CMBS 2.0: An Overview of Changes and Challenges
The Line is pleased to bring you an article from our esteemed colleague, Pat Sargent.
Capital Markets Overview
For over 20 years an increasing percentage of commercial real estate has been financed efficiently through the packaging of commercial mortgages into commercial mortgage backed securities (CMBS) sold into the capital markets. Issuance exploded in 2007 to over $230 billion, right before the broader economy imploded into the Great Recession, after which issuance plummeted: $12 billion in 2008, and a paltry $2.9 billion in 2009. In 2010, lenders returned to the market with issuance of a still anemic $12 billion. Yet investors made it clear they wanted more transparency, better underwriting and stronger alignment of risk. Thus began an effort to bring about changes that would encourage a return to the sector by investors as well as loan originators and issuers, led in part by the Commercial Real Estate Finance Council (CREFC), a key industry group composed of participants in all aspects of CMBS. Meanwhile, Congress, trying to address the economic catastrophe, passed the Dodd-Frank Act in July of 2010, calling for significant financial market regulations and studies. The new and evolving changes in the market for CMBS, which include self imposed industry standards and implementation of legislative and regulatory mandates, are referred to as CMBS 2.0.
Model Representations and Warranties and Dispute Resolution in CMBS 2.0; Rule 17g-7
The Line is pleased to bring you an alert from our esteemed colleague, Pat Sargent.
Representations and warranties by loan sellers/originators concerning characteristics of commercial mortgage loans have been a component of commercial mortgage backed securities (CMBS) since inception. While significant and important in transactions through 2007 (so-called CMBS 1.0), these representations and warranties have become a central focus of investor and regulator attention in CMBS 2.0.
Moving Forward
Over the past year, we have looked far and wide for answers to how we got in this real estate finance and capital markets mess and how to get out of it. We have listened to real estate industry leaders and economists. We have examined rating agency delinquency reports and downgrades. We have looked for comparative solace from the experience of the Dust Bowl, the carnage of the First World War and the 1980s bust. We have even consulted with Dr. Strangelove, Ferris Bueller, and Willy Loman.
What Financial Regulatory Reform Means to Private Funds
The Line is pleased to bring you the first in an ongoing analysis of financial regulatory reform with this alert on the impact on private equity funds from several of our experienced colleagues, David Buck, Bill Rivers, Vic Zanetti and Peter Bogdanow.
On July 21, 2010, President Obama signed HR 4173, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”), which puts in place a substantial regulatory overhaul for business, especially in the financial industry. The Act includes various new laws affecting fund managers, the most notable of which is “hedge fund registration,” whereby advisers to hedge funds, as well as private equity funds, real estate funds and venture capital funds, will be required to register with and/or report to the SEC. Hedge fund registration, or “private fund registration,” will substantially enhance compliance costs for fund managers. While the Act generally affects larger funds, it contains a number of provisions that will be troubling for middle-sized and even smaller funds, as well as additional record-keeping requirements and reporting requirements for investment advisers to private funds. The Act also creates additional challenges and opportunities for private investment funds, including (i) limiting bank involvement in the private fund space, (ii) introducing new corporate governance reforms and (iii) regulating the trading of swaps.
Scoreboard
In early August, pennant fever begins to transform the casual baseball fan into a fanatic. At ballparks, eyes dart from the field to the scoreboard and back, manically monitoring the scores of games involving competitors. The scoreboard is as important as the game. Whether the home team is ahead or behind, it provides inning by inning thrill or solace, or both. (With our local team, the Texas Rangers, in the uncharted territory of being both in first place in August and mired in bankruptcy court, The Line has become a big scoreboard and court watcher.)
Ruthless
Fitch Ratings’ weekly U.S. CMBS Market Trends newsletter released today disclosed that CMBS loan delinquencies in June pushed the delinquency rate to 8.14% (Fitch Ratings’ delinquency index includes 2,962 loans totaling $35.9 billion that are at least 60 days delinquent or in foreclosure out of the agency’s rated universe of approximately 40,000 loans comprising $440.8 billion). June also marked the fifth straight month of loan resolutions in excess of $1 billion, as $1.5 billion of loans leaving the index in June helped to offset the $2 billion of new delinquencies.
The Line Reports from Andrews Kurth's Mid-Year Real Estate Roundtable - Part III: Vuvuzelas
In most soccer games there comes a moment, usually around the 60 minute mark, when tired legs and passionate fans recommit and reenergize for the final push. Depending on the country or stadium, that’s when the cheering, flare burning, singing, flag waving, or blowing of vuvuzelas intensifies and the teams rally.
Big Bambu
At the CRE Finance Council convention in New York this week, an exuberant band played at a networking cocktail party, economists reported upbeat data and issuers and originators boldly committed to start pushing money out the door. That was the good news. The bad news: the band members were moonlighting investment bankers and lawyers, the servicers didn’t share the same optimism and the uncertainty of regulatory and accounting reform still looms.
It Comes with the Territory
In those days, there was personality in it... There was respect, and comradeship, and gratitude in it. Today, it’s all cut and dried, and there’s no chance for bringing friendship to bear—or personality. You see what I mean? They don’t know me anymore.
–Willy Loman, Death of a Salesman
The Fictional 15
As though we needed another reminder of the impact of the Great Recession, Forbes recently released the long-awaited Fictional 15, its annual ranking of the fifteen wealthiest fictional characters.
