Rally fizzled on Friday - as it should...

The looser guidance of the IRS drove a rally initially, but I think the market will back up. It's like the market found out a girl that it was hot for had just decided to become a prostitute, and it got excited about the imminent action, but after a roll in the hay has realized it can never take her home to see the parentals. She'll still come in useful in the future though.

Things simply aren't good either.

• CRENews.com had an article out summarizing the rating actions year-to-date: 3,405 CMBS Downgrades, Only 82 Upgrades. Keeping in mind that rating agencies are extremely reactionary by nature (rather than making calls on the future - just wait until we actually have widespread problems).
• PCV/ST is defaulting imminently, along with a number of other high profile loans that are not cashflowing. I'm calling for a December default on PCV/ST with an over/under of 1 month - bets are now being taken.
• European CMBS loans were structured in an inherently weaker fashion in many regards, but also have additional covenants that lead to defaults faster (to protect the investor). That market is unraveling a little ahead of the domestic market. Not too mention there was ruling recently in France that allowed a Lehman-owned office building to pursue a workout strategy - DESPITE the fact that the bondholders wanted to take over the already defaulted loan as would normally happen. They're rewriting contract law everywhere, to the detriment of real estate investors, it is not just a domestic issue!
• The IRS changes its mind all the time. I'll bet a small sum that 10-years down the road we'll be able to look back and talk about a REMIC that was broken up because of some loan mod they decided they didn't like.
  
• Not to mention that some current- and next-pay AAA bond holders are going to be up in arms over the new IRS guidance - They already are.
  
• Will TALF new issue be successful? It has some draw backs that make it even less interesting to investors than the legacy TALF, which frankly hasn't seen much demand because it was structured so poorly (on purpose) by NYFRB.
  
• If new issue TALF isn't successful, we're going to have problems. The first new issue TALF deal should be DDR's - they have $900mm CMBS loans maturing next year, and another $500mm in 2011.
  
• CMBS maturities are nothing compared to banks/thrifts, but some REITs have a lot of CMBS mortgage debt to roll (I still can't believe that idiot, Cramer, would tell you to buy REITs right now). The ones with the largest maturities (all are >$500mm) next year are, in order, GGP, Vornado, DDR, Simon, Colonial, and Regency.
• Looking at REIT CMBS loan maturities over the next 3 years that exceed $1 billion, you end up with a similar list: GGP, Vornado, DDR, Simon, Regency, and Brookfield. Brookfield is an addition to the list, and has the second largest maturity schedule ($3.6billion) due the mortgages it used in the Trizec acquisition back in 2006. It has another $2 billion or so of CMBS loans due after 2012 as well.
  
  

Tangle Up In Blue - CRE Investors wth Big Yachts

The 2008-C2 deal has since added another large delinquency to its list of problems. Regency Portfolio is a 60-day delinquent $25 mm loan on 20 properties mostly located in Iowa. The sponsor is a CRE firm run by two brothers (Rob and Jamie Myers) who actually come across as rather seasoned regional CRE investors and developers. They had multiple business offshoots, almost all in Iowa, that ran the gamut from shopping center development, to resi developments (largest home builder in Iowa). They got overleveraged, and spent too much time at the Resi trough, and just got caught up in the general hype that has crashed our dear market...

They've since had to layoff over 100 employees, defaulted on multiple loans, and been hauled in to court losing numerous assets in the fray.

They also owned a boat named the 63' yacht, RegenSea, which brings back memories of another CRE investor who defaulted on a slew of loans - Hurley Booth (Jr.), who owned a 41' footer down in Tallahassee named the ContingenSea. What cute boat names.

Hurley Booth missed some of the limelight when he defaulted on virtually all of his loans at once, because this all happened in late 2007 and early 2008 - right when the news was focused on MBS Companies (Michael B Smuck). Hurley owned a number of student housing complexes around Tallahassee and they are mostly REO now, although Midland has been a little slow to make that move on the loans it controls - not sure why. The loans were spread across three deals: FUNBC 2001-C4, JPMCC 2005-C13, and JPMCC 2006-C14. The Booth website has the tagline, "Building a Legacy" - surely they could've come up with something less ironic by now.

Do you know a CRE investor that owns a big yacht? Let us know and we'll see if they're behind on payments. ;-)

JPMCC 2008-C2 & JPMCC 2007-C1 Appraisal Reductions

The fact that there were appraisal reductions related to the Promenade Shops at Dos Lagos and the Westin Portfolio (in both JPMCC 2007-C1 and 2008-C2), which were so widely reported in November they helped move the market to historical wides, was no surprise. However, the ASER calculation was off by a $100,000 on the Promenade Shops loan - a mistake that you really don't expect to see. It is a rather simple calculation.

Keeping in mind the '08 deal in particular was a small deal dominated by several large weak loans, the interest shortfall reached high into the capital stack effecting as high up as the A-rated (orig. rating) F class (higher if they stick to the incorrect calculation - there has not been a comment on the error yet...). This is significant - the subordination rate on this class is over 9% (3x historical losses) and it's already being hit with shortfalls. Again, it was a weak deal, a small deal, and a chunky deal, but a significant event nonetheless.

The 2008-C2 deal has since added another large delinquency to its list of problems. Regency Portfolio is a 60-day delinquent $25 mm loan on 20 properties mostly located in Iowa. More on this later...

The whole story is worth putting up the picture of the man, J.P. Morgan, with a knife in his hand ready to cut out the entrails of the poor originator who made these pathetic loans in the first place.