Friday, June 29, 2012

Let's talk about the scariest thing we've heard in the mortgage market for a minute

While we rarely post residential-related updates here, an article out today caught our attention and frankly scared the beejezus out of us. Apparently this plan has been making its way through the various political and business echelons for some time now, and we've just missed it. An article in Bloomberg today highlighted a plan where municipalities would use their eminent domain powers to condemn all the mortgages in their county that are underwater, pay a reduced wholesale price to the mortgage holders (i.e. the Federal government, taxpayers, and other investors), and then refinance the homeowners into new mortgages based on market values.

I provided a few snippets and links below for your reading pleasure, and I'm going to avoid the most obvious arguments... okay, I'm going to make just one. If you are a company and you borrow money that is backed by some form of hard asset as collateral, and that hard asset goes down in value, you have to post new collateral - right? Not with a home, but that is kind of the way the world works. You borrow $100k and use a $120k house as collateral, if the house burns down, you need to replace that collateral - you don't just get to write down the amount that was borrowed - that would be insane. If anything, mortgage holders should be asking for more collateral, not writing it off. And why is the government stepping into this process again - it isn't working guys, please stop trying to help us.

A private investment firm (Mortgage Resolution Partners LLC; MRP) is pushing this plan forward and apparently has made great headway in some locales such as San Bernandino County where local ordinances have been drawn up to allow this to happen.

They are not talking about bailing out homeowners who are delinquent, mind you. The plan is for *help* underwater homeowners who are current on their payments. So, a local government is using it's laws to pass substantial costs back to the Federal government - Our $100k example above might mean that the San Bernandino resident gets a free $50k (not completely free, he'll owe taxes - at least there is some justice in the world!) while the residents of all the other counties in the United States will essentially cover the other $50k for him through our tax dollars. The taxpayer will get stuck with this in two ways: Directly - i.e. the Federal government guarantees principal on Fannie, Freddie, and Ginnie deals. and Indirectly - someone is going to have to fund the bailout of all the Pensions and Investment Companies that are going to crash from the non-agency bonds impacted.

And who is going to ever lend money to any homeowner that lives in one of these counties EVER again if this goes forward? I've seen a few comments that reply that it is absurd to think that originators will get over it in time, or work around it - do they not remember what happened a few years ago in Georgia when a new state law allowed for legal liability all the way up to the individual bondholders if a mortgage was not underwritten correctly... Almost every national originator closed shop until the law was struck down. Fannie and Freddie won't ever be able to do business in San Bernandino county again.

Even if an originator decides to start writing new mortgages in this county in the future they are without a doubt going to add language holding the homebuyer responsible, demand larger down payments, increase various costs, and only lend to the highest quality borrowers.

The complexity of the deal is enormous as well - there would be fights for decades over the valuation of the properties. San Bernardino is not just ripping off a little old lady here - they're ripping off EVERY little old lady in the country by hitting their retirement accounts and increasing their tax liabilities at the same time. Even the head of MRP, Steven Gluckstern, stated "no bondholders will be hurt because the loans would be bought for amounts that could be objected to in court." (he left out, "for years, and years, and years of trials and debates and great expense to everyone involved because this is the worst possible approach to solving the problem", but I'll tack it on there for him.)

They do realize the mortgage market is on the order of $14 trillion  - it's kind of a big deal - right?

Oh, and one more thing - Shiller thinks this plan is a good idea?!?!

Shiller ?

Thursday, June 28, 2012

People have only one wallet.

Kottke has a summary of Uniqlo's (highest paying retail tenant in Manhattan in 666 Fifth?) CEO interview with Fast Company.

I love his little one liners throughout - if you use your Mr. Miyagi voice they are that much more meaningful.

Wednesday, June 20, 2012

Savoy Park purportedly sold at no loss

Bloomberg reported (sorry no link) that a fund jointly started by Citigroup and L&M Development Partners bought the loan for "more than $210 million, the outstanding balance on the senior mortgage, satisfying the loan", but no additional details. The senior is in CSMC 2007-C1 and constitutes 7.08% of the collateral. Unlike some rent-control flips (i.e. PCV/ST), this is actually paying towards the A1A tranche, which is probably held by Freddie (although that is a complete guess).

The A2 is the current pay for the rest of the pool, and a small piece was on a BWIC yesterday. 13mm+ of the A3 was being offered at a 103 handle last week.

This was one of the rent control "let's kick out the rent control tenants and replace them with market-payers" projects that failed miserably. Vantage and Area Property Partners were the sellers.

We've previously discussed Savoy Park (fka Delano Village) here.

Monday, June 18, 2012

CMBS, Distress Debt Plays Returning to Market

See full article here - I excerpted the last few bits on distressed debt below:

When it comes to investing in distressed debt deals, Sotoloff says the best value is found the securities space. “We were able to buy a significant amount of legacy loans,” he said. “There haven’t been as many as we expected, but that’s testament to the Fed’s efforts to keep liquidity in the market and keep banks afloat.”

The market has indeed shown a tremendous amount of rescue capital opportunities, said Gollenberg. “What was once a trickle of deals is now starting to become a steady stream of resolutions come through, where actual assets—those bank-owned properties—are starting to be resolved.”

More loans are coming out of special servicers, said Lesser; expect a few billion dollars worth to come out of that segment this year. European loan portfolios are also being sold, but it’s been very slow going. Two biggest sources, added Salem, are direct relationships with regional banks and special servicers. “More banks are starting to let go of assets.”

Kline, too, sees more activity out there than there has been in the past. “No doubt we’re going to see fewer banks over the next few years.”

Which led Donahue to comment that perhaps “too big to fail is creating too small to survive.”

Monday, June 4, 2012

S&P to Revamp CMBS Ratings

WSJ reports that S&P is revamping it's CMBS rating system:
Since that event last July, no issuer has hired S&P to rate any of multiloan CMBS deals, which have typically been $1 billion in size. More than $12 billion in CMBS have been sold this year.
Payback hurts, doesn't it. We have not analyzed the proposed changes, but we have to assume that they are doing more than just calling all the new loans "crap", as an S&P analyst was quoted saying back in February 2011, just 4 months before the ratings firm was essentially blocked from all new issue deals.

My favorite quote is:
Harris Trifon, a CMBS strategist at Deutsche Bank, said that "at first glance, it seems the magnitude of the changes will disappoint most investors."
They fail to mention that he is a former S&P analyst. He's a nice guy, and he's probably right - heck, he probably knows more about S&P than just about anyone in a research group on the Street - but it just seems like WSJ would disclose that, right?

Friday, June 1, 2012

4 New York Plaza trades, defeases

4 New York Plaza traded from Harbor Group International (HGI) to HSBC and Edge Fund Advisors for $270mm. That's a great return for HGI who bought it as part of a sale-leaseback from JPMorgan in January 2010 for $107mm, although they did do some work to boost occupancy during that time.

The 2010 transaction was funded with a $72.6mm mortgage that comprises 24% of the RBSCF 2010-MB1 deal, which will be defeased. The new purchase is funded with a $154mm 5-year mortgage from MetLife according to an update out from Nomura. This is the first defeasance from a CMBS 2.0 deal.

Third Party Pricing - Case Study WBCMT 2006-C24 K

As CrabsOfSteel so eloquently put it,

...Every model in the universe will give it some positive value. Yet, a bond which will never receive another cashflow is worth 0. IDC may be tied into TRACE, and BVAL is mining quotes from Bberg emails, but the bond is worth $0. It's really that simple...
It is almost that simple, except when you open up your Pershing account and look at your holdings there is a price next to it. We all know it comes from IDC and it's just a made up price that doesn't have a firm grip on reality, but try telling your investors that. Try telling your auditor that! They're going to argue with you until the cow's come home that the value in the Pershing account is Level 1 (even though it is not "quoted prices in active markets for identical assets or liabilities"). In reality these are more likely a Level 2 pricing source, which according to FAS 157 is "based on market observables" using inputs that are observable in the market such as quoted prices for similar assets. Level 3 is the broadest category and includes unobservable inputs for assets where there is "little, if any, market activity".

The best place in the world to get the most accurate pricing is to call up your friendly dealer, or evaluate the security yourself and determine it's value on your own. Neither of these are favored by either FASB or your friendly auditor, and in some cases investors don't prefer that method either.They all want to see a nice clean print out on a monthly statement.

If the values were always a little high, or a little low, then it would be something you could manage, but they're not - they're all over the place. I've personally witnessed cases where IDC had a bond marked at half what it actually traded at the same day - can you imagine if you reported to investors a value that was either 50% of or 2 times reality? That is what IDC (and the others do).

So, that is my long-winded rant that brings us to WBCMT 2006-C24 K. It defaulted in May. Default means that it will no longer receive any principal or interest, it has a factor of 0, and could not be worth any dollar amount to anyone - you couldn't trade it if you wanted to, because it's gone.

Or is it? BVAL, Bloomberg's valuation tool pegged it at over $7 on 5/17, the last valuation they have for it (likely because they marked it as defaulted that day). Needless to say that seems a little high - especially if you look at their historical pricing where they actually improved it's price substantially the last month.

As of 5/17 (likely the day their system noted it as defaulted)

IDC is a little better in that they at least have it priced lower, $1.78, but they're still showing (via Pershing) the holding has a $178k value (for $1mm face) this morning. That's an entry-level Bentley.
As of this morning, last night's value

IDC, BVAL, Trepp - they're all just trying to provide a model-in-a-box solution to investors, and any model is bound to have flaws. The real problem is that the accounting authorities of the world hold this methodology in such high esteem.

If someone has an image of Trepp's valuation for this bond, let me know and I'll post it.

Loss Severities improve slightly in Q1

Moody's reports that loss severities for Conduit loans were down 50bps to 40.5% in the 1Q, and excluding loans with <2% losses the average was 52.2% (down 40bps).

Click your feet together in the air and Jazz Hands