Bureau of Misinformation

Someone took a reasonably accurate article from the WSJ and turned it into this diatribe.

First off, homeowner's turning in their keys versus CRE owners turning in their keys.
A) CRE owners do not turn in their keys because they are cash flowing every month but are underwater. Instead, they turn them in because they lost tenants (or never had them) and cannot afford to pay the mortgage. Complain about pro forma underwriting all you want, right here.

Apparently, you're comparing this to a situation where a homeowner is underwater, can still afford the payments, but walks away from a legal contract - likely with recourse to the borrower (unlike the CRE loan). If I, personally, had made the loan to this guy, I'd drill his knees. If, however, he lost his job, had a mortgage that he never could afford in the first place, well, then, he should turn in his keys just like the horrible CMBS borrower you describe.

B) Further, the CRE borrower in a CMBS deal, signed a non-recourse loan doc - the lender agreed that the borrower could turn in the keys with no credit impact. The poor pitiful homeowner signed an agreement saying they would be held liable if they stopped payments. Bad stuff happens to everyone, but you should feel bad when you go back on your word, even if you feel like it was a bit beyond your control. Bring back debtor prisons and stop writing non-recourse CRE loans.

Second, how did Lehman enter into the story? Ok - Derivatives - where did that come into play?

After blaming CMBS repeatedly, the author does admit to not understanding the structure of CMBS deals, but then he keeps doing it in the follow-up comments.

Fannie and Freddie - they always bought most of the Multifamily collateral of deals. This shouldn't be surprising - maybe unknown, but not surprising. The surprising part is that a transitional loan like this was dropped into the Group 2. Still, I don't see them losing money related to the A1A, even on WBCMT 2007-C30.

Speyer not paying the price (author + commenters)? The poor tenants are the only ones to suffer (commenter)? Let's use the authors numbers (which do not necessarily reflect the truth or current investment sizes). The equity owners are losing $224 million dollars. That is not a big deal? They lost 100% of their investment - I've never lost 100% of any investment, and I've never lost any amount of money with a million after it. Seems like a big deal. Tishman Speyer overpaid for Archstone and numerous property investments, are extremely overlevered... Yeah, I think they're pretty big losers here.

Pension plans losing money - oh, the horror. Don't blame Tishman or Blackrock for this, blame the portfolio manager at the pension for investing in mezzanine loans on a property, in a deal that was hard to make work when they were marketing it. I don't have a crystal ball, and I make a lot of mistakes, but I did not buy any related paper to this deal back when it was originally done (I have bought some over the last 12 months, though, at pretty steep discounts - the see saw is broken).

My favorite part is that the google ad that popped up right above the comments was a freecreditreport.com ad that quoted "A Bad Credit Score is 600 or Below". I think the official ranking of 600 below is "Shitty", and "Bad" starts somewhere north of 600. It had a little pile of gold if your credit score is 699 - really? Nothing wrong with a 699 credit score, but the pile of gold probably should be a pile of plastic to more accurately reflect your typical American with a 699 credit score.

Curbed RE: Stuy Town

Headline says, Even God is Losing Money on Stuy Town. Good stuff.



The list of mezz investors is typical of some of the worst CRE investors out there. You look at any of their portfolios, say Hartford, more AJs than almost all other insurers, more CMBS as a % of total portfolio too, more small balance CMBS exposure, more MEZZ deal exposure.

2010 TALF requests grew - unexpectedly

$1.45billion. I thought everyone was at CMSA? Guess there wasn't a budget for it this year.


==========================================================================
Date 01/20 12/14 11/17 10/21
==========================================================================
TOTAL $1,453.433 $1,324.854 $1,489.827 $2,124.921
% Change 9.7% -11.1% -29.9% 51.6%
-----------------------------------------------------------------------
Newly issued amount $0.000 $0.000 $72.248 $0.000
Legacy amount $1,453.433 $1,324.854 $1,417.579 $2,124.921
==========================================================================
Note: All dollar figures in millions.

Source: Bloomberg, FRBNY

Winter Olympics - Foreclosed

Okay, not really, but just pretending to be a journalist for the day with a catchy misleading headline. NPR reported this morning that the Intrawest foreclosure impacts some of the property the Games are being held on.

Intrawest was bought out by Fortress (yeah, the same guys that just issued that BALL 2009-FDG deal, but this is totally different, totally) and Lehman financed it in 2006. It's not working out well.

Tranche Warfare?

Shoddy journalism from Bloomberg goes out with a catchphrase headline of "Tranche Warfare", and then doesn't talk about Tranche Warfare at all. Honestly I just skimmed it, and wouldn't even recommend doing that, but I don't think they even describe tranche warfare or discuss it in any way. Instead, they just regurgitate stories about loans like ESH - which didn't make sense when they were done, and make references to mezzanine debt.

However embarrassed I am for the journalists involved, I've been waiting to use this image for months and months, so I'm going to waste it on this non-review of their non-story.



























I'm ready to see some real tranche warfare where the special charges some nonperforming property owner 100 bps to extend their loan and push a loss off for a few years, while some front-pay investor cries foul and sues the bejeezus out of them. They should pick on LNR first - they're going down soon.

Blackrock picks up Helix

Not sure what this says, but I bet Kevin Donlon (the CMBS one, not the Father one) is planning a real nice vacation.

Blackrock bought Helix. Blackrock currently sells a product to institutional investors that I assumed competed with Helix, but I'm not really familiar with both companies in that regard - at least not enough to fully tease out what the purchase means. I'm leaning towards either "Blackrock's CMBS analytics suck" or "Helix's analytics are that awesome".

Extended Stay's Stay of Execution

Judge Peck extended the bankrupcty filing deadline to April 2nd.

According to Richard Parkus at DB, Centerbridge and Paulson are injecting $400mm in cash (200 equity/200 rights), and they want to bring on Doug Geoga to represent them on the board. Further, they're ready to pull the trigger immediately.

This may turn into a real issue with Starwood who bought the mezzanine debt, and subordinate bonds off the CMBS (G and H), and has been in much longer negotiations to take over the chain. They've publicly accused ESH of misleading them. Their reorg plan calls for making payments to the CMBS holders (who all are not receiving any interest right now, btw), amongst other things. They may well get a big slap in the face for their efforts to buy the debt, get a controlling position, receive no income on the debt purchase, pay a consultant, and then not get anything for it.

I'm on the road traveling, so don't quote me on the information below that ise based on memory alone!!!

For those without the full history, this is one of those loans (similar to PCV/ST) that everyone scratched their head on when it was first issued. It didn't make sense then, and it's fitting that it is one of the first to fail. Blackstone bought the chain in 2004 for something like $4 billion, and financed it through a loan that ultimately ended up in a Bear Stearns deal. Then, just 2 or 3 short years later, Blackstone flipped it to Lightstone, for TWICE as much ($8 billion). Lightstone is quite possibly the worst real estate investment vehicle ever created - the guy that runs it bought at the top, used the most leverage, and overpaid on top of that, and he did it over, and over, and over again.

So, Lightstone called up their buddy at Wachovia (whose name rhymes with varoom, kind of) and put together a great debt package including a CMBS component and mezzanine debt. Lichenstein (the dolt who runs Lightstone) even got on the hook for a $100mm personal recourse carveout when the loan went into bankruptcy. Of course he figured out a way to get out of this by getting an indemnification from some of the bondholders, which smelled a little funny and he must have used some sort of voodoo to get this in place.

Starwood stepped in and has effectively offered to buy them for $3.5billion. But that brings us back to the start of this article.

Ethan Penner - "Completely Reformatted"

The "inventor of modern day CMBS" was out a year ago highlighting that securitization was not THE problem at all (nothing to see here, people), and then more recently he actually has changed tack and proposed changes to securitization such as retained interests. Read the second half of the article though - most of it is just spot on.

I couldn't disagree more regarding this tired "retained interest" argument. Retained interest and Pfandbrief bond structures would not have prevented the current issues at all. Take a look at the retained interest model used in Auto ABS, or better, subprime Auto ABS - value interest near $0, pass costs onto other bond investors, make more risky loans. The current model where the special servicer buys the b-piece actually works much better - it mostly failed because they got competitive and started reselling the risk into CDOs (the market has effectively stopped that). Special servicer takes first loss risk, manages problem loan portfolio, receives fees for working out problem loans and from cash flow on bonds.

This guy is a really smart guy, and has more CMBS experience than just about every single other person in the market.

Penner experienced a meteoric rise of his own at Nomura Securities Co. in the mid-1990s before his sudden departure in 1998 amid a spreading Asian financial crisis.

... oh yeah, that Asian financial crisis. I don't know shit from shinola, but his departure may also have stemmed from the nine-figure loss he amassed in just six months at Nomura, and was followed just weeks after his resignation by a complete shuttering of the CMBS operation there. AND, followed for years by multiple violation of reps and warranties lawsuits that successfully put back multiple loans to Nomura that resulted in huge losses.

Doctor's Hospital by itself was a $50mm loss, on a senior mortgage that was something like $49mm - made on a hospital that had appraised in the single-digit millions just before the loan was made (just 18 months before his resignation)! This one loan took something like 10 years to play out, so the losses that could be tied back to actions that he oversaw, are actually substantially higher than what you read about.



I really don't have anything in the world against the guy, but if you're going to allow press releases that go out showing all the shiny stuff, flip flop on what you say year-to-year, and then not acknowledge the flip-flopping and prior errors that are fairly substantial and at least something an investor in one of CBRE's funds might want to hear both sides about... Well, someone is going to say something. And it might be me, and it might be anonymous. But, I'll make a deal - let me know if anything is wrong here, and I'll retract it and apologize about it. I'll even send a gift basket with shinola in it to any offended party.

Insurance Companies do the darndest things

Insurance companies are heavily reliant on ratings. Although many insurers would have rock solid portfolio managers in place, perhaps even more so on CRE investments, others would target the highest yield available solely based on the credit rating. Obviously that was not smart.

I don't know what the right solution is, haven't thought about it much and not going to right now. However, presumably they have thought about it, and their solutions will make you scratch your head. Instead of changing the silly reliance on credit ratings, they just started rating their own bonds. They're already doing this for RMBS, and they're looking to expand it to CMBS. This is not THAT crazy - instead of trusting a biased third party with a horrible track record, they're presumably doing some credit analysis of their own (or trusting PIMCO to do it).

Now they're also adjusting the rules regarding how to value the security, at least in terms of how it affects their capital reserves. Taking the opposite approach of FASB, they're just valuing bonds at par instead of book...

Life insurers are readying for an estimated $5 billion-plus capital benefit ...

The change involving carrying values has been largely off the radar screen, as consumer groups have fretted that Pimco and the NAIC would employ economic assumptions more optimistic than those used by rating providers in the past year or so in downgrading many once-triple-A-rated bonds to "junk."

Moody's concluded that assumptions disclosed recently by the NAIC—for things such as home prices and unemployment rates—"are quite similar to the assumptions we use in rating these securities." Pimco declined to comment.

Ha! So, the rating providers actually put thought and 'economic assumptions' into ratings? Could have fooled me. The most disturbing thing about the entire article is that last paragraph though. Moody's reviewed the new NAIC assumptions, and felt they were demonstrably similar - so the NAIC ratings are as weak as the public rating agencies. This tells us one of two things 1) Moody's is wrong, there are no similarities and the NAIC is simply doing a better job at monitoring their firms' credit risk, or 2) The NAIC is making stuff up as they go. I'm leaning towards the former option, but either way the rating agencies no longer serve any purpose and will quickly go out of business at this rate.

Second & Seneca asking for debt restructuring

Originally part of the EOP transaction, Second & Seneca traded hands 4 times (Zell->Blackstone->Archon (GS)->Tishman), very quickly, ending up in Tishman's hands. For some reason that is not working out so well, and Tishman is attempting to restructure the debt.

More bad news for BACM 2007-3 - see prior post on Renaissance Mayflower.

Rennaisance Mayflower Hotel (DC) asking for loan mod

One of the largest (5.7%) loans in BACM 2007-3 is asking for debt relief. Not completely unexpected, but we did call them last fall on a number of occasions and couldn't get a room - took that as a sign things might be okay there, despite the financials...

Although Rockwood isn’t in default on the note, it was forced to lower room rates to keep up occupancy. As a result, the hotel earned just $7.6 million in 2008 and $6 million for the first half of 2009. That’s not enough to cover the $11.5 million in debt payments that Rockwood pays each year.

Value deficiency is around 55% per Realpoint.

Room 871 is where Ashley Dupre cheered Eliot Spitzer up on a number of occasions, but here presence was apparently unable to lift the hotels flaccid financials.

The Rockwood Group has a number of other problems too, and that concerns me.


UPDATE: April 2010 - went delinquent

Comings and Goings

Peter Cooper/Stuy Town is finally defaulting on their mortgage after much anticipation. Five different CMBS deals have exposure, and are gearing up for their shortfalls.

One, unnamed*, journalist got it right. She didn't get a byline, maybe I should know who she is, but I'm going to dub her "Samantha's Mom". As we've said all along - the CRE problems are much worse on bank's balance sheets than in CMBS.

CMBS is going to rally in 2010, and it's going to be huge!

I'm just embarrassed for the Fed and how they've done pretty much everything. They screwed up TALF, again. Did you know the fed was a private enterprise that can be hired/fired by Congress? Should you be asking your Congressman to let go this wayward contractor?

*It's Agnes Crane - I just think it's weird she doesn't have a byline.

Big distressed deals getting done

The WSJ highlights several distressed deals going to institutional buyers...

In the case of the Drake site, the partnership has signed a deal to pay off about 10 creditors that hold the $510 million loan the developer took out primarily to acquire the site. The creditors are getting paid as much as 90 cents on the dollar and as little as zero, the people with the knowledge of the matter said.

...

Meantime, Blackstone is aiming to control the restructuring Highland by buying a chunk of so-called mezzanine debt with a face value of about $320 million from Wachovia Corp. That piece of debt, in a key position between the equity and the first mortgage debt backed by the hotels, gives Blackstone a significant say in how any restructuring unfolds, people familiar with the matter said.

...

Currently, the Federal Deposit Insurance Corp. has about $30 billion in real-estate debt that had been held by the scores of banks that have failed since the economic downturn, according to the agency. CMBS servicers also are emerging as sellers because, unlike banks, they have limited flexibility to extend or restructure troubled loans. Carlton Group, a loan-sale adviser in New York, is currently marketing $307 million CMBS loans in one of the largest sales by a nongovernmental agency.

CMBS Delinquencies continue to hit new records

Delinquencies are still really, really high, and headed higher. Hotels are the worst.

Oops - TALF accepts bond on accident

BACM 2007-1. The FED has accepted a few bonds off of it, then rejected one, then accepted one in December. Then yesterday they came out and said it was an error to accept it this last time, and they wouldn't accept it again at the current market price.

The, er, logic continues to baffle investors.

Also, what does price have to do with their TALF decision? If they don't think its worth PAR in the stress scenario they shouldn't be lending money on it - right?