Securitization

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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)

Or maybe not.  At the outset, let’s give credit where credit is due.  It was gratifying to read a governmental missive on the capital markets that made sense, showed an actual grasp of how markets function and an awareness of the issues confronting capital formation.  Best damn thing I ever read coming out of the swamp.

The Treasury Report on the capital markets published in early October is indeed pretty fantastic stuff.  The Report covers the Treasury’s recommendation on re-centering many of the rules around the capital markets over a wide range of regulatory issues important to securitization and capital formation.

Let’s focus on the provisions in this Report that are central to securitization.

These can be summarized as follows:

  • There should be one agency with the responsibility for the Risk Retention Rule and we should dispense with the committee-of-committee that’s been running the clown car for the past couple of years. The old saw that “a camel is a horse built by a committee” is certainly proven by the risk retention experience.
  • Regulatory bank capital requirements treat investment in non-agency securitized instruments punitively.
  • Regulatory liquidity standards unfairly discriminate against securitized products.
  • Sponsor risk retention as set out in the Risk Retention Rule represents an unnecessary cost imposed upon securitization.
  • Some of the new and improved (read: expanded) disclosure requirements under Dodd-Frank are unnecessarily burdensome.

In other words, our regulatory regime needs a certain amount of recalibration to achieve its goals of safety and soundness in the financial market place while not impeding capital formation. 
Continue Reading Treasury Report on the Capital Markets: A New Day

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

The Wall Street Journal reminded us this month that it was ten years ago, August 9, 2007, that the first regulatory domino in The Great Recession fell as BNP Paribas froze a series of resi investment funds for lack of a functioning market to value the securities. One could quibble about whether The Great Recession could be so precisely dated. Were there the blackened equivalent of green shoots earlier in the year? Did The Great Recession really only begin when the trouble in the subprime resi market morphed into all other credit markets? But that’s merely a cavil. August 9, 2007 is, for me, the date the world changed.
Continue Reading A Tale of Two Years; This Time Will Be Different

A standalone securitization of a portfolio of properties closed in June. To our knowledge, this was the first transaction in recent memory done in a direct issuance format.  In this case, direct issuance means that the sponsor organized the lender and the depositor as well as a borrower and crafted the loan between the lender and borrower, which was simultaneously closed and funded by the bond proceeds from the securitization at closing.  An additional unique feature in this transaction was that the sponsor met its obligations under the risk retention rules with a horizontal cash deposit equal to 5% of the fair value of the certificates.  More on this later.

In this annoying new world of risk retention, the direct issuance model embodied in this transaction can be a paradigm for transactions in the SASB space.
Continue Reading Direct Issuance is Here – A New Paradigm for Single Asset Single Borrower (SASB) Securitization

John Cleese, one of the great classic philosophers of the mid-twentieth century, made that inauspicious (from the perspective of the Shop Keeper) observation, “This parrot is dead!”  To which Michael Palin responded that it was merely resting.  (It’s better in drag and with the East Ender accent, but you get the idea.)

The Parrot skit [I wish I could link you to YouTube here, it is really very funny, but the damn lawyers here won’t let me.] came to mind recently as I attempted to negotiate yet another Third Party Purchaser (TPP) Agreement in risk retention land.  As everyone knows and is heartily sick of hearing, all securitization transactions now require the sponsor, or in commercial real estate deals, a third party purchaser, to hold risk retention securities in accordance with the breathtakingly vacuous Risk Retention Rule.  At Dechert, we did one of the pre-effective date pretend risk retention deals and, our TPP agreement was a weighty six pages long.  Since the Rule became real, TPP agreements have metastasized into much longer, more complex documents raising numerous dauntingly trying questions.

I have begun to wonder whether the risk retention TPP agreement is already near its death bed just some brief months following its birth.Continue Reading Monty Python Dead Parrot? Risk Retention and the Third Party Purchaser

This is all about the difficulty of taking the punch bowl away from a roaring good party. Over the past several weeks a number of major banks folded under enormous pressure from the US DOJ to settle fraud claims resulting from the sale of bonds prior to the financial crisis of 2008. The allegations here were that, as they have been in many many cases over the past several years, the banks knowingly sold bonds backed by crappy residential mortgage loans. Apparently, no one else had a clue that this stuff was crap! Who knew? These last suite of deals were relative bargains for the banks because, reportedly, the DOJ was highly motivated to get these deals done before Mr. Trump took the helm at the White House.

For some reason this calmed investors’ concerns.

I don’t get it.
Continue Reading Hey Guys, Let’s Sue a Financial Institution! Our Government at Play

I’d like everyone to go out and buy a copy of Professor Paul Mahoney’s slender new book, Wasting a Crisis – Why Securities Regulation Fails.  Paul is a brilliant guy.  Until this spring, he was the dean of the University of Virginia School of Law where he is the David and Mary Harrison Distinguished Professor of Law and the Arnold H. Leon Professor of Law, teaching securities laws.  This is a great book and an important read.  Paul argues cogently that:
Continue Reading Why Regulation Fails

For the past year or so, Dechert has been keeping a close eye on the marketplace lending industry and the tension between innovation, which portends the development of an entirely new non-banking financial space, and the instinctual reaction of the regulatory state to resist and restrict innovation. Earlier this summer, we published an OnPoint providing a comprehensive review of recent hurdles and developments affecting the marketplace lending industry, including the potentially far-reaching Madden v. Midland Funding case from the Second Circuit. The Supreme Court has now denied cert in the case and so the Second Circuit’s decision will stand.
Continue Reading The Marketplace Lending Industry Sneezes and Securitization Catches a Cold – Bad Law in the Madden Decision

And now to return to our commentary a few weeks back about the stultifying impact of ill-thought through rules and regulations (at best) (Brexit has intervened).  This is our Regulatory State which broadly attempted to pick winners and losers and modify market behavior, to get an engineered outcome by using the blunderbuss of proscriptive rules and regulation.
Continue Reading A Trip Through the Labyrinth – The Regulatory Man in Full