Saturday, August 15, 2009

WSJ "reports" More Hotel Jingle Mail

The WSJ put out an article on hotel defaults.
One major factor in the foreclosures: Many hotel loans are difficult to restructure because they were packaged into commercial mortgage-backed securities, or CMBS, which combine hundreds of property payments into one single bond. With scores of investors owning those bonds, it is extremely hard to cut a new deal to keep the hotel in owners' hands.

"There is no one person or two people that can really represent the interests of the borrowers and strike a deal," said Art Buser, chief executive of Sunstone Hotel Investors Inc., which is forfeiting one hotel and has put lenders on notice that it might do so with others.
This argument is getting tired. The investors own debt obligations of a Trust, of which, the hotel loan serves as collateral and has signed a contract obliging it to make monthly debt service payments as a result of putting a mortgage on their property. There is just ONE, 1, UNO, entity that they have to talk to in order to get debt relief or modify their loan - it is called the Special Servicer. Typically, the Master Servicer handles sending out bills and receiving payments, and as soon as it gets more complex than that, they engage the Special Servicer, who does heavy lifting such as loan modifications, foreclosures, appraisal and property management engagements, etc. The Special does not necessarily get engaged solely because a property is delinquent either - i.e. you can negotiate to prevent default! wow, that's surprising. Maguire did it just the summer with his Solana complex in Westlake - the master servicer said, and I quote, "transferring to special servicer for imminent default".

The borrowers (he lost the W San Diego a few weeks ago) are either lying to themselves, or have been lied to by whomever was charged with the task of contacting the servicer. There is precisely "ONE PERSON" who he needs to deal with. That is a simple fact. They're not even hard to find, and they're name and phone number can easily be looked up in your monthly statement (if you're Art Buser) or in Bloomberg on the CF page of whatever deal the loan is in, or on the free Edgar search site for SEC filings, or at the Trustee's free website (either Wells or LaSalle). So, just stop it with this tired argument. You're lying to us, you're lying to yourself, and you're lying to whomever your trying to get out from under your debt obligation with! Liar, Liar, pants on fire!

Further, hotels have always been the most volatile CRE sector - always. As one response to the article noted, none of this is a surprise. Hotels by their nature are susceptible to economic downturns (tight wallets equal less travel), are more quickly impacted by changes in rental rates (because leases roll nightly), and were way over-priced and over-levered. I don't have a crystal ball, but I remember a lot of conversations back in 2006 and many more in 2007 where we looked at hotel loans that didn't make any sense - we frankly couldn't believe the Extended Stay deal that Lightstone is "burdened" with now. It's hard to feel sorry for the investors because they were either too greedy or too dumb, but it's even harder to feel sorry for the sponsors - they're supposed to be professional real estate investors combing through the fine details of their contracts. They took out a CMBS loan in the first place aware of it's restrictions, but in favor of the easier process and lower rate, and now they cry foul.



Froggy said...

I personally heard Chief Credit Officer of CW Capital (a very large special servicer) Tom Nolan confirm to a room full of CMBS borrowers that they really don't have anything to say to a borrower until they start skipping payments. He went on to say that they don't do workouts, they do extensions and that the purpose of the extensions was to cause the borrower "pain" so that he pays off.

He also basically said that the AAA tranche owners are basically a bunch of retards that he could care less about and doesn't give a thought to their complaints about getting their principal back on their bonds.

Also, during the original CMBS deal, the SS would buy the entire B piece and equity for the issuance and then turn right back around and Re-REMIC it into a CDO with a 40-50% AAA tranche and dump it into those retarded pension funds and European municipalities. In so doing they would recoup their entire investment in their B notes. So, they don't give a fuck whether or not these deals pay off or not because the more assets get transferred to SS, the more bps they make on servicing and dispositions.

In other words, its' not so simple to pick up the phone and get the SS to deal with you. They are fucking scumbags and could care less about the value of the securities in the trust since they cashed out long ago.

John Plunket said...

You misunderstand Art Buser's point. He's an extremely smart guy, dealing with what's turned out to be really dumb financing structure.

When a loan's held by a bank or an insurance company, you can talk to a single decision maker, who represents the single entity that made the loan. That one person can ultimately make a decision, and that decision weighs all good aspects --eg, avoiding foreclosure time cost and effort-- against all bad aspects --eg, waiting longer for full repayment, reducing amortization or interest-- on a single scale. The "net weight" is very clear.

Art's point is that it's different when dealing with a loan held by a REMIC, for whom each loan indirectly supports multiple layers of discrete bonds held by unrelated independent parties each motivated by a wide variety of financial objectives, but all represented by a designated servicer, who has a different set of financial objectives of his/her own. The servicers, with its unique interests and motivations, is nonetheless charged with the responsibility to be fair to all bondholders. The servicer is in a real sense similar to the executor of a complicated estate, with dozens of heirs fighting among themselves. Some heirs just want really need cash NOW. Others might say don't sell stock now, the market sucks. Still others are dead themselves, and have another estate executor speaking for them.

YES, technically, the executor is your one, 1, uno, solo decision maker. Yes, the Art Busers of the world know his phone number, thank you very much. But, NO, dealing with an executor or a trustee or a special servicer is absolutely NOT the equivalent of dealing with the decision-maker at a bank or life company, such as Art so nostalgically pines for.

Servicers serve multiple masters. If they propose a discounted payoff, the squawks and jeers come rolling in from one side. If they ponder foreclosure, the threats and hoots and free advice come pouring in from the other. The CMBS servicer weighs the same factors, and the same classic decisions as the old-fashioned, independent lender --but he's surrounded by folks reaching in to put their thumbs on the scale, threatening to sue him if he makes any judgement they don't like for themselves, and ya know what? Right now, these decisions are lined up out the door and around the block, and the servicer gets paid regardless.

Give borrowers like Buser the credit they are due, please.

Froggy said...

Well said, except that I can assure you that the special servicers are not looking out for anyone but themselves. They are in the driver's seat on these blown up CMBS Trusts and they aim to stay there.

Contrary to the Mezz and Investment grade bondholders, the SS have already recovered their entire investments in the B piece by creating and selling CDOs collaterallized by their bonds. How a CDO that is completely consisting of B note can have AAA tranches is a mystery of the universe that will never be solved. Nevertheless, these douchebags have been playing with house money from the beginning.

Borrowers are screwed and in fact REMIC tax rules prevent actual workouts from happening even if a SS were willing to do so.

The SS earns 25 bps on every loan they service which is 3-5X what the master servicers get. They also get 100 bps for a disposition (note sale, REO sale) of a defaulting loan. Additionally, they get the pick of the litter of blown up, overleveraged deals (that they let into the trust) and are running de facto opportunity funds by purchasing the best notes at EXTREME discounts, foreclosing and owning the assets. They stuff they sell on debtx are the dregs.

Their control ends when their bonds become worthless, however, and they are now furiously buying up the mezz piece of the trusts in order to remain in control. Eventually they will get squeezed out, but until then everybody but them gets nailed.

Concrete Jungle said...

Fair enough - I don't know the guy personally, so its probably not fair to jab him directly when I get to remain anonymous on some level. Apologies.

However, although it would be great to be able to mod your loan based on your relationship with the president of the bank (who is your golfing buddy, and your kids hang out together), that is just not a fair excuse. The borrower did not get a relationship loan, opting instead for the cheaper CMBS loan with stricter workout rules. And, the Special represents those interests. No sympathy, and they are misrepresenting the truth with statements like the one in the article.

Specials typically hold the lower rated and equity to maturity, not always but typically. Most of the debt in CRE CDOs (which are not REMICs or ReREMICs) is BBB. The most obvious conflict at the Special level is whether to extend or default (extenions are more beneficial to the IO and B piece holders, defaults are more beneficial to the shortest AAA holders).