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

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More on my series commenting on the CMBS loan market and the broader capital markets for commercial real estate . . . .

Previously, we've brought to your attention a type of commercial real estate debt structure that HAS worked in the EU (for hundreds of years), and it HAS been tried at least twice in the U.S.  [link to prior posting]

It is called a "covered bond." 

Click here:  Wikipedia has a good description of it .

Covered bonds offer the best hope for improving the current capital grid lock, which has the commercial real estate market on its knees.  Covered bonds will be an important piece of the credit stack for the U.S. commercial mortgage market.  It will help the commercial real estate market recover.

We've meet with a EU bank that handles this product (during our trip to the EU in 2008) and we've closely followed this important topic since the then.  So, stay tuned.  We'll write more on it.

All that you need to know right now is that covered bonds are similar to CMBS pools, with this important difference: the issuer (read: the original lender) retains some risk on the performance of the pool.  This means that the issuer services the individual loans and literally cares for the loans—yes, this is the "retained risk" phrase that you'll start to read about.  For example, when a loan in a mortgage bond pool goes "bad," the issuer can swap out the "bad" loan with a "good" loan.  (What an idea!)  Sure, there are hurdles to this concept in the U.S., including probably amending the U.S. Bankruptcy Code.  And the public probably is in no mood to do that right now.  But as the real estate "recession" extends into 2010 and beyond, the time will come . . . .

 . . . maybe sooner than later.

A recent announcement from the CMSA (Commercial Mortgage Securities Association Web site) got me going today on this topic - tomorrow the U.S. House Financial Services Committee will hold a hearing entitled "Covered Bonds: Prospects for a U.S. Market Going Forward."  Here is the CMSA announcement:

"CMSA Executive Committee Member and immediate past president Christopher Hoeffel will testify before the full House Financial Services Committee on Tuesday, December 15 at 10:00 a.m. ET. The hearing, “Covered Bonds: Prospects for a U.S. Market Going Forward,” will provide a forum to discuss how such a market could be structured in light of current changes and the recovery efforts occurring within the financial markets.  For its part, CMSA supports efforts by policymakers to facilitate a U.S. commercial covered bond market in order to provide an additional source of liquidity through new and diverse funding sources, and the association continues to advocate for the inclusion of commercial mortgages in a covered bond market.  Mr. Hoeffel’s remarks and the hearing itself can be watched live through the House Financial Services Committee’s video sever shortly before the 10:00 a.m. ET start-time December 15."

IF Congress and IF the American public can stomach including covered bonds as part of the financial reforms, then the commercial real estate market will finally have some capital relief.

There is hope.

If you have thoughts, comments, questions or resources covering covered bonds, please post a comment.