Tough Times for Lenders : Financial Services Lawyer & Attorney : Winstead Law Firm : Finance, Banking, Bankruptcy

Last Tuesday (Feb 2), the ALTA Board of Governors met to review and discuss the creditor rights issue in light of various recent court rulings.

The outcome is no surprise: they voted (unanimously) to withdraw and de-certify the ALTA 21 endorsement (commonly referred to as creditors' rights coverage).  This change will be effective on March 8th.

Briefly, this endorsement removes creditors rights issues from coverage of the policy – such as fraudulent preferential transfers.

We've addressed the ALTA 21 as part of your file review process (link)

As you might suspect, money is the root of this decision.  The title insurance industry has been experiencing significant losses through this endorsement (although it is not available in all states - for example, it is not available in Texas).  Many underwriters had begun to decline to give this endorsement, or were imposing onerous conditions to issuing the endorsement.  And it was beginning to increase premium rates.

I agree with ALTA's decision.  The financial viability of the company covered by the endorsement is NOT a title record matter that the title insurer can protect itself against through examination.  Indeed, it was a business decision or risk, and of a nature that the lender should independently assess and address.  Why should a lender depend upon another party to assess the financial viability of a party to a transaction?  Isn't the lender ultimately responsible for this underwriting risk? Do we really want lenders to lay-off that assessment to a title company?  And if it is duplicate or "belts and suspenders" to the lender's process and assessment, it is an additional cost that we want to load up on to a transaction?

At least one very, very significant lending client of ours sees it the same way: one of the largest apartment lenders will NO longer require the ALTA 21.

• are other lenders taking this same approach?

No doubt, this approach will be adopted by non-ALTA jurisdictions.

Please post your information, questions or comments below.

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(This is the last in a series covering the MBA-CREF convention.  In contrast to the first two days [link Day 1] [link Day 2] and our convention "preview" [link], this last posting focuses on the two polar extremes of the convention, and the industry.)

For Chris Nixon [link to bio] and myself, day 3 of the MBA-CREF convention (yesterday, Weds.) was filled with meetings with significant industry players from two distinct groups: special servicing and life insurance companies.

We listened for the answer to one specific question from each group, which for us (and perhaps for you) is “the” question.

• Special servicing: what tips or advice can you give a borrower in 2010?
• Life insurance company: will your loan allocations differ from your 2009 performance? (Read: will we see any “improvement” over 2009?)

Here is our summary of the answers given to us.

Special Servicing Tips

Not surprisingly, the tips were very similar to those articulated at the recent CMSA January Conference [link to 2nd day posting].    However, we heard enough “new” or different answers to craft an expanded list of tips.

True, the answers vary depending upon the particular servicer, the project, the carveout sponsor, the tenants, etc.

But putting it all together, here are the tips:

Do This:

• be nice
• send all information in; be open and transparent
• sign a pre-negotiations agreement
• keep paying cash flow
• have a reasonable, cogent plan BEFORE you contact the lender or servicer (show us that you are in a good city\market, with good tenants, good DSC, etc.) 
• show up with $ (to right size the loan) when you ask for a debt restructure
• default with dignity (i.e., have a "real" default and then be truthful)

Do NOT Do This:

• tell lender or servicer that you're "partners"
• show up with a sham balance sheet
• stiff or abuse your other lenders and the expect us to expect otherwise
• tell lender or servicer that you're a good borrower
• "fish" for information or for terms of a plan that will be acceptable
• cry
• hold lender or servicer hostage
• ask for any of the cash flow (nor a cash flow mortgage)
• fly in on a private jet
• offer a bribe
• rob Peter to pay Paul
• launch off on a religious sermon (caveat: "the special servicer knows that it is going to Hell – every day is Hell")
• ask for any return on the new equity infusion made in borrower 

(For our other postings on CMBS special servicing, use the “search” function on the right side – and search terms such as “special servicing.’)

Life Company Loan Allocations for 2010 (& comparison to 2009)

The message generally was consistent from all our life insurance company contacts:

• in 2009, roughly 30%-45% of the allocation was utilized to refinance the “best” loans\relationships in the portfolio
• in 2009, not all of the allocation was utilized . . .
• but since corporate spread have dramatically dropped in the last 6 months, mortgages are a relative good investment; so . . . 
• there is hope that the mortgage allocation will be fully funded in 2010 . . .
• however, probably the same percentage of the allocation (30%-45%) will be utilized to refinance the “best” loans\relationships in the portfolio . . .
• and, the allocation amount is not near the level seen during recent years
• the limited funds available for new loans will target the narrow bandwidth of the best projects and sponsors (high Debt Service Coverage or DSC; good Loan to Value or LTV; good balance sheet of the sponsor; good tenants; good market position; etc.)
• since large loans to single-sponsor borrowers (and not multiple loans to different sponsors) typically fit this narrow bandwidth, 2010 could be the year of the large loan for many life insurance companies

Add all of this up, and it is clear that with a muted allocation amount and the commitment to utilize a significant part of it to refinance the current portfolio, the total amount of credit available for 2010 from life companies is small (relative to demand). 

The story here reminds me of the message from the CMSA January Conference: the recent CMBS issuances are good news for Wall Street but “no” news (i.e., no help) for Main Street.

The same should be said of the Life Insurance Company mortgage loan allocations: it sounds good, but really?

So, the message from both the CMBS Conference and the MBA-CREF Convention sync very nicely. (As predicted in my earlier posting?) [link]

If the mantra during the ‘90s and ‘00s was “other people’s money” (or “commercial subprime”), the mantra for the new economy is “show me the hard equity” (or “real money for real people”).

Yes, we’re returning to real estate fundamentals.

And since a large percentage of CRE is over-leveraged (a condition that I call "subprime commercial"), we circle back to the tips on special servicing . . .

If you see it differently, or have something to add, please post a comment below.

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 One take-away for me from the second day of the convention is this: while the three different perspectives (below) point to 2010 being a better or different year than 2009, it will be far from “normal” (when compared to 1994-2004).

The Mortgage Banker: relieved

The general sense or mood of the mortgage bankers is that 2010 will be much, much, better than the train wreck of 2009 – a year of almost no new financings closed. Finally, some mortgage production. And a sense that “we made it.” And thankful for the possibility of having some meaningful work.

The Life Company Lender: guarded

On the other hand, the message from the life company lenders is that since corporate spreads are so low (when compared to the spreads of a year ago), they will be lending this year.  Their target, however, is the best borrowers and on the best property (with great DSC, LTV, etc.). And they admit that some percentage of their 2010 loan origination will be devoted to refinancing (extending) loans currently in their portfolio.

The MBA Staffer: focused on the Hill

The MBA is focused on better serving its members, as evidenced by a reorganization of its committees into various “councils” centered on its membership. But more importantly, it is focused on the US Congress and the Obama Administration.

It seems that the discussion in almost every panel returns to public policy, or financial reform.

Take a look at the MBA’s 2010 public policy priorities:

• Financial crisis responsibility fee
• Risk retention (“CMBS 2.0”)
• REMIC rule reform (“CMBS 2.0”)
• Rating agency reform (“CMBS 2.0”)
• Risk-based capital for CMBS under FAS 166 & 167 ("CMBS 2.0")
• TALF CMBS extension
• FDIC legacy loan program
• GSE restructuring (the “new” Freddie & Fannie Mae)
• FHA modernization
• FHA multi-family loan limits
• Low Income Housing Tax Credit
• Funding for rental assistance
• Life Insurance Company risk-based capital
• Covered Bonds
• Carried interest

NOT a short list!

The “real” focus on the MBA is as it should be – on the Hill. Unfortunately, the mid-term Congressional elections effectively will inhibit the passage of new legislation starting this August. So, the window for addressing these priorities is quickly closing.

The next time you hear the phrase “financial reform,” think of this long list – and the August finish line.

My Bottom Line: low expectations

No doubt, a lasting recovery for the credit market will hinge on jobs and consumer confidence.

However, just looking at the long, long, long list of public policy priorities tells me that we are a couple of years away from returning to the new “normal” – effectuating changes like this will take time. My prediction is that only a few items on this list will be realized in 2010.

Seriously, does that look like a “quick fix” list to you?

If you have any questions or comments, or your own perspective, please post a comment.

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Unlike the CMSA January Conference (where the primary focus is on addressing substantive issues) [link], the MBA-CREF convention has a primary focus on relationships: mortgage bankers meet with lenders; and lenders meet with mortgage bankers.

However, the MBA does offer some very interesting Committee and Council meetings, where substantive issues are discussed.

But make no mistake about this: the focus is on the meetings.

Any way, here are my notes from two committee and council meetings that I found particularly interesting today: the Public Policy Committee; and the Investor & Originator Council.

As a general proposition, the general "atmosphere" is much, much more optimistic than the atmosphere at the CMSA January Conference.

Maybe the credit markets have radically changed in two weeks.  (Or not.)

Public Policy Committee

• Legislative climate: bad. "Hostile environment" for lenders.  Lenders are "demonized" by the administration. No one wants to help Financial Services sector. With this background, here are MBA priorities: financial reform (big issue for CRE: risk retention provision - skin in the game; MBA try exempt multi-family & CRE); FHA role & mission (housing finance system); future of Freddie & Fannie (altho only briefly mentioned in comments to the proposed budget). Revenue raising tax issues are important to the Administration.
• Financial reform: House bill passed. Action now in the Senate. Bi-partisan working groups at work in Senate since November. Senator Dodd is not under political pressure due to his announcement that he will not run for re-election. Risk retention is focus of MBA. Calendar constrained because no hope for bills after August (due to mid-term elections). Plus other regulator reform happening, such as the "Voelker bill" (which will severely restrict the activities of banks).
• Need specifics on Administration's proposal to fund $30bill for community banks
• The MBA has a long, long list of regulatory and legislative items
• GSE: part of restructure of housing finance system; no "hard" direction from administration; the unlimited funding of Freddie & Fannie (per the Dec 10 announcement) will not continue forever
• MBA will formally oppose the fee on regulated institutions (but caveat: no one loves bankers)

Investor & Originator Council

At the beginning of this meeting, the MBA's economist (Jamie Woodwell) discussed the MBA's 4thQ data (to be released on Tuesday, 2/2); CRE loan originations up 12% on average; caution - comparing to a low level (in 2008); CRE originations still at low volume; maturity volume survey - 13% of non-bank will mature in '10 and 7% in '11 (highest product is variable rate CMBS); all to be on MBA's website.

Next, a panel of speakers gave their perspectives on the following:

• Buzz in market - things are getting better; what is your origination prediction for '10? Life Cos have almost normal funds (and spreads a good relative to corp bonds), but conservative underwriting will limit production volume; wild card is employment numbers
• Trends in last 90 days: sentiment in market is improved, w/ people wanting to invest; but challenged by worsening CRE fundamentals; tale of two cities (intense competition for best deals and no $ for bad deals); several big banks have approval to take loan applications for multi-borrower loans for CMBS pools (but same challenge - the same tale of two cities); strong investor demand for GSE bonds (a lot of capital looking for a home); need to see job growth in order for lenders to believe rents have stabilize
• Risk of double dip in '11: due to foreclosed properties hitting the market; at same time, some properties will attract investors if in good location or unique replacement cost (high quality asset); one panel member did not believe in "double dip" theory; good, performing loans are being sold at close/at par
• Will rising employment save the "kick the can" lenders? Banks need to see an accruing loan, and thus A/B note structures will be attractive; but this will take time to implement
• Rush to fix CRE is not the best strategy; lenders are taking the right approach in extending & restructuring (charge off the new B Note); average loss on foreclosure is 2x loss following smart restructure (if B motivated & doing the right thing, and a performing loan will be in place); however, this approach will affect price uncertainty; but lenders will foreclose (if B can not cure a $ default) and are motivated to sell REO
• Risk Based Capital for life insurance companies: regulators have given concessions and are working for a long-term solution
• FDIC: maybe considering keeping assets and working them out - as opposed to taking the "RTC" approach (from the late '80s)

This is a very different crowd, with a much more optimistic attitude, than the attendees at the CMSA January Conference.

If you have any comments, please post them below.

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Standard & Poors is having a half day "Leverage Credit and Recovery Conference" on February 25 in NYC.  In S&P's announcement of the conference, they summarize their 2010 outlook for leveraged credit: 

It is Standard & Poor's view that, at the outset of 2010, speculative grade corporate credits present a mixed picture. Although market prices for both bonds and loans have recovered from their record lows at the end of 2008 and beginning of 2009, we believe that credit risk remains a challenge. Borrowers face ongoing refinancing requirements and continue to concentrate at the lower end of the rating distribution at 'B' and 'CCC'. Ongoing growth in topline revenues and cash flow required for debt service remain elusive for many borrowers.
 

S&P definitely has at best a "guarded" outlook for corporate credit in 2010.

As to commercial mortgages, Chris Nixon and I are in Las Vegas for the Mortgage Bankers Association - Commercial Real Estate Finance convention. [link to conference book] 

We'll see if the MBA has the same view of the CRE Capital Markets as we heard at the CMSA January Conference.  [link to our 2nd day posting]

This I know already: our life insurance company contacts and mortgage banker contacts are sending fewer people to this event than last year, and have planned fewer, and much more "muted" parties and events.

Stay tuned over the next few days for our reports from Vegas.

If you have a particular comment, or question, for us to investigate as we attend the MBA-CREF conference, please post a comment.

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Each year, several of us write a news alert covering the "hot" legal topics for commercial real estate finance, with a focus on the prior year.  Here's the news alert we did for 2004 [download it]

Wow, reading this old piece is a slap on the face.

What a mistake on our part.

The "story" is NOT what we (lawyers) think it is.  Our thoughts might be good guesses; but they remain guesses.

As I wrote for you here at ToughTimes during the last 16 months, I've learned that you will show me the topics that interest you the most. 

Sure, you won't show me by posting in the "comment" box below.  Instead, you'll vote by reading what interests you.

So, the list below is your story for 2009.  These are the blog posts that were most highly read by followers of Tough Times in 2009.

It is a very interesting story.

TOP 10 TOPICS AT TOUGHTIMES:

(Links to the posting are furnished - but be sure to "click" on links to earlier posts in a series.)

#1 New Federal Foreclosure Law Gives Residential Tenants 90 Days to Vacate (link)

#2 Lender Liability Returns: Sample Cases and Situations (link)

#3 Lender’s Top Frequently Asked Questions (link)

#4 Key Differences Between CMBS Loans & Portfolio Loans in the Loan Default Scenario (link)

#5 Uncertain Waters: Scorecard on the CMBS Market (link)

#6 Evaluating Material Adverse Change (MAC) Clauses in the Loan Default Context (link)

#7 Steering Through CMBS Waters: A Primer for Troubled Loans (link)

#8 SARE Cases Causing Big Stir in Bankruptcy Courts (link)

#9 Ticking Sound: Review Your Title Insurance - A Quick Checklist (link)

#10 More on That Ticking Sound: Don’t Forget to Obtain or Verify Insurance Coverage (link)

If clicking these links is just too much for you, here is a PDF collecting all of these blog posts - and bundled as our "2009 Year in Review." [download]

Lesson learned: it is about YOU.

If you have a favorite posting, please tell us about it below.

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Commentators note that one great attribute of the Internet, and the communities formed within and around it, is this: when someone wanders off (or climbs on a ledge), the community does a good job of nudging each other back to the group.

Yes, I was a little disappointed (OK, even upset) at the lack of focus by the CMSA on covered bonds at the January conference (see my comment regarding the session called "Lessons From CMBS 1.0").

However, my friends at the Covered Bond Investor (link) correctly note that the Mortgage Bankers Association lists covered bonds as part of "legislation among the organization's legislative and regulatory priorities for 2010."  (posting on the MBA list)

My sense, however, is that covered bonds will NOT be a near-term reality. 

But thank you, Covered Bond Investor, for talking me off the ledge.

If you have an interest in covered bonds, visit the Covered Bond Investor.

And if you have any questions or comments for me, please post them below. 

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As noted in my lengthy postings summarizing the recent 2010 CMSA January Conference in DC [Day 1 link; Day 2 link], over 1,000 commercial real estate professionals attended the conference – roughly 2X more than expected.

Why this unexpected attendance? Answer: All of us are looking for answers amidst the continuing liquidity problems in the CRE Capital Markets. This topic was the sole focus at this conference.  (And it even shows in the number of people "visiting" TTL blog since the Tuesday [Day 1] posting: we show over 1,000 total "hits", of which over 550 are "unique", as of this blog posting.)

 I've received feedback asking for a summary covering a specified set of topics from the two (much, much longer) blogs covering days 1 and 2.  (Keep that feedback coming!)

So, here is that subset of information from the 2010 CMSA January Conference:

INVESTORS FORUM

This forum is for a broad band of CRE debt investors (such as B note holders, mezzanine lenders).

The meeting time was devoted to a survey of the 250+ people in the room. Here are some of the responses: 

• 45% of the voters believe that CRE values will continue to fall in 2010 with no recovery in CRE values until 2011 (this fall is in addition to the 44% fall from 2007 CRE pricing)
• with respect to the 2005-2008 CMBS pools, 37% of the voters believe that the average losses will be in the 11%-15% range (these loses will wipe out bond holder through the "AJ" class)
• 43% of the voters believe that for CMBS loans liquidated in 2010, the average loss severity will be 40%-50% (and 27% believe that the average loss severity will be 50%-60%)
• 69% of the voters believe that annual new CMBS issuances will not exceed $100B until 2013
• for new CMBS issuances in 2010: 50% of the voters believe that issuances will be single borrower transactions; and 33% of the voters believe that issuances will be multi-borrower and large loan structures (with only a few assets); and
• 58% of the voters believe that "old-school" multi-borrower, fixed rate deals will return no sooner than 2012 (or later)

REAL ESTATE FUNDAMENTALS: "THE FACTS OF LIFE"

If the focus on "CMBS 2.0" (which is the "hot" phrase used to describe the "new" CMBS model and market) is a bit too out of touch for me, this session just hammered on the current picture of the CRE market:

• unemployment at historical highs (and still rising)
• retail sales still stumbling
• consumer confidence falling
• "asking" commercial rents falling
• commercial leasing activity (absorption) falling
• CRE sales activity: stagnant
• CRE values -43% from the high in 2007
• huge amount of CRE loan maturities over the next three years, with inadequate sources of credit to pay-off those maturities
• huge shortfall in CRE equity (such that it will not fill gap between the credit available and the looming CRE maturities)
• over 75 funds have been formed to buy distressed CRE debt and properties; but little it has been deployed
• very little CRE has been "re-priced" or "re-set" by lenders or servicers foreclosing or disposing of assets
• we're still early in the CRE recover (perhaps only 25% into the process!) (One interesting comment: remember that valuation adjustment occurs early in the CRE recovery process; so we might be 75%-90% into the valuation adjustment process.)
• importantly: no one on the panel, nor else where in the room, foresees an implementation by the Government of an "RTC style" approach (where the Federal government quickly closes large numbers of banks and thrifts, and then quickly sells the loans and assets at steep discounts – resulting in a "harsh pain" but quick re-pricing of CRE
• unlike the late 80s & early 90s: this time there is no new industry (such at technology) to lead the recovery by increasing employment

BORROWER PANEL: "SURVIVOR"

This panel focused on "how" a borrower could make it through until CRE liquidity returns.

The panel has some advice for borrowers:

• show up with $ if you want to restructure your debt
• if you're in a good city, with good tenants and with DSC (get it?
• Use $ to right-size the loan), then you'll probably survive

It was interesting that while reference was made to splitting up a CMBS loan into an A Note (with good DSC & LTV) and a B Note (representing the "bad" part of the original loan), no one gave any details on the structure (such as the terms of the B Note, the proceeds waterfall between the lender [under the B Note] and the "new" equity [that injected capital needed, in part, to right-size the Note A], the rate of return on the new equity, etc.)

SURVEILLANCE & WORKOUTS: "LET'S MAKE A DEAL'

This panel didn't give any real guidance on terms of workouts, other than to list some basic rules of the game:

Do This:

• be nice
• send all information in; be open and transparent
• sign a pre-negotiations agreement
• keep paying cash flow
• have a reasonable, cogent plan BEFORE you contact the lender or servicer

Do NOT Do This:

• tell lender or servicer that you're "partners"
• tell lender or servicer that you're a good borrower
• "fish" for information or for terms of a plan that will be acceptable
• cry
• hold lender or servicer hostage
• ask for any of the cash flow (nor a cash flow mortgage)
• fly in on a private jet
• offer a bribe
• rob Peter to pay Paul
• launch off on a religious sermon (caveat: "the special servicer knows that it is going to Hell – every day is Hell")
• ask for any return on the new equity infusion made in borrower

It was an interesting day. Much like our experience in Munich – very little clapping at the end of any session (yes, it reminded me a little of the sessions at the EU conference that we attended in October 2008) [link]

In a future posting, I'll cover comments made to us by several elected and appointed Federal officials.

If you have any questions, comments or observations, please post them below.

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(When we attend industry conferences, we bring you along by blogging on topics of interest to us, with our comments as a bonus. This is the second in a series of posting relating to, and from, the 2010 CMSA January Conference. [Link to Day 1] Our blogs on other conferences are found [i] under the "Market Trends" category in the archives on the right side of the page, or [ii] by a word or phrase search on the right side of the page [suggested search terms: looking glass; scorecard; pond].)

Technology Tip: darn, this American Airlines flight does NOT have GoGo Inflight Wi-Fi. I hate this. So, I'm forced to type this in Word, and then post it tomorrow morning from home. 

However, here's a tip on "how" I organize all of my passwords and PINs, including my password for GoGo:

- create a separate Contact card in Outlook for each website, frequent flyer\use membership, etc.; include the applicable website on the card

- be sure to password "protect" your phone\PDA (tip: use a password combination that you can enter with one hand, so that you can leave your other hand free)

Now, on to Day 2 . . .

Day 2 is the last day of the conference. It has a different feel than day one, in part because the crowd is significantly larger.

I've been told that when the CMSA planned this 2010 event, they anticipated @ 500 people would register for the conference. Whether is was the pain of an uneventful 2009 (read: no CRE money for no one), or simply wanting to be told that 2010 would be better (read: CRE money for someone . . . please), today it felt like every one of the registered 1,000 attendees crowded into the basement ballroom floor of the JW Marriott Hotel.

Yes, we're literally all "in this cramped CRE space together."

Today the program focused on different points of the CRE space, with appearances and comments by two members of the US House and by the Chairman of the FDIC. This posting will summarize the substantive items.

The comments by the elected and appointed officials will be included in a post later this week (or this weekend - I have to get caught up at "real" work).

Here are the highlights (with some commentary, of course) from the last session on Day 1 and several Sessions from Day 2.

LESSONS FROM CMBS 1.0: "THE WONDER YEARS"

Frankly, calling the "old" CMBS market\model "1.0" and then labeling the soon-to-come, "rejuvenated" CMBS market\model "2.0" strikes me as being very, very hopeful. From my perspective, CMBS 2.0 better be strikingly different and improved over CMBS 1.0. (Indeed, why are we so married to the CMBS model? As an Air Force brat, it strikes me as if we're focusing on making the bi-plane better.) And CMBS 2.0 better arrive quickly and with billions of Dollars. (Warning: 2.0 is no "CMBSuperman.")

Time will tell, of course.

But if the comments at this conference are correct:

• CMBS 2.0 will not arrive quickly
• 2.0 will not be the "proceeds party" that characterized CMBS 1.0, and
• 2.0 will not come close to bringing the liquidity needed to refi the huge amount of near-term loan maturities.

One panelist gave a very good description of the collateral damage to the CRE finance market caused by pushing CMBS 1.0 to the limits:

• Wall Street's intervention (or commodization) of CRE finance brought an incredible amount of liquidity to CRE
• Utilizing the CDO structure in the CRE space was a logical, yet terribly short-sighted mistake in that it effectively separated (or "de-linked" the unique credit risk inherent in CRE from the investment decision
• The liquidity party quickly spread across the CRE finance spectrum
• Wall Street underwriting, downward rate pressure, increase in proceeds and complicated credit "stack" structures quickly captured a significant share of credit extended to improved CRE, and in doing so, forced regional and community banks to change the focus of their CRE lending away from income producing CRE and into construction loans, builder lines of credit, land development loans and raw land loans.
• CMBS 1.0 was characterized by: (1) no future exposure by the loan originator and too many loan originators placed loans with other people's money (Comment: I call this the "merchant lender" mentality – 'if you lend it, someone will buy it'); (2) it did NOT adequately address the current "shut down" scenario (for example, the investment grade investor is given too little "control").
• Some of the lessons learned from CMBS 1.0, and perhaps early characteristics of CMBS 2.0:
  • the B-piece needs to be larger (for meaningful "skin in the game") or even structured out of the deal by having a mezzanine strips in place of a B-piece (the Inland Retail deal is an example of this);
  • the special servicer needs to be independent, or some other mechanism put in place to give the investment grade investor some assurance of impartiality by the special servicer, or the ability to have meaningful input on special servicer decisions;
  • limit the number of investment classes (for example, the DDR, Flagler & Inland Retail issuances in late '09 only have a handful of bond holder classes);
  • single purpose entity (SPE) changes in response to the GGP case; and
  • FINALLY, someone mentioned covered bonds [link to prior posting on covered bonds] – I find it very, very interesting that this comment was quickly brushed aside, as if the covered bond product was irrelevant. (So, if it is irrelevant, then "why" did a former President of the CMSA testify on the Hill in support of the product? Is the CMSA simply focusing on the near term revival of the CMBS market?  What about a long-term fix or better model?)

REAL ESTATE FUNDAMENTALS: "THE FACTS OF LIFE"

If the focus on 2.0 is a bit too out of touch for me, this session just hammered on the current picture of the CRE market:

• unemployment at historical highs (and still rising)
• retail sales still stumbling
• consumer confidence falling
• "asking" commercial rents falling
• commercial leasing activity (absorption) falling
• CRE sales activity: stagnant
• CRE values -43% from the high in 2007
• huge amount of CRE loan maturities over the next three years, with inadequate sources of credit to pay-off those maturities
• huge shortfall in CRE equity (such that it will not fill gap between the credit available and the looming CRE maturities)
• over 75 funds have been formed to buy distressed CRE debt and properties; but little it has been deployed
• very little CRE has been "re-priced" or "re-set" by lenders or servicers foreclosing or disposing of assets
• we're still early in the CRE recover (perhaps only 25% into the process!) (One interesting comment: remember that valuation adjustment occurs early in the CRE recovery process; so we might be 75%-90% into the valuation adjustment process.)
• importantly: no one on the panel, nor else where in the room, foresees an implementation by the Government of an "RTC style" approach (where the Federal government quickly closes large numbers of banks and thrifts, and then quickly sells the loans and assets at steep discounts – resulting in a "harsh pain" but quick re-pricing of CRE
• unlike the late 80s & early 90s: this time there is no new industry (such at technology) to lead the recovery by increasing employment

The audience was very quiet during this session.

BORROWER PANEL: "SURVIVOR"

This panel focused on "how" a borrower could make it through until CRE liquidity returns.

The panel has some advice for borrowers:

• show up with $ if you want to restructure your debt
• if you're in a good city, with good tenants and with DSC (get it?
• Use $ to right-size the loan), then you'll probably survive

It was interesting that while reference was made to splitting up a CMBS loan into an A Note (with good DSC & LTV) and a B Note (representing the "bad" part of the original loan), no one gave any details on the structure (such as the terms of the B Note, the proceeds waterfall between the lender [under the B Note] and the "new" equity [that injected capital needed, in part, to right-size the Note A], the rate of return on the new equity, etc.)

SURVEILLANCE & WORKOUTS: "LET'S MAKE A DEAL'

This panel didn't give any real guidance on terms of workouts, other than to list some basic rules of the game:

Do This:

• be nice
• send all information in; be open and transparent
• sign a pre-negotiations agreement
• keep paying cash flow
• have a reasonable, cogent plan BEFORE you contact the lender or servicer

Do NOT Do This:

• tell lender or servicer that you're "partners"
• tell lender or servicer that you're a good borrower
• "fish" for information or for terms of a plan that will be acceptable
• cry
• hold lender or servicer hostage
• ask for any of the cash flow (nor a cash flow mortgage)
• fly in on a private jet
• offer a bribe
• rob Peter to pay Paul
• launch off on a religious sermon (caveat: "the special servicer knows that it is going to Hell – every day is Hell")
• ask for any return on the new equity infusion made in borrower

It was an interesting day. Much like our experience in Munich – very little clapping at the end of any session (yes, it reminded me a little of the sessions at the EU conference that we attended in October 2008) [link]

In a future posting, I'll cover comments made to us by several elected and appointed Federal officials.

If you have any questions or comments, please post your comment below.

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