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

Recall that on July 28, the US House of Representatives Financial Services Committee approved H.R. 5823, the “United States Covered Bond Act of 2010,” which now is on the floor of the House for a vote (but not yet scheduled for a vote). This means that legislation on covered bonds (H.R. 5823) is currently eligible for further consideration and a possible vote by the full House of Representatives in this Congressional term.

My perspective is that covered bonds will be an important and fundamental product for the much-needed, “new middle-tier” CREF lender position on the finance spectrum, as described by me in anther posting (see my “call” for this new group of lenders).

I've offered up at least 5 reasons “why” covered bonds are a viable structure and an important product for bringing liquidity into the commercial real estate market.

So, how can you “follow” H.R. 5823 and if passed into law, will banking regulations need to be changed?

How To “Follow” H.R. 5823?

The Internet and my favorite technology tool (Google Reader) make it easy to follow the legislation and to learn about covered bonds. Here are my suggestions:

• OpenCongress “collects” (or aggregates) news and blogs on H.R. 5823 at this link
• The Library of Congress tracks Bills at this link (simply search for H.R. 5823)
• Follow the Bill in your Google Reader (I give you instructions on "how" to set up Goggle Reader here)
• Closely follow sites like covered bond investor
• Purchase PLI's book on covered bonds
• Follow it here at TT4L

If Passed, Will Bank Regulations Need To Be Changed?

In addition to needing new legislation, implementing covered bonds will require change in some features of American banking regulations   The FDIC already has addressed this issue: covered bonds could affect potential recovery for the Federal Deposit Insurance Corporation (FDIC) when a bank fails. In 2008, the FDIC issued Financial Institution Letter (FIL)  FIL 73-2008, which clarified its obligations to the holders of covered bonds if an FDIC-insured institution is placed in FDIC receivership or conservatorship.  Of course, other bank regulations probably also will need to be changed.

This is the first in a series addressing covered bonds.  With H.R. 5823 out of committee, and with an economy that continues to limp along, covered bonds probably will become a reality for us.  It is time to understand them, so that we can use them as one way to lift out of these troubled times.

If you have other resources addressing covered bonds, please tell us about them below.

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On the 4th of July.  I suggested that you celebrate it by becoming more "involved" in understanding what is being called the greatest "reform" or restructure of our national economic platform since the Great Depression (remember: we're only in a "recession").

If you're following this important financial reform bill (the Dodd-Frank Wall Street Reform and Consumer Protection Act), you know that it passed the House on Wednesday, June 30 by a vote of 237-192.  You also know that three Republicans broke party ranks and voted for the bill: Joseph Cao (LA), Mike Castle (DE) and Walter Jones (NC).

How do I know this? How am I following this very, very important bill?

I'm using Google Reader to track all appearances of the phrase "Dodd-Frank" in these three information sources:

• in news accounts on the Internet (using the Google News search engine)
• in blogs on the Internet (using the Google Bog search engine)
• in twitter entries on the Internet (again, using the Google Twitter search engine)

OK, I agree: this sounds way, way "techie" and a real pain - just too many clicks and steps.

Google, however, makes it very, very easy: Google Reader automatically does all of this for me.

Consequently, it is very, very easy to track the bill's progress through Congress, and to read commentary about it.

For example, Google Reader collects these different perspectives and commentators on the bill:

• Open Left, which is a "website dedicated toward building a progressive governing majority in America"
• Deal Book on the New York Times' website, which is starting a "tour" of the sixteen titles of the Dodd-Frank bill
• Commentators such as Tyler Cowen, who give his unique assessment of various aspects of the bill (Wikipedia describes Cowen as a "libertarian bargainer")

Come on - don't you want to watch and read this great debate on this important bill?

It is so, so easy to do using Google Reader.

For step-by-step instructions (6 total steps) on "how" to do this, go to my earlier posting on using Google Reader for your lease surveillance projects.  The six steps are at the end of the blog post.

The instructions are easy.

The benefit to you will be great.

The Internet is the new knowledge bank.  Use it.

And happy 4th of July to  you!

If you have other "hot" topics that you're following, please post them below.

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This will be short, because I"m heading over to Fort Worth for the annual Texas State Bar Convention.   In the next few hours, I'll be meeting with two people who are on the "short, short" list of people that have influenced my career.  One is a Professor from England, who has influenced the entire legal profession; and the other an expert in using blogs and social networking tools, who has introduced most of the largest law firms in America to web 2.0 tools (like this blog).

Who are they?

• Kevin O'Keefe is a lawyer who now runs LexBlog.  His company, and the webinars and blog postings authored by Kevin, have taught me the value in reaching out to clients and the financial service industry using this blog, and our extranet site (that contains all of our workout papers and presentations - see the "client resources tab above).  In 2006, I became interested in blogging.  Once I discovered Kevin's service and his message, and then regularly participated in his webinars and followed his blog, then I began to understand the value proposition of web 2.0 and using this blog as a means to contribute to the financial services industry, and to establish deeper and broader relationships using this blog.  These are the reasons "why" I devote 30 minutes to an hour each day on it.
• Richard Susskind is the thought leader (yes, in the world and the known universe) on "how" technology will change the delivery of legal services and the legal profession.  His latest book is "The End of Lawyers?" - which is extremely interesting.  Richard's message furnished the foundation for my focus on using technology in new ways in my practice - including my "legal knowledge as data has value" mantra, which is behind the technology tools and approach covered by me in a recent blog posing.

In the next few days, I'll report to you on what I learned from them today.

If you have any specific questions on this, please post a comment below.

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(Blogging from or about the MBA Servicing & Technology Conference . . . .) (Day One blog) (Day Two blog)

On the first day of the conference, I had the pleasure of being on a panel with Bill Frazer (CBRE Capital Markets), Steven Bean (Situs Realty Services, Inc) and Catherine Rodewald (Prudential Mortgage Capital Company).  Each is a leader and expert in uses of technology in servicing commercial mortgage loans.

The topic of the presentation was "Using Technology to Improve the Servicing Process."  The panel was charged with (1) focusing on what’s currently working and what has revolutionized servicing and (2) addressing the changes technology has brought to the servicing sector, with a look at the technology tools that can have a dramatic impact on every step of the commercial loan servicing business for all levels of servicing - including dealing with distressed loans in special servicing.

And I was on the panel.

• What was a lawyer doing on the panel?
• How can lawyers use technology to improve the servicing process?

This topic, and variations of this question, have been a quest of mine for almost ten years.  (And yes: 99% of the time I've more closely resembled Don Quixote than Steven Jobs.)

The answers to these questions are very simple:

• Lawyers need to deliver work product using the same technology tools utilized by the client
• My role on the panel was to give this startling message to the audience, and to "show" them one of the technology tools as an example

But first, here's some important back ground on the "need" for information (even legal knowledge)as data, and the role of lawyers as "producers" and conveyors of legal knowledge as data:

• Joseph Rubin with E&Y published a white paper (@ 6 years ago) on the impact of technology on operational efficiency and profitability in the commercial mortgage finance industry.  The paper shows how better uses of technology will solve "points of pain" in loan origination\underwriting, closing and securitization.  (Comment: it is no major leap to include dealing with distressed debt in this list).  The paper is fantastic.
• The Mortgage Bankers Ass'n jumped all over these concepts and formed the Mortgage Industry Standards Maintenance Organization, which is tasked with creating "data standards" that will allow companies to seamlessly communicate or transfer data from one company to another (as "trading" partners).  The members of MISMO are a "who's who" in the mortgage lending industry.
• Like Joseph Rubin, legal and technology thought leaders (such as Richard Susskind and Mark Chandler) all point to the changes that technology will bring to the delivery of legal services to clients
• Social networking tools (like this blog and our website where we give clients access to our papers and speeches on distressed investments) now allow lawyers to share knowledge - at no charge to clients (for free access to those materials, look at the "client resources" tab at the top of this page)
• Collaboration tools (such as Microsoft SharePoint, Realworkspaces and other "deal" or document "rooms") give the business community and their lawyers the ability to easily work together (if you are a lawyer, I highly recommend this book: The Lawyers Guide to Collaboration Tools and Technology)
• All of this supports the movement toward greater transparency, which I've blogged about in the past - including a blog on the proposed SEC rule for CMBS lending ("private is the new public")

Now, back to the reason to include a lawyer on a panel with technology experts (and leaders in companies built on sophisticated technology tools) like Bill, Steven and Catherine.

My presentation to the @ 100 people in the audience was very simple:

1. Lawyers should be expected to use technology to generate legal knowledge as data - as a new legal deliverable.  We're doing this right now for a large special asset group, where we collect status reporting on foreclosures and related litigation from outside legal counsel located across the nation.  Our learning curve has been steep, but we're (finally) focusing on reporting functionality that has only a few "clicks" in it, together with a subscription service feature.
2. Lawyers should be expected to use technology as a helpful training and knowledge sharing tool.  Over and over again, General Counsel asks outside counsel for information - and at no cost.  There are numerous technology tools for this knowledge sharing.

I'm very, very excited to see "how" all of this plays out. 

Lawyers can face these changes with ignorance and fear; or jump in the fray and explore ways to use them in the same way as clients use them.

If you have you own story, please post it below.

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As I've noted in in a prior posting, the informed borrower might have some angst about using technology for the public disclosure of loan level information - although (for example) you will be amazed at the amount of information available on CoStar and other databases built by the brokerage community.

But from the perspective of the lender or servicer handling distressed loans, technology will bring solutions to some very pressing problems.

This movement to use technology to solve points of pain in commercial real estate was foretold by a great white paper written by Joseph Rubin with E&Y.  (I've had this paper since 2005 - so it is a least 6 years old.)

This paper literally opened my eyes to "how" technology will impact commercial real estate.

Once you read Rubin's white paper, you'll have a deeper understanding and appreciation of the technology and transparency movement in commercial real estate, and an understanding that the SEC's proposed rule on loan level information disclosure simply is an extension of Rubin's paper (in addition to being responsive, in part, to investor demand for more and better information).

Indeed, the  push for common data standards (or "language" where a computer can transmit data to another computer without human involvement [referred to as  "B2B"]) through MISMO is closely related to the problems, concepts and solutions articulated by Rubin in his paper.

Sure, none of this directly addresses technology uses in CMBS special servicing, bank special asset work or distressed investments, but there currently are uses of technology that address the same or similar problems and solutions covered by Rubin.  Yes, technolgy helping to solve problems.

These technology tools include:

• blogs (like this one) (training)
• on-line libraries containing papers, speeches and other materials on distressed investments (like the Winstead resource materials site [look at the "client resources" tab at the top of this page]) (training)
• legal collaboration sites, which collect or aggregate legal blogs, papers, etc. (such as LegalOnRamp and Martindale-Hubbell Connected) (training)
• on-line, restricted access sites where companies and law firms post documents and information as data (like our VistaSync tool) (document collaboration; data collection)  (Note: I'll be discussing our tool next Monday at a 4p panel presentation at the MBA Loan Servicing & Technology Conference)

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

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Rating Agencies continue to be under a microscope. Here are two recent events, and two points that should be of interest:

1. Moody’s Receives a Wells Letter
2. Information Sharing Under New SEC Rule 17g-5 Addresses Conflicts of Interest
3. Needed: Post-Employment Limitations On Rating Agency Employees Deserve Consideration; and
4. Needed: Rating Agency Focus On Loan Level Fundamentals (Using Databases)

Five year ago, would you have foreseen the following?

1.  SEC Sends Moody's A Wells Letter; Cease & Desist Coming Next? ZeroHedge reports  on the disclosure by Moody’s, in its 10-Q, that it received a “Wells Letter” on  March 18, 2010.  The 10-Q states:

“MIS [Moody's] received a ‘Wells Notice’ from the Staff of the SEC stating that the Staff is considering recommending that the Commission institute administrative and cease-and-desist proceedings against MIS in connection with MIS’s initial June 2007 application on SEC Form NRSRO to register as a nationally recognized statistical rating organization under the Credit Rating Agency Reform Act of 2006.” 

ZeroHedge notes that this could be the “end for the rating agency.”

Separately, Market Pipeline quotes other portions of the 10-Q, which read like a bad dream for Moody’s.

Wow.

The European Union already is extremely upset with the US rating agencies.  This will only add to their anger.

2.  Conflict of Interest Addressed By New SEC Information Sharing Rule (new SEC Rule 17g-5): Jim Flaherty reports on the Commercial Real Estate Finance Council's "After-Work Seminar - SEC Disclosure Requirements" covering the new SEC Rule 17g-5.  This rule is designed to address the conflict of interest that rating agencies have as a result of issuers paying for ratings. It goes into effect on June 2. Here is Jim’s summary:

“The rule requires issuers and hired rating agencies to maintain password-protected websites to share rating information with non-hired rating agencies.

Here are the rule’s objectives (as summarized by Jim):

• Increase the number of ratings for structured finance products,
• Promote issuance of unsolicited ratings and
• Reduce the ability of issuers to obtain better than warranted ratings by exerting influence over hired rating agencies.”

Jim gives a good summary of the seminar, including a summary of the presentation on Rule 17g-5 and a copy of the presentation – read his blog.

This is a great break through for those of us supporting, and working on, data standards in support of B2B information sharing in the commercial real estate industry.   It also is another example of the transparency movement.  (See my earlier posting on CMBS loan level information disclosure.)

3. Needed - Post-Employment Limitations: I suggest that this additional step be taken - just as with the restrictions placed on Federal employees, rating agency employees should face limitations on taking a job at an investment bank or any other company arranging or involved in the issuance of securities.

Is this idea under consideration?

4.  Needed - Rating Agency Focus On Loan Level Fundamentals (Using Databases).  Rating agency focus during CMBS 1.0 seemed to be on the financial structure and payment waterfall (among the bondholder class and the servicers) with  very little focus on the equally important underlying real estate fundamentals.

Am I incorrect in my belief that the rating agencies did not focus on real estate fundamentals?

My suspicion is that since so little of the loan level information (covering real estate fundamentals, such as lease issues, title issues, etc.) was in a database format, they really did NOT have the ability to focus on bedrock real estate issues.

There is an easy technology "answer" for this challenge: require the collection of loan level information as data, and the use of MISMO standards to achieve this information sharing.

Note that I experimented at collecting title, survey, lease and other legal information in a database format.  But the loan originators did not recognize the value in doing so.  Surely this will change in the near future.

If you have other observations or suggestions, please post a comment below.    

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In an earlier post, I commented on a proposed SEC rule that will require the disclosure of specific loan-level information as data, at CMBS securitization and then during the life of the CMBS pool.  In addition, the data will be needed to "support" certain certifications required to be delivered as part of the CMBS securitization process.  Also, the disclosure requirements cover both public AND private CMBS structures.  (Yes, a "private" CMBS deal must implement the same data collection [between the parties to the private deal] as implemented in a public CMBS issuance.)

Read the proposed rule: it will blow you away.

The purpose behind the rule is "transparency" - so that investors can better understand loan level information, and thus better evaluate the risk position of a possible purchase and investment in the CMBS pool.  (See my earlier posting on the CMBS investor's perspective on loan-level transparency.)  This will facilitate the marketability, trading or liquidity of the CMBS bonds, which in turn will "unlock" the CMBS market and encourage CMBS 2.0 to be launched, so that Main Street will have the much-needed capital source of Wall Street.

It makes sense.

Indeed, capitalism depends upon information, and one benefit of technology is that we can collect it and share it.  So, let's share it.

And it makes "political" sense (in an election year).

But the effect of this will be significant.

Here are my current thoughts:

• Data Standards:  collecting and sharing data among all parties to a mortgage loan is NOT a new concept.  The MBA formed the Mortgage Industry Standards Maintenance Organization (MISMO) years ago in order to facilitate sharing information in a data format, so that one computer could convey information to another - without human intervention (this is called "B2B communication").  Note that when one working group heard of the proposed SEC rule, it was called a "tectonic event" and a "tsunami" - and for good reason.  (Winstead is a member of MISMO since it is important to our on-line information service that I briefly describe below)
• This Will Change CRE - the Halo Effect: clearly, CMBS 1.0 showed us that the CMBS product did influence other CRE finance products, and we're still seeing CMBS influence those products.  For example, the wealth of information reported from the current CMBS pools has people complaining about the lack of information on bank loans and life insurance company loans.  Well, if this rule passes - and my bet is that it will pass - these complaints might not continue. Yes, CMBS has a "halo effect" in that it influences the entire market.  This data collection requirement will effect the entire CRE market.
• Private Information No More: One change will be that private will be the new public.  This means that . . . .
• Private Is the new Public:  Let's admit something - brokers already know the terms of leases in the market, and they share it with each other and with their customers.  Right? I've seen a stunning presentation of the terms of commercial lease terms covering the entire downtown of Dallas.  But why should I be surprised?  Is there really a legally protected commercial expectation of privacy?  Do leases and mortgage loan documents expressly prohibit one party from sharing contract information with others, or even with an entire market (or the public)? Will this prompt parties to add provisions prohibiting this sharing in future leases and mortgages? But will landlords and owners "fight" this request, because adding this will reduce the marketability and value of the building?  This proposed rule could really start all kinds of reactions.
• Portfolio Loans Designed To Be Securitized: Here's a new thought - even if your lending product will NOT be securitized, IF there is any chance that you will want to do so in the future, then you need to collect this data.  Portfolio loans no longer are an inland to themselves - if the lender wants to kick the loan off the island.
• Workouts and Loans to Facilitate Sales:  And the same concepts and comments apply to workouts and loans made to buyers of REO: if there is any intent or possibility that the loan will be put in a private or public CMBS pool, then information needs to be collected as data.
• Collecting Data From All Participants: one obvious result is that lender will require that vendors (title companies, appraisers, surveyors, inspectors, lawyers, etc.) furnish relevant information in a data format.  No more e-mails with "hard copy" attachments.  Instead, the vendor will be required to furnish information in a usable format - which means as data in a database.
• Role of Lawyers: this change really excites me.  I've been noodling around with - even creating- databases on all sorts of topics (lease reviews; survey reviews; entity reviews; etc.) for years, but clients simply did not have a pressing need for legal information as data.  Except in one area: risk management.  We have an on-line service that one client uses.  I'll be discussing it (maybe even doing a demo) at the MBA Loan Servicing & Technology Conference this month.  I hope to see you at the conference.
• Costly Change:  change is NOT free.  This will impose an additional cost to everyone in the data generating-sharing chain.
• Tsunami Change: I agree with those who call this rule a HUGE change for the CRE industry.  The all-important political winds are in place to push this long-anticipated change into reality.

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

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For most commercial real estate lenders and loan servicers, it is important to quickly stabilize and then promptly sell property after acquiring  title to collateral.  The typical REO (definition) business plan includes the need to move the REO off the balance sheet by selling REO in an orderly manner—after coordinating loss recognition with an increase in capital reserves, with any loss sharing agreement, etc.

The sale of REO is the stuff that all of the “opportunity” or distressed investment funds target, and have been waiting for during the last 24 months.

Those funds and investors, of course, recall the quick profits realized in the late ‘80s\early ‘90s by those who purchased properties from the government (acting through the Resolution Trust Corporation or RTC), or from failing banks and savings and loan associations.

How did the RTC quickly sell the thousands of commercial real estate properties that it owned, or the mortgages on those properties?  The RTC often held auctions.

The RTC experience proved that auctions are a good way to quickly move a lot of REO off book. 

In 2009, we worked on several CRE auctions.  For 2010, we anticipate (finally) being involved in more auctions by commercial lenders—after they  take back collateral through foreclosures and deeds in lieu of foreclosure (link to prior postings on deeds in lieu).

Auctions are back.

Auction companies come in all shapes and sizes. (Google search).  There even are specialists: DebtX focuses on loan sales using an on-line bidding process (The Debt Exchange).

While DebtX's online model has proven successful, and has been well-received by note buyers, I favor a blended approach: (i) real, “live” auctions in a local ballroom combined with (ii) online bidding.  And, of course, like a pure online model, any auction should utilize online due diligence tools.

This series will help you understand commercial real estate auctions; and how technology now plays a key role both in auctions (and during the on-going "life" of the asset).

In this series, I interview Bill Vaughan with CREAuction Group) (e-mail Bill at bill@creauctiongroup.com), an expert in commercial real estate auctions; and Mike Shanley with Realworkspaces) (e-mail Mike at mike.shanley@realworkspaces.com), an expert in online due diligence tools and electronic document storage.

Bill and Mike will educate and show us how CRE auctions in 2010 will be executed.  Parts of it will be very different from the RTC auctions of the late ‘80s & early ‘90s.  And that’s a good thing.

But before we get into the details of auctions and the role of technology in auctions, let’s take a quick look at two high-level pieces furnished to me by Bill Vaughan and Mike Shanley.

• Bill Vaughan gives us this advertisement for a December 2009 auction held by CREAuction Group.  This ad points to the importance of local, “live” auctions in your REO sales strategy. [download advertisement]
• Mike Shanley can not compete with Steve Jobs on creating a gee-wiz video of cool technology doing great things [Link to iPad announcement].  However, this picture clearly shows that using an electronic process for collecting and sharing due diligence materials results in an entirely new ecosystem—both during the auction and continuing throughout the life of the asset (i.e., the electronic file should "follow" the ownership through all stages of ownership, operations and management)

In the next posting (and series), we’ll jump into the details of auctions and how technology makes it all possible.

If you have a question, comment or war story on the topics of commercial real estate auctions and the uses of technology in it, please post a comment 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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(When we attend industry conferences and meetings, we bring you along by blogging - offering content that we find interesting, and offering our comments [with an occasional restaurant review]. This is the first in a series covering the 2010 CMSA January Conference. Our blogs on other conferences and meetings 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]).

TIPS ON USING WI-FI ON AN AIRPLANE

This is a new experience for me: creating a blog entry while I'm flying to an industry conference.  (Yes, I will receive much, much "grief" for this at my favorite law firm.  But then, if I can bring a little humor and laughter into their lonely, miserable lawyer lives . . . then mission accomplished.)

I promised to cover technology uses for lenders & servicers, and given our hectic schedules and work loads . . . writing this blog on an airplane just seems right on.  (Find other technology entries by [a] doing a word search using the "search" field located on the right side of the page, or [b] click on the "Technology" term in the archives section, located on the right side of the page.)

I typically travel on American Airlines (DFW=AA), and I use their GoGo Inflight wi-fi service all the time [link], which means every time that I'm on a plane with wi-fi, I use it.  I really, really like it.

Here are my tips on using wi-fi (or wifi) on an airplane:

• bring an extra battery for your notebook; or bring the proper electrical "plug" for the electrical connection (warning: the plug that works in your car is NOT the proper plug for use on the plane) (I know, that's another rant of mine: can't people use the same hardware? how about agreeing upon common or standard hardware?)
• the fee is very reasonable based upon this reason alone: by  "cleaning" out my e-mail while I'm in the air, I can quickly get to work (or to play) when the plane gets on the ground
• my notebook has a 15" screen; it is too big; I'd much rather travel using a smaller 13" screen; but if you have a large screen . . .
• sit on the aisle (or up-grade to first class) (yes, I up-graded for this 2.5 hour flight from Dallas to DC)
• save and save often; while I have never lost a wi-fi connection on GoGo, I'm just cautious enough to  . . . save and save often

2010 CMSA JANUARY CONFERENCE 

Now, focusing on the 2010 CMSA January Conference [website] -

This conference traditionally focuses on CMBS bondholder issues.  After all, in the past it was called the "Investor's Conference."  However, this year the focus has expanded due to the current CRE finance train wreck, which makes this conference very, very interesting - and drove over 1,000 people to pre-register for this conference.

So, with the crash of the CMBS market, the CMSA has re-invented itself - just as the CMBS market is . . . well . . . trying to re-invent itself?  I'll know more after this conference on all of this, and I'll post "what" I learn.

Of course, the central message or question for the Conference is the same riddle everyone is discussing, all across America (in the board rooms, office, cubes and 19th holes):

• What is the capital market solution, or replacement for the CMBS market? Will CMBS be tweaked, change or gutted? What is next? When is next? (HURRY!!)

The event is organized around meetings called "Forums" and topics of interest.  I'll be going to as many forums and sessions as possible, and I'll be posting information and my commentary.

Importantly, the Conference is in DC in recognition of the need for, or coming reality of, financial and regulatory reform.  Consequently, several events include comments from influential members of the US House (Minority Whip Eric Cantor [R-VA] and Chairman Paul Kanjorksi [D-PA,] of the House Financial Services Subcommittee),  and even a keynote address by FDIC Chairman Shelia Bair.

The topics for the breakout sessions are not surprising, and they include: Lessons from CMBS 1.0; Real Estate Fundamentals; Trader Panel; Borrower Panel; Surveillance & Workouts; Large Loan Financing; and New Sources of Capital.

Here is the CMSA's summary of the Forums:

Investment Grade Bondholders Forum: the CMSA describes this as the "Introduction of a Forum for the Investment Grade Bondholders."  (Wow. Strange that this event went from being the "Investors Conference" to now a forum.  Are you telling me that the prior conference really didn't address issues? Were they more about golf handicaps than risk\returns?) Issues to be covered include:

• Terms, Practices and Structures for new issue CMBS

• Loan Resolutions: What policies and reporting practices do investors prefer?

• Selling REO with trust level financing: What terms might make sense.

 [As an aside, I sense that the Investment Grade Bondholders want much more that simply their "own" forum. We'll see if this is enough; or if they want real change and real influence . . . . ]

Servicers Forum:

• How do you manage the increasing demands of the CRE credit issues on your servicing operations

• Where is future servicing growth going to come from, and when?

• What is the optimal business model for the future of commercial servicing?

• What do servicers want from their trade association?

Portfolio Lenders Forum

• Do you want securitization to return any time soon?

• Do you look at risk, and price risk, differently now than in the past?

• What are the biggest lessons learned from the past few years?

• What is the impact of current and proposed regulatory items on your firm?

 Investors Forum (Wow.  The CMSA has now transformed itself as the home of A\B note holders, mezzanine lenders, participants, syndicated lenders, etc.  Impressive.  But is this focus simply too broad?) As the CMSA notes: "This Forum will focus on a broad spectrum of CRE debt investor issues."

 • When will deteriorating fundamentals become a factor in bond pricing?

 • How would you change loan and bond documents knowing what you now know?

• Government involvement: too much or too little?

• What opportunities and risks exist for whole loan, B note and mezz debt investors?

 Multifamily Lenders Forum

• How will affordable housing get built going forward? Will tax credits play a meaningful role?

• What is driving asset performance today?

• Is there capital for new multifamily developments? Who is getting financing?

• Will current lenders remain active? Will other sources of capital emerge?

This promises to be a very, very interesting couple of days.  Hopefully it will be an encouraging experience (in contrast to our experience during our trip to the EU in October, 2008 [link]).

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

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Just as they did for 2009 [link], our friends at Armstrong & Associates [website] have prepared a 2010 calendar events and meetings for industry associations, legal education events, governmental meetings, etc. -- all focused on bankruptcy and insolvency.

It is a very good list [PDF]

If your focus is on distressed commercial mortgages, then you’ll note that this event is missing from the list: the MBA’s Commercial/Multifamily Servicing and Technology Conference.  It is May 23-26, 2010 in New York City [Link to MBA conference website]

I attended the 2009 MBA Loan Servicing and Technology Conference, and as I typically do at conferences, I posted several blogs covering topics addressed at the conference [day two link].  (Bonus information included several restaurant reviews - how could I be in New Orleans and not mention the food?  Work.  Eat.  Work.  Eat.)

From my perspective, the topics covered by the 2010 conference will sound a lot like the topics at the 2009 conference – unless we have truly significant changes in the regulatory environment and\or in the financial markets, which from my perspective would include changes in the Federal Bankruptcy Code AND Treasury Regulations in support of a covered (mortgage) bond product.  (If you're a regular reader, you know that we're following this topic.)

Here's a "new" topic, however; and it is one that we're suggesting the MBA include in the 2010 Conference: Taking Control of Building Operating Systems Upon Foreclosure or Receivership.

• how does that topic strike you?
• is this a "hot" topic for you?
• for example, how are you dealing with technology issues at building takeover?  Is the server on site? Is removal of the server a non-recourse carve-out event?  Oops - "how" do we "control" the HVAC or the building electrical grid or telephone and data services? (Yes, this is something "new" from the late 80s - technology has impacted building operations; did you make corresponding changes to your loan documents? Is it on your takeover list? How are you dealing with it at takeover?)

My bet is that the MBA will want us to present this topic, and that as commercial office buildings "enter" the workout mix, this topic will jump up and bite us.  (And yes, in 2010 we'll do a few blog entries on this subject as part of our "Ticking Sound" series.)

Also, Kevin Sullivan [web bio] and I will be attending the CMSA's Investor Conference next month [conference flier].  I'll update you on a daily basis while we're in DC at the conference.  It promises to be very, very interesting - given all of the regulatory reform in the winds.

Finally, please comment on any of this.

We hope that you're having a good holiday season.

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(Continuing my series on practical advice in using technology to assist you in dealing with distressed debt or investments)

Perhaps the most important part, or stage, in dealing with distressed debt is a stage that doesn’t receive much attention by many (inexperienced) people.

The stage has a one word description: surveillance.

This stage includes an almost “new” underwriting of the existing loans in the lender’s portfolio. Tasks include reviewing the loan file, updating lease abstracts, working on lease rollover or stacking plans, understanding the rental market (rate, competing space, vacancy\absorption rates, etc.), examining financial statements (the borrower, sponsor, key tenants, etc.) . . . and the list goes on.

There is a tool that opens the door to a HUGE source of information—and it is:

• Free
• Already on everyone’s desktop
• Does NOT involve your IT department
• Can be used 24/7, from any location (work, home, your iPhone, etc.)
• Simple to use (very, very simple)

What is it?

Google Reader.

Google Reader is a tool in Google. It can be used to collect and store searches of people, topics, companies, etc.—from sources such as news, blogs, Twitter and other social networking tools.
It does NOT replace traditional sources of research and information, such as Bloomberg, Lexis Nexus and other costly subscription resources.

However, Google Reader is a great source of supplemental information—and for non-public borrowers or sponsors, it becomes a very, very valuable source of information.

Here’s how I use my Google Reader: I create searches on a company in Google News Search, Google Blog Search, and Twitter (Note: I am NOT setting up “RSS” feeds—I do NOT need more information coming at me in a “one-off” fashion). Once these searches are set up in my Google Reader (as subscriptions), then I review them each day (yes, a single, familiar place). When I open it, each of the searches is “refreshed” and the searches collect the newest “hits” or links in those three sources. I now have updated information on the company from Twitter, Google News Search and Google Blog Search—which can be from sources overlooked or in advance of publication by the popular press.

Here’s a link covering how to set up your own Google Reader:  click here  

So, here’s an incredibly easy way to set up your searches of news, blogs and Twitter:
 

1. Open Google; and select the “more” drop down menu; then select “Reader”
2. Select “Browse for stuff”
3. Select the “Search” tab (inside the “Discover and search for feeds” part)
4. Scroll down to the “Track keywords and searches”
5. Enter your keyword or phrase; and in the 2nd box, select Google News, Google Blog Search or Twitter Search from the drop down box; then select “Subscribe” (the blue “+” selection box
6. Finally, organize your search subscriptions by selecting “Manage subscriptions” at the lower left side of your Google Reader (to rename the searches [making it easier to quickly distinguish between news, blogs and Twitter search feeds], and to organize them in a folder system)

This is a great, practical use of technology—and an example of using technology to manage distressed debt.  If you have examples of using Google Reader in a similar fashion, or use other free technology tools, please share the information by posting a comment.

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Earlier this month, the Corporate Executive Board announced (Bloomberg story) that it will collaborate with Legal OnRamp in an initiative to bring new resources to law department members of the General Counsel Roundtable (which is a program of the Corporate Executive Board).  The goal of the initiative is to enable in-house counsel to network and share knowledge with one another through the use of Web-based collaboration tools.

So what?  What does that have to do with dealing with distressed debt?

It is important because we've (finally) reached the tipping point (ok, the starting point) where, over the next few years, all of the talk of "how technology will change our business" will be transformed into "technology sure has improved the process and the results of how we manage risk in our commercial investment portfolio."

You're probably thinking "whoa, that's a huge A to Z leap" and "what are you talking about?"

Understanding "how" disruptive technologies will change (for the better) my relationships with clients and the commercial finance industry is a passion of mine.  I've worked on MISMO committees  (Winstead is a member), written about eMortgage [PDF], created a legal database used in the sale of an equipment lease portfolio, dabbled in databases for commercial mortgage loan originations, and launched a Web-based tool used for monitoring workouts (on a national basis) for an apartment lender.  I get the value proposition in technology as the tool for collaboration and separate deliverables.

However, I also understand that the commercial side of the financial services industry, and certainly most lawyers do NOT really understand the value proposition.

This announcement has spurred me to blog about it.

It is a huge subject.  And "huge" can be difficult.  Transforming high level, broad generalizations into practical pieces can be daunting (Or at least a sure path to joining the Don Quixote brotherhood).  But the topic must be addressed.  I'll write about both ends of the space.

This first piece will be a broad overview.  In future postings, I'll be more practical.

Clearly, technology promises to dramatically change how we work with distressed investments.  And all of us can point to tangible examples of this within the 4 walls of our offices when we look back to the downturn of the late 80s.  The mag cards are gone.  Spreadsheets are now everywhere.  Databases now abound.  We have e-mail.  We have PCs.  We're all "connected" (Perhaps with too much data and not with the "right" type of connectivity).

However, the next 10 years promise to bring even more dramatic changes--and it will be technology driven.

The changes will seem most dramatic in the following:

• Our interaction with each other as we handle distressed investments (new, different knowledge collaboration tools; [a form of social networking])
• New deliverables between lenders\servicers and vendors--even outside counsel (new format: paper to electronic)

We've already seen how disruptive technologies bring huge changes to newspapers, medicine, banking, etc.

We're about to experience similar changes in our handling of commercial investments, including distressed debt.  We'll see the changes between all points of the vendor compass in the financial services industry.  We'll even see it in the interaction with outside counsel.

From the legal perspective, various thought leaders have been harping on this for some time, including sharp thinkers such as:

• Richard Susskind, author of the book The End of Lawyers?
• Mark Chandler, GC of Cisco and one of the founders of Legal OnRamp
• And in my hometown of Dallas, Tom Mighell, co-author of a book published by the ABA on Legal Collaboration

In future postings, I'll comment on their work, and the work of others on changes coming to us through disruptive technology.

The "new" economy has changed.  For those of us handling distressed commercial investments, disruptive technologies will form a basis for new relationships with richer, new business processes.  The commercial finance service industry will be different, with new dialog and relationships.  And technology will be the reason "why"-- and the back bone of it all.

Finally.
More to come . . .

If this topic is of interest to you, or if you have your own perspective, please post a comment.

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