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

(This is a little out of order, in that in our Monday blog we covered in "real time" the Opening Session and today [Tuesday] we cover the Sunday committee meetings.  But then this is a blog, which is a bit different any way.  So, here is our summary of the Sunday committee meetings.)

Although separate servicing and origination meetings were on the agenda, last minute plans combined the groups into one meeting; perhaps because the silence would have been deafening, had the originations group held their own meeting.
 

The meeting was candid and sobering without being alarmist, covering a wide range of topics, including:
 

• CMBS servicers generally believe that annual delinquency estimates for 2009 have increased from 7.5B (estimate in Nov. 2008) to 15B currently and that real estate values will decrease further from 2008 by an additional 10% to 15%.

• The life industry is having a hard time articulating 2009 allocations for "new" originations because they are generally limited by ratios of in-force mortgages to total assets, and they are very unsure how their mortgage and bond portfolios will pay-off, refinance or be extended, either internally or through 3rd parties, all having significant effects on funds available later in the annual cycle (3rd and 4th Q)

• Risk-based Capital Allocation requirements are hurting servicing outcomes for the life companies

• Discussion of maturity default risk and it's timing (late 09, but significantly more in 2010 and 2011)

• Modifications (through the use of extensions) instead of foreclosure in a capital frozen environment seems to be the way to go

• Emphasis on "capturing the cash", i.e. cash management as the cornerstone of workouts

• Special servicer concerns over liability under the PSA or as fiduciary for actions taken or directed by the B piece buyer as the controlling class

• Much gripping about mark-to-market and the need for clarifying guidance from the SEC.
   

The sun came out today,
but like the fickle markets,
didn't stay.

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In October 2008, Brenda Brown, Keith Mullen and Lou Strawn authored a series of posts while attending a real estate conference in Munich, and then from London as we returned to the United States.  The series chronicled the European perspective as the economic crisis first rattled around the world (Day 1, Day 2, Day 3, Day 4 & Last Day).   A "big picture" view of the crisis can be helpful in dealing with a troubled loan.

Before we attended the conference in Munich, we anticipated some of the topics that we thought would be of interest to Europeans, as the EU anticipated changes in U.S. politics, and as they watched alarming events in the U.S. economy (Pre-EU Trip ).

Early next week, we'll focus on the "big picture" in the U.S., as the three of us (and other Winstead lawyers) attend the Mortgage Bankers Association's Annual Commercial Real Estate Convention.  The focus of the convention is commercial real estate finance in the U.S. It is a huge "meet and greet" for lenders and mortgage brokers - where lenders explain their loan production in the prior year and present their projected production in the coming year, and ask mortgage bankers to help them achieve these goals.

Just as we did prior to our EU trip, we have listed what we think will be some of the "hot" topics at the MBA-CREF convention:

• Some anticipate that the turnout will be 40% below the attendance at last year's convention. What does this say about the anticipated volume of commercial real estate loans in 2009? Are people NOT attending the convention because they anticipate a significant decrease in loan production in 2009? Or is all or part of the drop-off simply because the investment banks, and the CMBS loan production shops (and product) have disappeared?
• As to CMBS, what about the looming "maturity defaults"covered by our earlier post? What will replace this large component of the financial market? What will happen when there are limited sources of commercial mortgage finance?  What does a severly constricted loan production line look like?
• Will the life companies increase their investment allocations to allow for an increase in mortgage loan production? What about the rumor that several life companies remain "out" of the market, and that other life companies have a defacto "no new loan" policy, based upon extremely cautious underwriting criteria? What will this look like in the market?
• Another rumor is that interested investors actively are contemplating starting new loan production platforms (partly in response to the void created by the death of the CMBS loan origination market). Is this for real?
• Some believe that we're about to enter the "age of regulation." How will this play out in 2009? For example, the risk-based capital rules severely limit the ability of insurance companies to restructure troubled loans. Will these rules be revised? Also, will Federal regulation of insurance companies be implemented; and how will that play out in mortgage investments?  Turning to banks, one rumor is that bank regulators effectively have put a freeze on new commercial mortgage lending. Will the regulators change their tune, so that banks, who hold a majority of commercial mortgages in the U.S., start to lend again?
• In 2009, will we (finally) experience a significant up-tick in defaulted commercial mortgage loans? Will they be bank loans, CMBS loans or life insurance company loans? And is the industry prepared?

These are incredibly troubled times in commercial real estate finance. This should be an incredibly interesting convention.  We will be reporting on what we hear and discover at the convention next week.

Please post your comments and questions.
 

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