One of the factors dampening the recovery in the commercial real estate markets is the lack of liquidity. The problem is immense: without liquidity, buyers of distressed debt and foreclosed real estate do not have access to the financing that makes the investment attractive to them; and maturity defaults become a growing reality.

Recent developments show the scope and challenges of this problem, and possibly show part of a possible solution:

• Comments on Proposed Changes to SEC Regulation AB - The Problems: The Mortgage Bankers Association (MBA) and the Commercial Real Estate Finance Council (CREFC) both have issued their comment letters on proposed changes to the SEC's Regulation AB, which is an important rule governing securitization (CMBS).  Both letters explain the key role of the capital markets in furnishing capital to commercial real estate; and both comment upon the proposed rule and offer suggested changes (
• Senior Bondholder Control of Special Servicer - Partial Solution: The current Goldman Sachs CMBS offering contains a unique (and new) structural component: the senior bondholders will have the power to direct and replace the special servicer (a right normally held by the owner of the unrated B-piece bondholder [who often is affiliated with the special servicer]).  This is a very, very significant departure from prior CMBS structures, and squarely addresses a key complaint of the senior bondholders.
• Skin In The Game or Risk Retention - Not Applicable:  The proposed rule would require the sponsor of the securitization to retain an economic interest of not less than 5 percent of the credit risk of financial assets securitized, This would be a dramatic change from CMBS as we know it - because in CMBS, the unrated B-piece holder has first-loss exposure, and thus it has "skin in the game."

Comments to SEC Regulation AB:  Both the MBA's letter and the CREFC's letter artfully articulate the challenges and the importance of the capital markets to commercial real estate.  The CREF's letter succinctly lists them as follows:

• Limited Liquidity/Lending with CMBS Dormant: CMBS accounts for @ 25% of all outstanding CREF debt, and as much as 50% of all CREF debt during the (roaring) mid-2000s.
• Significant Loan Maturities: @ $1trillion of CREF loans will mature over the next several years - yet capital to refinance these maturities is "still relatively constrained."  (Wow. Constrained?  We get the message.)

The CREFC letter focuses on these two primary concerns:

1. Costs: the concern is that the requirements will substantially increase costs for closing a CMBS issuance without real benefits (given the unique attributes of commercial real estate and existing industry practices)
2. Transparency: the concern is that proposed disclosure and reporting requirements (for both public AND private placements) are not necessary, given (again) the unique attributes of commercial real estate and existing industry practices.  This issue is what I describe as the "private is the new public."

Senior Bondholder Control of Special Servicing: This topic has been the subject of much debate within the industry.  Goldman's solution, where the senior bondholder has the power to direct and replace special servicers (a right normally afforded to those owning the B-Piece), is both startling AND new - which I read as meaning the senior bondholder investment market simply refuses to go forward with the current CMBS model, which forces them to sit on the side line as subordinate bondholders approve (and direct) loan level changes, modifications and remedies - at the ultimate expense of the senior bondholder.  Bloomberg has a nice posting on this significant development.

This Goldman structure is very significant, and it will not surprise me if somehow it is "baked into" future CMBS deals (as part of the new CMBS 2.0) - whether pursuant to a new SEC rule or as a customary structure.  It squarely addresses a major investor complaint about CMBS by senior bondholders, and thus it could be part of the liquidity solution.

Skin In The Game:  In its letter, the MBA notes that the SEC's 5% retention risk proposal needs to be consistent with the Dodd-Frank Act.  The MBA asks the SEC to work with other federal regulatory agencies to harmonize risk retention regulations based upon Sec. 941 of the Dodd-Frank Act. And with respect to commercial real estate, MBA said the proposed rule’s requirement that a sponsor of a commercial mortgage-backed securitization to hold a 5 percent vertical strip of bonds issued is no necessary given certain, key structural components of CMBS.

 If you see it differently, or have other information, please comment below.

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 The lack of liquidity, of course, is a huge drag on the recovery of the commercial real estate market.  Buyers of foreclosed properties, or as white knights of deals in distress, need credit as part of the investment mix.

As I've noted before (prior posting), capital market credit (in the nature of CMBS or equivalent product) is an important, and missing element in what I call the "funding gap" (i.e., the difference between CRE financing needed to refinance maturing debt in excess of financing available from traditional funding sources [banks, life companies and Freddie\Fannie]).

This week I'll be attending the June Convention of the Commercial Real Estate Finance Council.  The "hot" topic will be the "return" of multi-borrower CMBS 2.0 securitization (with a close look on the financial reform bills and the House-Senate conference committee).

For a good review of recent developments of the "return" of the CMBS loan market (sometimes referred to as CMBS 2.0), read the summary from Retail Traffic.

The good news last week is that the first large, multi-borrower CMBS was brought to the market.  It will be the second CMBS issuance this year (but first public offering), following a private CMBS securitization by Royal Bank of Scotland in the amount of $309.7million, which also was a multi-borrower deal (but mainly retail properties located in New York).

In contrast to the RBS private securitization, the JPMCC 2010-C1 is larger in amount and broader in its reach.  Here are some details:

• 36 fixed-rate commercial mortgage loans secured by 96 properties
• Twelve of the loans are secured by multiple properties
• Multi-borrower, with 13 loans (or 42.5% of the pool balance) made to a single borrower (Inland Western Retail Real Estate Trust) (so, not the "real" multi-borrower pool that we saw in CMBS 1.0 - but the market must like Inland Retail: recall the Inland Retail [single borrower] CMBS securitization last fall [briefly described by Retail Traffic)
• 76.4% of the offering were JPMorgan Chase Bank loans
• 21.6% of loans come from Ladder Capital Finance (hurrah: multi-lender, too!)
• 80.4% loan-to-value ratio
• Multi- product mix: 70.9% anchored retail, 14.1% office, 11.8% industrial, 1.8% self-storage and 1.4% manufactured housing

More details are in this presale report prepared by Fitch (pdf).

So, with these two new CMBS securitizations, what are the current projections of CMBS for 2010 to cover the funding gap, and to bring credit available for the purchase of foreclosed properties, or for use by "white knights" to buy distressed deals?

• Barclays predicts between $15-20 billion
• Trepp predicts $25-$30 billion
• My prediction (yes, I'm laughing, too): $10billion, tops

I discount the Barclays and Trepp predictions simply because:

• the start-up time at the loan production operations alone will take us into 4th quarter 2010 until we'll really see loan originaiton shops at full speed - with closing rates capable of hitting their predictions
• remember - the CMBS shops will be competing against life companies, who have not placed a significant amount of their 2010 allocations (one source reports that life companies have only placed @ $5B of their $30B allocations after the 2nd quarter of 2010)
• and the deck chairs will be realigned upon the passage of the financial reform bill - with new roles for rating agencies, new oversight regulations, etc.; all of which will take time to digest
   

Of course, while the 2010 CMBS securitizations will be a significant improvement over the $8.9B of CMBS issued in 2008 and the the $2.2B issued in 2009, the predicted amounts are way, way under the $207B issued in 2007 - at the height of the credit christmas.

But, it is a good start.

And the 2007 amount is NOT reality.

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

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(Blogging from the MBA Servicing & Technology Conference . . . )

One phrase describes the majority of the content today at the sessions attended by me at the MBA Servicing & Technology Conference:  "Change is now . . . we just don't know all of the details."

My take away is that some very significant work needs to be completed before the "new" CMBS 2.0 will be implemented to any significant level.

Here are some examples from sessions today:

• Reconciliation of H.B. 4176 and S. 3217:  Representative Carolyn Maloney (D-NY) talked about the importance of the CRE market to the broader economy, and briefly mentioned the status of the reconciliation of the House Bill H.R. 4176 and the Senate Bill S. 3217 (prior posting on two bills).  My take on her talk?  Short on details on the all-important reconciliation, and not enough guidance on "where" we are going . . . but then this morphed into the general theme of the day.  (The Congresswoman nailed it: so, change is now . . . we just don't know all of the details.)
• REMIC Rules Need More Change - Unilateral Releases of Collateral:  One session raised the continuing need of the IRS to modify collateral release rules found in changes to real estate mortgage investment conduit (REMIC) regulations (Treasury Decision 9463).  This topic has been the focus of much discussion because the Treasury rule had the effect of imposing additional restrictions on collateral releases, when compared to the prior law - even when the release is expressly permitted under the loan documents.  Currently, the rumor is the that the IRS is prepared to issue a new announcement resolving this problem. So, change is now . . . we just don't know all of the details.
• FDIC Safe Harbor Only Part of the Story:  While the FDIC on May 11 issued a proposed rule to clarify the safe harbor protection in a conservatorship or receivership for financial assets transferred by an insured depository institution in connection with a securitization or participation, the FDIC is not the only regulatory body with a voice on this issue.  For example, FASB rules 166 and 167 may require consolidation of those same assets with the bank that originated the securitized loans.  ln addition, the SEC and the IRS may weigh in on the same issue.  So, change is now . . . we just don't know all of the details.
• Regulation AB - Much Work Ahead:  While this summary is short, the SEC's proposed changes to Regulation AB is @ 667 pages, and contains @ 300 questions.  One session here at the Conference devoted 15 minutes to generally describe the challenges in the proposal; and an entire session during Tuesday at the Conference will be devoted to (literally) working on it.  And much, much more work is being done by industry volunteers in analyzing and responding to the proposed changes.  So, change is now . . . we just don't know all of the details.

Some heavy listing needs to be accomplished.

Question: are you seeing this differently?  Please post a comment below.

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In an earlier posting on CRE finance reform and market trends, I stepped back and asked the all-important questions:

• What does all this mean?
• What is the big-picture?
• Where is this going?

I offered up four perspectives, with these as the first two –

1. The Good: the “return” of the unregulated lender

2. The Bad: extend and pretend” will continue due to more and more CRE defaults.

My third perspective is much more controversial, and probably will not receive explicit recognition nor acknowledgment by many:

3. The Uncertain CMBS 2.0: Practical and important structural challenges abound before the new CMBS (“CMBS 2.0”) will include pools of loans from multiple borrowers, in amounts that will have a meaningful impact on the CRE finance market, and as a source of finance for Main Street borrowers (i.e., CRE owners other than the large funds, REITS and institutions).

In earlier posting covering this third topic, I posed some tough questions from the perspective of the CMBS Investment Grade Bondholder.

Below are just some of the challenges facing CMBS 2.0, framed from the perspective of the other the most important players in the CMBS structure -

From the Borrower: without this player, there are no loans to place in a CMBS pool.  Here are a few of the concerns from the Borrower side of the table:

• Will the loan servicer be more responsive in the new CMBS 2.0 than my servicer in CMBS 1.0? You talked about my complaints about poor service at your CMSA conferences; but have you found a solution?
• Will the new CMBS 2.0 give us more flexibility, such as partial releases, substitution of collateral, future funding, etc.? When will you realize that commercial real estate changes almost daily and that the scale or number of loans in your CMBS pools are vastly different from your credit card, or a home loan pools? (Perhaps commercial real estate is NOT as fungible as you assume.)
• Why should I use the new CMBS 2.0 as a financing source? Unless, of course, you throw money at me . . . like last time. Or, simply offer me a great rate.  Right now, I need access to credit, so  . . . yeah, I'd do another CMBS loan.
• If the new CMBS 2.0 contains tougher loan terms (such as mandatory lock box\cash management from day one, agreed receiverships [with powers to market and sell], etc.), what makes you think that I’ll accept those terms? (Unless, of course, you throw money at me . . . like last time.)  Maybe I'll simply do a new CMBS 2.0 loan if it is my only source of financing.
• Disclosing Information About My Property:  If the "private is the new public" (in that the SEC will require the new CMBS 2.0 to disclose my loan level information both at securitization AND during the life of my loan), then how will this effect the ability of my property to compete (relative to other properties)?  Do lease brokers really have the terms of all of my leases, and are they really sharing this in the market place?  Has the digital age really invaded my space? Wow.  I had no idea.  Will banks and life insurance companies also follow this disclosure path?  If this really is a problem to me, I'll need to negotiate non-disclosure terms into my loan documents, which means . . .  CMBS 2.0 will NOT be an option for me.

These are tough questions.

• But: what questions am I missing from the potential CMBS borrower?

As I've noted before, when you combine the questions from the Investment Grade Bondholder with the questions from the potential borrower, we don’t have an elephant in the room – we have a herd.

If you have additional Borrower perspective questions, or other comments or observations, or your own questions, please post a comment.     

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In two prior postings [first] [second] addressing the CRE finance crisis and market trends, I have explored three (3) topics that point us to answers on these all-important (even personal) questions:

• What does all this mean?
• What is the big-picture?
• Where is this going?

Before we address the 4^th topic (covered bonds), we need to devote additional attention to the 3^rd topic: The Uncertain CMBS 2.0 in that . . . .

(1) Recent Senate panel testimony and (2) a recent decision of a New York trial court both illustrate another hurdle for launching CMBS 2.0, and point to the need for rating agency reform.

The decision also falls in line with my concern that these tough times will result in courts accepting new and novel legal theories – and my prior posting warning all of us to “watch for change in the court house."

The recent case goes to this simple question: what if the rating agency is wrong in its rating? (Hum . . . can we stipulate or agree that this has happened at least a few times in recent years?)

1. Reform: Of course, rating agencies do NOT have any liability for mistakes [see this white paper]; however, rating agency reform needs to be a focus of the financial reform.
2. Liability: So, if there is no recourse against the rating agency (right now), is there another way to get “at” somebody in the deal based upon rating agency mistakes?  If the rating agencies don't have any liability, then who does?

Liability:

Maybe there is liability for "missing" a rating designation . . . here are the facts in a New York state case involving two financial titans: MBIA Insurance Corp. v. Merrill Lynch, Pierce, Fenner & Smith Inc., No. 09- 601324 (N.Y. Sup. Ct. Apr. 7, 2010) [link to copy of opinion]. MBIA’s subsidiary, LaCrosse Financial Products LLC, issued a number of credit default swaps with various counter parties, in which it sold protection on purportedly “senior” and “super senior” tranches of various collateralized debt obligations (“CDOs”) (having a total notional value of approximately $5.7 billion). As is very typical in the financial guarantees of these structures, MBIA executed a financial guaranty insurance policy, which guaranteed the seller’s payment obligations under the credit default swap contracts.   As part of the credit default swap contracts, Merrill Lynch (through its subsidiary Merrill Lynch International), promised to deliver securities that were AAA-rated with senior or super-senior subordination characteristics. The securities were rated AAA; however, the court refused to dismiss MBIA’s claims that the credit quality of the collateral underlying the securities did NOT warrant the AAA rating of the securities, and did not have the levels of subordination represented by Merrill Lynch International.

This might be the first time that for a court to recognize possible liability of a party based upon the party’s statements that securities were AAA-rated (in harmony with the rating agency) when in fact, the rating agency should NOT have rated the securities AAA.

Sure, this ruling is being appealed; and a higher New York State Court could overturn it. But the appeal will take time, which means further delay on a resolution on this issue.

Rating Agency Reform

Separately, on April 23, former credit rating industry executives told the Senate Permanent Subcommittee on Investigations that competitive pressures and poor internal communications led their analysts to award safe ratings to risky investments - which (of course) turned out to be toxic and contributed to the financial crisis. Senator Carl Levin (D-Mich), the chairman of the panel hit the nail on the head, when he focused on the conflict of interest that arises when the credit rating agencies are paid by the same party whose bonds they rate. “It’s like one of the parties in court paying the judge’s salary,” said Sen. Carl Levin, D-Mich.  As Barbara Kiviat notes at The Curious Capitalist, "A purer conflict of interest would be hard to find."  Her comments mirror Tex Gross' question in my earlier posting: ""why would anyone rely upon you (the rating agencies) when the rated party pays the fees of the rating agency?"

Congress needs to address this conflict - and not simply focus on the creation of Office of Credit Rating Agencies at the Securities and Exchange Commission (as a means to strengthen regulation of credit rating agencies).  [see p. 8 of the attached summary of the Senate financial reform bill].  Barbara Kiviat favors a "credit ratings clearinghouse" as the solution to the conflict problem, which makes good sense to me.  Her column is a good read on this keystone topic.

Here is the importance of these two events for me:

• Reliance on Ratings: If parties to a securitization can NOT rely upon a rating agency designation (which is the lesson from the MBIA case), then how can the market rely upon it?
• Future of Rating Agencies: What is the future of the rating agencies?  Surely change is on the way.
• Congressional Debate & Meaningful Reform: Will this case and this alarming testimony focus Congress on the need for real rating agency reform? What about changing the way that rating agencies are paid?  This is a must do.
• Huge Hurdle: How can CMBS 2.0 get off the ground, in any meaningful way, with this rating agency cloud on the horizon?  Can it really be ignored?
  

A meaningful CMBS 2.0 platform must include rating agency reform.

Question for you: do you see it any other way?

Post your comment, perspective or correction below. 

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In an earlier posting on CRE finance reform and market trends, I stepped back and asked the all-important questions:

• What does all this mean?
• What is the big-picture?
• Where is this going?

I offered up four perspectives, with these as the first two –

1. The Good: the “return” of the unregulated lender

2. The Bad: "extend and pretend” will continue due to more and more CRE defaults.

My third perspective is much more controversial, and probably will not receive explicit recognition nor acknowledgment by many:

3. The Uncertain CMBS 2.0: Practical and important structural challenges abound before the new CMBS (“CMBS 2.0”) will include pools of loans from multiple borrowers, in amounts that will have a meaningful impact on the CRE finance market. Challenges from the investment grade bondholder include: (i) loan level transparency, (ii) structural concerns for CMBS 2.0, and (iii) finding an effective forum to effectuate these changes.

These are just some of the challenges facing CMBS 2.0, framed from the perspective of one of two of the most important players in the CMBS structure - an imaginary or hypothetical investment grade bondholder.

From this Investment Grade Bondholder: without this player, there is no market for CMBS bonds. This player is the most “under represented” player in the CMBS industry.  Here are some questions crafted with the voice of this hypothetical investor, as the industry heralds the arrival of CMBS 2.0:

• LOAN LEVEL TRANSPARENCY: Will CMBS 2.0 offer “real” loan or property level transparency, such as disclosure of modification terms for loans in special servicing; or rent rolls and operating statements for performing loans?
  • Servicers tell us that the Investor Reporting Package (IRP) [download guide; download version 5] contains information sufficient to our needs; will you tell this to our accountants and make them go away; and to the SEC as it seeks more transparency from us in our reporting? (This is all about information . . . data that we need.)
  • Speaking of the SEC, have you seen the proposed SEC rule [download a summary] that will require the disclosure of specific loan-level data, at securitization and then during the life of the pool?  Does the scope of the proposed rule address our needs? We're going to look into this . . . . (In a future posting, I'll cover the struggle between the servicers and the investment grade bondholders over loan level disclosures, which now comes under public scrutiny with the SEC's proposed rule.  The proposed SEC rule is called a "tectonic event" and a "tsunami" by a group working on industry-wide data standards.)
  • Who were the investment grade bondholders on the IRP committee that created this report?
  • Does the IRP “match up” with the pooling and servicing agreement provisions covered by my bond? (Did the attorney that drafted the PSA conform it to the IRP? We’re gong to look into this . . . .)
  • We understand that CMBS loan servicers report that loan level transparency (such as giving us current rent rolls) has legal hurdles relating to privacy rights of the CMBS borrower; so, where is the legal “white” paper that shows commercial parties have implied rights of privacy; or is it really a financial concern on the part of the loan servicers? Do the mortgage documents really prohibit disclosure?
• SIMPLE CMBS 2.0 STRUCTURE (?):
  • As to pools with multi-borrower loans, will these pools be the simple structures seen by us in the CMBS pools that were closed in the 4^th quarter of 2009? (Simple gives us both transparency and structures that address our special servicing concerns.  "Simple" does NOT look like this: download (depiction of a fairly typical debt structure from the "old" CMBS model).
  • Will we have information from, and the ability to influence, the special servicer in its decisions? What will assure us that the special servicer truly is making independent decisions in multi-borrower pools?
  • Who will be paying the rating agency fees; and how will the rating agency be equipped to monitor the pool going after securitization; and what will the rating agency reform look like? (Take a look at our white paper for our bottom line on rating agency reform.)
• FORUM FOR CHANGE(?): if we become active in the Investment-Grade Bondholders Forum with the CRE Finance Council, will this really be the best forum for us to champion loan level transparency, and where our comments relating to CMBS 2.0 structure will be given due consideration?  If not at this Forum, then where?

These are tough questions.

• What questions am I missing from this imaginary or hypothetical investment grade bondholder?

As we envision CMBS 2.0, this is at least one elephant in the room.

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

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James Ruiz recently wrote a piece, published in the Texas Lawyer, summarizing the February 10, 2010 report (“Commercial Real Estate Loses and the Risk to Financial Stability”) issued by the Congressional Oversight Panel. (continue reading link below). It is a good summary of the Panel’s perspective of the credit problems in commercial real estate, and addresses the REMIC issues inherent in modifications of CMBS loans and the impact of two new accounting standards (Statement of Financial Standards 166 & 167).

Earlier, I posted a summary of the report, and commented that if financial reform is going to occur, the window is narrow given the August start of the mid-term Congressional re-election campaign season. As you might know, I’have been blogging\following the Restoring American Financial Stability Act of 2010 [link] as it makes its way through the Congressional process. 

It’s time to step back and ask the all-important questions: so what does all this mean? What is the big-picture? Where is this going?

Here’s my list of some of the answers to those important questions:

1. The Good: ‘Return’ of the unregulated CRE lenderr. in the near future, unregulated lenders will play a very important role in CRE finance. This will mean new opportunity from a new source.
2. The Bad: ‘Extend and Pretend’ and More Defaults. This will mean continuing opportunity for special servicing and asset management - but the RTC is not the model.
3. The Uncertain CMBS 2.0: Practical and important structural challenges abound before the new CMBS (“CMBS 2.0”) will include pools of loans from multiple borrowers, in amounts that will have a meaningful impact on the CRE finance market.
4. The Not Now For Covered Bonds: the current focus is on CMBS 2.0, although covered bond legislation was introduced by members of the House Financial Services Committee – Capital Markets Subcommittee. Why isn't’t this legislation getting more attention?

Based on this list, the next 2-4 years will look like this: CRE finance = Good+Bad.

Yes, we’ll have good and bad at the same time (with more of the later in the near-term).

Let me briefly explain:

#1. “Unregulated Lenders” Will Play An Important Role In CRE Financee: By this phrase, I mean lenders who are not banks, savings and loans, credit unions, insurance companies or government sponsored entities (such as Fannie Mae). In addition, these lenders will be different from “hard money” or “hot money” commercial lenders, who as lenders of last resort offer loan terms that resemble predatory lending.

Instead, these lenders will be mortgage REITS and other lenders whose base or core sources of funds are not the Federal Reserve, insurance premiums or Federal Government sponsorship (which I call the “traditional sources of CRE finance”). The pricing and terms will be more favorable to the borrower than offered by the "hard money" or "hot money" lenders, and more expensive than terms than offered by traditional sources of CRE finance. In my description of this middle-tier CRE finance group, I’m thinking of mortgage REITs such as CreXus and of mortgage finance companies like the former Lomas & Nettleton.

What leads me to this conclusion?

• One study reports that traditional sources of CRE finance only offer @ $200Bill of funds annually for CRE lending (based upon a recent three year average of loan originations by this group).
• The same study shows that CRE lending needs for maturing debt will exceed this amount by a total of $500Bill in 2010, 2011 & 2012.
• This “funding gap” doesn't’t take into account funding for defaulted CRE loans (by way of financing purchases of notes and REO from lenders and servicers). So, the gap really is larger than $500Bill
  
  What will be the source of funding to “fill” this gap?
   
• CMBS 2.0 will not fill this funding gap any time soon. True, banks and life companies are forming CMBS 2.0 programs – and we’re working on several of them. However, at the CMSA January conference, in an informal poll of investors, 58% of the investors believed that “CMBS 1.0” style multi-borrower, fixed rate pools will be return no sooner than 2012 (or even later); and 69% of the investors believed that annual new CMBS issuances would not exceed $100bill until 2013. (click on this link to my blogs from the conference for more information; and\or search TTFL blog using the term “CMSA” for more information.)  The message is simple: CMBS 2.0 probably is not a near term reality for multi-borrower loan pools in an amount necessary to close this gap  – which also is why the new CMBS 2.0 programs will be underwriting loans as if they were going to hold them on their books – and not sell them in a securitization.
• Bank CRE lending will not fill the gap for several reasons:
  -  Banks credit allocations for CRE will decrease for the near term (my guess: 3-5 years). Recently, the US Controller of the Currency spoke at the annual convention of the Independent Community Bankers of America, and called on policymakers to devote special attention to the CRE lending concentrations at banks. He then suggested a lengthy list of options, all of which would reduce lending risks AND result in less capital available for CRE lending.  Regional and community banks have high CRE loan concentrations.  For example, I've been told that the CRE lending concentration for banks governed by the Dallas Federal Reserve Bank is @ 26%. Simply too, too much CRE loans on the bank portfolios.
  -  The Wall Street Journal reported on March 15Th that in the coming weeks, the Financial Accounting Standards Board is likely to propose that banks expand their use of market values for financial assets such as loans (called “mark-to-market”). If these accounting rules are implemented, then this will be another pressure on banks to make less capital available for CRE lending.
• Insurance company CRE lending will not fill the gap. Recently the Capital Adequacy Working Group of the National Association of Insurance Commissioners (“NAIC") voted to release for comment a proposal that might result in a large increase to the risk-based capital (“RBC”) charges for life company holdings of CRE mortgages.   If passed, this could significantly restrict the ability of some life companies to make capital available for CRE lending.

All of this points to opportunity for a new niche CRE lender.

#2. Extend and Pretend AND More Defaults:  as noted in our postings on the October 31, 2009 bank regulatory announcement, and at the CMSA January conference, the regulatory plan clearly is to avoid taking back CRE collateral if it has some reasonable basis for keeping the loan current. Many people, myself included, called for a quick RTC style take over of failed banks, with a quick disposition of the assets. Clearly, absent a change in the mark-to-market rules (described above), the perspective of the administration is that the current CRE crisis is NOT attributable to over building. Instead, it is a credit crisis unrelated to CRE. So, the plan seems to be extend until the fundamentals for the broader economic recovery firm up as evidenced by: increases in employment; improvement in consumer confidence and spending; etc.  In other words, treat the source of the problem, and not the symptoms.

However, default rates on CRE mortgages continue to climb (see my earlier posting).

So, unless and until we clear much of the over-leveraged CRE from the market (my “sub-prime commercial” product type), if you have expertise in distressed CRE, then you should be busy.

And, if your company can handle both the good AND the bad, then you’ll really be busy.

In the near future, I’ll cover #3 and #4.

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

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On Monday, March 15, the Senate Banking Committee released it's draft of the "Restoring American Financial Stability Act of 2010" [click name to download it]. 

It is long: 1336 pages.

And no surprise at this: it is complicated.

Provisions include creation of a consumer protection watchdog housed in the Federal Reserve; creation of a nine-member Financial Stability Oversight Council chaired by the Treasury Secretary; an “advanced warning system” for systemic risk; an end to “too big to fail;” increased transparency and accountability for “exotic” instruments such as derivatives; streamlined federal bank supervision; increased regulation of credit rating agencies; and a “say on pay” provision for shareholders on executive compensation

Fortunately, the Commercial Mortgage Securities Association (CMSA) furnished a preliminary summary of the bill [click to download it] - it is 11 pages.

Note, however, that the CMSA summary focuses (as it should) upon issues important to its members.  So, if you are a bank or a life insurance company, you probably need to reach out to your industry advocate group for details of importance to you.  (Did I say "this is complicated?")

Here is the summary of the summary furnished by the CMSA (further proof that this is complicated):

• For ABS, including CMBS, a reduction in the retention requirement by “originators” and/or “securitizers” from 10% to 5% and a clarification that this applies only to securitized loans;

• A requirement that regulators (the OCC, the FDIC and the SEC acting jointly) tailor retention rules by “asset class";

• Regulator authority to lower or eliminate retention if “underwriting standards” (as jointly established by the regulators) are satisfied, or if the regulators jointly find that the reduction or elimination of the retention is appropriate for any other reason;

• Enhanced Credit Rating Agency transparency for investors and related operating requirements;

• Modification of Treasury’s proposal that the SEC direct credit rating agencies (CRAs) to “differentiate” ratings with a requirement that CRAs disclose the basis of ratings and that symbols be used consistently across the types of securities to which they apply (with the CRA discretion to differentiate if chosen). 

Remember, the House already passed financial reform legislation last fall.  So, this bill will be debated in the Senate, and then if it passes, it'll go to joint committee for reconciliation.

No doubt, we'll be reading much about this from many sources.  In the interim, here are my quick thoughts:

• Time is short, and the mine field already is full of controversial issues (such as health care).  Mid-term elections are approaching; and after August, a significant portion of Congress will have one thing in mind: re-election.  And thus no time for financial reform.
• This is a long, long, long bill.  This is complicated.  One criticism of the American Recovery and Investment Act [track it here] was that it was long and complicated.  A topic as important as financial reform needs careful consideration.  This just strikes me as too much with not enough: is there really enough time and attention bandwidth in Congress to give this topic the proper consideration?
• U.S. Senate Banking Committee Chairman Chris Dodd (D-CT) is not running for reelection. He is the key in keeping the necessary focus, and in acting as the moderator and mediator in this process.  This is good.  But, as the next bullet shows, he isn't pulling the other side of the aisle with him (yet).
• But I still come back to this point: is a 5 month period (full of other political issues) really enough time to vet a Senate Bill and a House Bill, and then to overhaul the financial services industry?  This is an overhaul of a very, very important industry.  Sure, other topics in front of Congress are important, such as education and the overhaul of the "no child left behind" bill.  But will the net effect of a financial reform bill, passed under intense time pressure, simply give us a financial services industry "left behind" in a very competitive world economy?  The "new" world order no longer has the US imposing our will on the world financial markets.  There's real competition now.
• Already, the committee’s ranking Republican, Richard Shelby, R-Ala., and nine other Republicans on the committee sent Dodd a letter saying the proposed timetable does not give members adequate time to understand the scope of the proposal: “Given the sheer magnitude and complexity of the financial reform package you intend to introduce, this legislation will inevitably have a substantial impact on our financial system and overall economy. Accordingly, we urge you to allow for sufficient time to review the language.”

This is complicated.

Please post your initial thoughts, comments, and questions blow.

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As I noted previously [link], the mid-term elections significantly limit the time period for Congress to pass a meaningful financial reform bill. The “window” for this closes in August – five months from now – when the fall election campaigns kick into high gear.

With this short-course in mind, the CMSA and other key industry groups (listed below) are peppering Congress with this message: restoring lending for commercial real estate, and the capital markets supporting this lending, are critical elements for the nation’s recovery from this great “recession.” AND action needs to be taken now.

Here are three examples (with a few comments by me) of action taken over a recent Thursday through Monday:

1. Thursday, Feb. 25 Letter: The organizations include those listed in a letter [download\link] sent on Thursday (Feb. 25) to Committee Chairman Chris Dodd and Ranking Member Richard Selby of the Senate Banking Committee. It is an impressive list:

American Hotel & Lodging Association

American Land Title Association

American Resort Development Association

Associated General Contractors of America

Building Owners and Managers Association International

CCIM Institute

Commercial Mortgage Securities Association

Institute of Real Estate Management

International Council of Shopping Centers

NAIOP, Commercial Real Estate Development Association

National Apartment Association

National Association of REALTORS®

National Association of Real Estate Investment Managers
National Multi Housing Council

Briefly, this letter argues that the “risk retention” requirements (also known as “skin in the game”) for CMBS 2.0 issuances need to allow a third party (known as the “B-piece” buyer) to hold that risk. 

Comment: one lesson learned from CMBS 1.0 that this third party will undergo greater financial scrutiny and underwriting by the initial investors, AND by potential buyers in the secondary trading market. And, I believe, investors will look for ways both to monitor the “skin in the game” party and to receiver better loan level information if\when a workout or default arises under a specific loan. Underwrite this third party? Sure. Better information from this third party? Bet on it.

2. Joint Panel Hearing on Friday, Feb. 26: The House Financial Services Committee (chaired by Barney Frank, D-Mass) and the House Small Business Committee (chaired by Nydia Velazquez, D-NY) held a hearing to discuss commercial real estate and issues facing small businesses.

Questions:

• How many people attended this hearing? (Hopefully more people than the handful who attended the Dec. 15 hearing on covered bonds.) [link to my two postings on that meeting]
•  What kind of media coverage did the Feb. 26 hearing generate? Was it “lost” in the health care debate and other issues?

3. Monday, March 1 position paper: The CMSA issued a paper titled “A Framework for a Sustainable Commercial Real Estate Recovery” [download\link]. This is a must read. The paper gives a succinct description of the current state of the CRE market, a listing of “unique” features of the CMBS product and market, and a framework for CRE recovery.

A few comments:

• There is no mention of CDOs [link] – thankfully.
• The paper states that one unique feature of CMBS is “most CBMS loans have 5- to10- year terms with 20- to 30-year amortization schedules.” Question: no mention of all of the interest only (“IO”) loans? What percentage of the loans currently in special servicing loans are IO loans? When people discuss implementing “standard underwriting” standards, are they really talking about banning IO loans?
• The paper states that the structure of CMBS allows investors the ability to gather detailed, loan level information; and that the information available to investors is “tremendous.” While this is the message in the front entry hall, the pillow talk in the bedroom between investors and special servicers is all about the need for MORE loan level information.  Greater loan level transparency is a late night topic certain to bubble up in the CMSA's new Investor Forum.
• The paper points to a recent European ruling that requires credit agencies to implement new ratings for certain US securitized products. Putting aside the merits of the argument, it is alarming that the investment community appears at odds with industry organizations on this basic issue – or at least the EU sees it differently. Can this get any more complicated? (Remember: the window slams shut in August.)
• Finally, I’m pleased to read that covered bonds remain on the list. Covered bonds [link] are a favorite topic of mine - as the best, long-term capital market product for commercial real estate.

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

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Yesterday, the Commercial Mortgage Securities Association (CMSA) submitted a comment letter [download] to the FDIC concerning the FDIC's 'Safe Harbor' rule [down load the FDIC's Advanced Notice of Proposed Rulemaking] covering the securitization of commercial real estate loans. 

Of course, the CMSA is not the only industry organization to comment on the FDIC's proposed rule.  For example, Housing Wire [link] describes comments to the proposed rule raised by the American Securitization Forum, the Mortgage Bankers Association and the Securities Industry and Financial Markets Association.

The FDIC's proposed rule is designed to isolate, from the failure of a bank, the underlying assets of securities held by the bank.  The treatment by the FDIC of assets transferred by a bank in connection with a securitization, and the subsequent failure of the bank, is an underlying building block for securitization - simply because investors will NOT buy CMBS bonds if the underlying loans may be stripped from the CMBS pool, if the bank that originated the loan goes into FDIC conservatorship or receivership.

Under the proposed new rule, the safe harbor would be amended to include numerous preconditions regarding a transaction’s capital structure, disclosure, documentation, origination and compensation.

I really don't have anything to "add" to the pointed comments made by these organizations .  If you want the "detail" on their perspectives, I've furnished you the links (above).  (They contain some very, very interesting points.)

My focus is on the following statement in the CMSA' e-mail announcing its comment letter:

"[The] CMSA suggests that the FDIC work in concert with Congress, the Obama Administration and the other agencies that are developing securitization reforms to ensure that FDIC's safe-harbor efforts do not lead to a regulatory framework of conflicting or overlapping requirements that may impede the restoration of functioning credit markets."

My read of the situation remains unchanged:

• unlike at the creation of the CMBS model in the early '90s, the financial crisis and the role of CMBS 2.0 in it is a political process - which means a large number of parties have a voice in the process
• the changes needed to restart the CMBS model (referred to as "CMBS 2.0") are not easy
• mid-term elections mean that Congress will NOT address this critical component of the credit crisis once the heavy campaigning begins (in August) . . .
• . . . which leads to the conclusion that in 2010, we will NOT see a return to a meaningful CMBS market.  In other words, no CMBS 2.0 for the small commercial real estate borrower.  Sure, single sponsor deals with the best DSC, LTV and other uber-credit criteria will be launched (good for Wall Street).  But a multiple borrower pool of small loans (help for Main Street)?  I say not in 2010.

I hope that I'm wrong.

If you view it differently, please 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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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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