menace worth noting. 
Continue Reading Beany & CECL

Morningstar has published a proposed method for rating single-asset/single-borrower (SASB) transactions. The new approach is slated to replace the “U.S. CMBS Subordination Model” with respect to SASBs and other forms of CMBS securities with similar credit and diversity profiles, including large-loan transactions and rake certificates. Morningstar has issued a request for comments on the proposal. We plan to provide our thoughts, described below, before the April 20th deadline, and encourage you to do the same. But first, answers to what are sure to be your most burning questions:
Continue Reading Morningstar Requests Comments on Proposed Rating Methodology for SASB Deals

Our friend, Dan Rubock, just inked an interesting and timely piece entitled, “Key pillars of loan structural quality are eroding, especially in single-borrower deals.”  As usual, Dan’s views at Moody’s are worth considerable attention.  That piece focused on bad-boy carve-out guaranties, the quality of borrower financial information, property release provisions, qualified transfer provisions and cash sweep triggers.  While reasonable professionals can differ on both the incidence and the impact of the deterioration of these deal features, the point is well taken that the deterioration of legal structural features in CRE lending is often a canary in the mine for… excessive exuberance.  I’ll put off litigating Dan’s points for a future time, but this got me thinking about all that we do in legally structuring loans for the capital market.

Much of the playbook for capital markets CRE lending was established at the dawn of this business.  At that time, Dechert was outside counsel to S&P and for good or ill, Dechert was responsible for much of the early architecture of CRE documentation and legal underwriting.  While these criteria have been periodically tweaked over the years and adapted to changes to the underlying CRE lending market, the original architecture is still pretty much in place.

I would posit that it is an industry failing that we haven’t really given legal underwriting a thorough rethink in 30 years.  Here’s a start.
Continue Reading I Urgently Want to Report the Deaths of the Non-Con Opinion (But Probably Cannot…Yet)

Earlier this month, our very own Kenneth D. Hackman, a regular contributor to Crunched Credit, moderated a panel entitled Single-Family Rental: The Landscape and Future of CRE’s Newest Asset Class, hosted by Dechert LLP, for CREFC’s After-Work Seminar Series.

The esteemed panel consisted of Kevin S. Dwyer, Senior Vice President, RMBS, Morningstar Credit Ratings, LLC; Bradley J. Hauger, Senior Vice President, Loan Servicing Director, PNC Real Estate/Midland Loan Services; J. Christopher Hoeffel, Chief Financial Officer, CoreVest American Finance and R. Christopher Jones, Director, Deutsche Bank.

Readers of Crunched Credit know that we are bullish on SFR: single-family rental is the largest class of rental stock in America, eclipsing the multi-family market. The number of single-family rental units grew 23% from 2006-2015, with most of that growth following the Great Recession. Since then, the institutional single-family rental business has blossomed into a viable, long-term business. And as institutional ownership has grown, SFR finance has grown apace.

You know, for a long time, we, and I think many other observers, thought that SFR was a trade created by the collapse of the residential housing market in 2007-2008. We thought when the opportunity to buy single family homes at ridiculously low prices, fix them up and rent them went away, the trade would go away. We were wrong and SFR is growing into a mature industry that is likely to continue to grow for many years. Right now, depending on who you ask, 12 or 13% of US housing stock is now single family home rentals. Of that, only a small percentage is in institutional hands. Note that in several G20 countries, a very large portion of the housing stock is in institutional hands. It seems there’s plenty of headroom for this industry to grow here at home.
Continue Reading Single-Family Rental: The Landscape and Future of CRE’s Newest Asset Class

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.