LN-ARB

Fresh from being bought out by Starwood, LNR was recently in the news regarding risk retention in the CMBS stack. Financial Times and Debtwire did a nice job of covering LNR's stance on retaining (or selling) the B-piece in a CMBS structure.
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For the uneducated, one of  the ways LNR became great in good times (and  weak, in bad times) was through buying the first-loss portion, also known as the B-piece, in CMBS deals. The B-piece buyers are also known as the "Gatekeepers" in the securitization because since they are first exposed to losses in the trust, they get to have a say as to what assets are included.  If a particular commercial-mortgage isn't up to snuff, then the B-piece buyer gets to "kick-out" the collateral in lieu of something of better quality.
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During the euphoria that was 2007, the B-piece buyers could be counted on to keep some kind of credit standard within a CMBS deal.  The shortened version of the role of the B-piece investor is that by purchasing the riskiest component of the CMBS, they get to choose what risks they are exposed to and earn a greater yield, at the expense of being the first to absorb losses.

Look at the chart below.  Typically, LNR will buy the lower half of the middle column which includes the BB tranche, B tranche and the non-rated portion also known as the B-piece.

The FT/Debtwire article goes on to say that with Dodd-Frank's securitization retention rules on the horizon, it is unclear as to how much of the B-piece LNR would have to retain and for how long.  Back in November the WSJ covered a similar issue regarding Rialto and BlackRock.  As this class of investors is known for having "skin in the game" by being long and strong the assets in the trust, they are shrewdly selling down some of their position (The BB & B tranches, for example) while they still can:

"On a notional basis that’s equivalent to about a 7% stake of a new deal. But recently, the BB portion (about 2% of the 7%) has been offloaded into a more liquid secondary market at roughly 8% yields, according to the buysider, a CMBS dealer and a trader.

Put another way, on a cash basis, given the discounted level B-piece buyers pay for their risky bonds, some buyers have retained only the equivalent of about 1% to 1.5% of CMBS deals after stripping away BBs. In doing so, they’ve recouped a major portion of their initial investment, the buysider said."

It's understandable that proponents of the CMBS market would want the league of extraordinary B-piece buyers to match their interests with that of the other investors in the securitization but as long as Dodd-Frank leave this loophole open, then others will keep on driving a truck through it.

*Here is the presale for GSMS 2013-GC10 by S&P, of which LNR bought the E(BB), F(B), G(NR) and R(NR) tranches.  
*Not for the faint of heart: The GSMS 2003-GC10 Prospectus*

Servicers Unite

Starwood is buying LNR for an undisclosed sum with 3 commas:

Barry Sternlicht's Starwood Capital Group has agreed to buy LNR Property LLC, a large player in the distressed-commercial-property market, for more than $1 billion, according to two people knowledgeable of the deal.

and, Ocwen won the bankruptcy bid for ResCap:

Ocwen will take over ResCap's business (subject to the pending approval), which includes the rights to serve nearly 2.4 million mortgages with an outstanding value of $374 billion. The company faced a serious competition from Nationstar Mortgage Holdings Inc. ( NSM ) at the ResCap bankruptcy auction in New York. Nationstar acted as the stalking horse bidder for the auction. For this, Ocwen will pay Nationstar a break-up fee of $24 million, which was included in its final bid amount.

Higher foreclosure rates coming to an RMBS near you.

LNR does the splits

CRENews has a full update here.

Three New Unites

1. Archetype Capital Markets - property level financing
1. Archetype Mortgage Capital subsidiary to be run by Larry Brown
2. Archetype Investment Management
1. Archetype Financial Institutions Services Group to buy small balance commercial mortgages I assume falls under AIM, not ACM, but it's not clear.
3. LNR Asset Servicing - special servicing operation to be run by Adam Behlman

Cantor 2011-1 - $1 billion - LNR to buy the B-Piece?

Bloomberg noted today that LNR might be the B-Piece buyer. See its NBD when you're a BSD.

More than $3 billion in Loan Sales Coming...

Also on the CRENews website, from last week:

Since the beginning of September, loan-sales advisers have taken offers on some $1.5 billion of loans that they have been marketing on behalf of their bank, special servicer and government-agency clients. And the expectation is that substantially more loans - as much as $3 billion or more - will be offered in the coming weeks.

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Among special servicers, LNR Partners, CWCapital Asset Management, C-III Asset Management and Midland Loan Services are each said to be preparing the sale of loans.

LNR will be offering $200 million of hotel loans through Jones Lang LaSalle and another $100 million of small-balance hotel loans through an auction venture of JLL and REDC. It will also be offering roughly $150 million of additional loans through DebtX.

Earlier this year, it [LNR] orchestrated the sale of a $1 billion portfolio that was comprised largely of small-balance loans. Those loans were sold through Eastdil Secured to four investor groups. But instead of going the bulk-sales route this time around, the Miami company is looking to sell loans individually.

CWCapital, meanwhile, will take bids for $207 million of loans later this month through Mission Capital. It has also offered loans through CB Richard Ellis and Eastdil.

The very excellent article goes on to list a number of other coming sales from banks including M&I, BB&T, KBW (for a third party) together are expected to sell another $2-3 billion in portfolio loans.

As previously noted, everyone was waiting to see how these late summer CMBS sales ($1.5 to $2 billion was CMBS loans via Eastdil and Mission Capital) went in order to judge what to do with the other $80 or so billion on special servicers' desks. At the end of the day, the big $1.04bln LNR package of small balance CMBS loans exceed expectations and were mostly bought up by a large financial institution and financed by another large financial institution (both household names) at higher than expected prices.

I don't know what that does to the market - so many buyers have to deploy capital or lose it, so maybe they acquiesce now that a high watermark has been set and they just keep bidding up prices. Surely sellers like the execution and will start flooding the market just as Orest Mandzy notes in the above article.

At the very least CMBS credit IO holders should probably start shortening their expected workout periods on the aged REOs. The LNR sale was officially announced on 4/29/2010 (there were some early looks in mid-April) and the losses were reflected on the loans on 7/21/2010. That seems pretty quick to me.

Rialto adds $7.7mm to LNRs bottom line

Distressed Debt Report:

Miami-based Lennar Corp. posted a profit for its fiscal quarter ending Aug. 31, thanks in part to the work of Rialto Investments, its division dedicated to acquiring distressed assets.

In February, Rialto teamed up with the Federal Deposit Insurance Corp. to acquire a 40% equity interest in 5,500 loans that had been originated by two dozen banks seized by the federal government. Rialto paid $243 million for its share of the loans.

LNR - The Comeback Kid?

FT reports:

...a plan by private equity owner Cerberus Capital management to refinance its debt and to refocus operations could give LNR a new lease on life.

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LNR recently bought controlling class-B pieces attached to three large CMBS – LB UBS 2007 C1, BACM 2006 5, and CSMC 2007 C1 – by outbidding incumbent servicer Midland Loan Services, according to the sources and remittance reports. For the USD 3.37bn CSMC 2007 C1 deal alone, 29 loans are in special servicing already with a balance of USD 559m, implying USD 1.4m of servicing fees based on a 25bps rate.

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The B pieces of the three deals went up for sale in a late-January auction of six Class-B bonds just before the former owner, Anthracite Capital, filed for bankruptcy. Midland attempted to buy the bonds itself but LNR won out with a bid exceeding USD 2m for all six bonds, speculated a third CMBS investor at the time.

Sell Mortimer, Sell!

Specials are coming out of the woodwork with CMBS loan portfolios for sale. First it was a hundred million there, a hundred million here, then LNR comes out in March with the $1billion portfolio announcement and the actual list in May (2 months?). Now we're seeing a $500mm and $300mm lists since the LNR lists from two others...

This is going to hurt those credit IOs. Well, we're going to see some accrued interest recapture real quick and some realized losses real fast - that'll help the lower mezz that are cusping on shortfalls but not potential principal loss and the short AAA stack - but that'll be followed by much shorter workout periods on loans.

Going into this CRE disaster the typical work out period was a little over 1 year (from 1st default to sale of asset), then the world changed and we all assumed it was going to average around 2 years, and now ... we need to focus on 2 month resolutions on already defaulted mortgages, and 6-8 month resolutions on newly defaulted loans.

Thoughts?

LNR - The Experts

LNR's marketing department was up late last week churning out rosy nuggets for the Miami Herald and South Florida Business Journal. Just two months after hiring bankruptcy attorneys to figure out how to get themselves out of the hole that they are in (they just didn't do enough of those LNR CRE CDOs it turns out), we find out that they are selling a $1billion portfolio of small balance loans.

But wait, there's more...

The Miami Herald reports here, that LNR is one of the LARGEST CMBS firms and are the experts... they fail to mention the correlation between the firm's expertise and the whole "brink of bankruptcy" thing, but I'm sure its there. In all seriousness, there is going to be some real value to the new regime - just like at Centerline and Capmark who were sold for a song in recent months.

LNR - will they FINALLY file?

Globe St.

Bottoms Up?

Numerous sources have been hinting at a bottom in CMBS, including Barclays who said,

From a macro perspective, an uptick is a clear positive, as it suggests that the gap between buyer and seller preferences is narrowing and could signal that some believe a bottom in prices is approaching.

Housingwire noted that the CPPI is now down 44% on average, and 58% down for distressed properties - back to 2001/2002 levels. They also noted that the insurers bid will come back now that they can rate their own bonds - maybe for new issue, but not so much on legacy assets would be my guess.

They also note the coming risk of partial IO bonds, and this is a very real threat. Up until just last month, we were averaging about $2.5 billion in partial IO rolls each month, but that just spiked above $3 billion in January, and touches $4 billion by July. After a loan rolls from partial IO to amortizing, the average increase in debt service costs is around 20%, but lower coupon loans can get substantially above that, and amortization terms are all over the place. Although CMBS loans were ideally on stabilized properties, the worst offenders of proforma underwriting were loans structured as partial IOs - the lender would underwrite rents in year 5 to the necessary level, and to make it cashflow, would just not require amortization payments until month 61 (as an example).

As a more specific example, take a look at the largest loan to roll to amortizing payments this year, Grand Plaza, $86.5mm, in CD 2007-CD4. That property generated NOI of $6.4mm, and had debt service of $5.1mm last year - the new annual debt service will be approximately $1mm more at $6.1mm. The property cashflows at that level, but the debt service increased by 21.5%, and the property is already underwater at anything above 6% cap rates.

In all fairness, even last year, we had about $30 billion in partial IOs roll, which is about the same for this year, 2011, and 2012.



The biggest near-term concern is the expiration of TALF this month, but Citi made a very good point last week that repo lending has made its way back for most TALF-eligible bonds, and is competitive with TALF financing. They make a linear argument, but fail to explore why anyone would risk TALF if they could get a better deal in the repo market. TALF is clunky, and does not curry favor with either party like a nice repo line can.


Several folks have pointed to the 100 or so bps of tightening over the last 3 months, but in the grand scheme of things, the market has been pretty flat since last fall.

So, a bottom? maybe, but I think it's too early. We still have a lot of pain to work out in the pipeline, LNR still needs to file for bankruptcy, and we're only just starting to see a deluge of defaulted CMBS properties getting sold at viable prices. I don't think there is much to gain by holding a position through March just for the carry, but I also don't think we should all just sell all MBS like PIMCO has done.

Watchlist, Delinquent loans stratified by Originator, Special

Just looking at recent vintage watchlists, MSC 2007-HQ12 has an astounding 57.26% of it's collateral on the watchlist (it also carries a 4.61% 90+ day delinquency rate).

The top 10 deals from 2005+ vintages with the highest watchlisted loans are:
MSC 2007-HQ12 57.26%
WBCMT 2007-C30 46.75%
CSMC 2007-C4 45.30%
BACM 2006-6 44.54%
LBUBS 2007-C6 43.40%
CSMC 2007-C1 43.21%
WBCMT 2007-C32 39.83%
WBCMT 2007-C31 39.80%
COMM 2006-C8 38.59%
MSC 2007-IQ13 38.27%

All of these are as of September 2009. Nothing new here, but still just amazingly high numbers of watchlisted loans.

Another interesting strat is to look at the Specials' workloads - LNR is by far the heaviest with 1,129 loans (worth $16.7bln) being specially serviced, and a distant second is Midland with 594 loans ($8.6bln).

If you look at the originators who contributed the most loans that are now delinquent, Column holds a solid lead with 6,159 loans worth $4.3 billion that are currently delinquent. By count, LaSalle (now BoA) comes in second with their small balance deals carrying 4,922 delinquent loans ($2.1 billion), and by size, BoA comes in second with $3.5 billion (3,384) delinquent loans.

Not 100% "stratified" is a word, but I'm going with it.