Pressure Busts Pipes

No doubt you may have heard that Fannie unloaded about 2 yards of A1A CMBS recently as it joins the ranks of large bailed-out institutions who are looking to take part in the extraordinary structured products rally.

1. UBS: WAVE CDOs - May 2012
2. AIG: Maiden Lane - February 2012
3. Lloyds Banking Group: RMBS - May 2013
4. Fannie Mae: A1A CMBS - May 2013

And while we're at it, who could ever forget Merrill's infamous deal with LoneStar back in 2008.  I remember as I, a young neophyte in the game at the time, was perplexed by the twenty-cent handle and the fact that MER financed 75% of the deal.

But as you can tell by today's picture at the top of this page, this beloved blog is going to focus on Fannie's particular type of bond that it sold into the market.  If you want to know how the sale went, I recommend this rather robust piece by Real Estate Finance Intelligence.

In other words, "price talk for the bonds ranged from low 70s basis points for higher quality items to 200 basis points for less attractive securities."

Today's lesson will be for the newbs and for the intermediates.  There is some ground to cover here in terms of understanding what exactly these kinds of securities are and how they came to be.  The goal is to understand what Fannie's multifamily loan business is, and then try to grasp the idea of securitizing those loans into the special "A1A' bonds that I mentioned above.  Please take a seat and make sure you have your glass of water handy.

 The following is a primer I picked up via Fannie and it covers what their multifamily business is. Give it a quick read or you may proceed if you're already familiar:

1. Fannie Mae: Multifamily Overview - May 2012

Good, so hopefully now you understand how and why FNM is a  MAJOR player in the market.  Interesting how in 2008, as multifamily contracted, Fannie and Freddie stepped in to counterbalance the sudden dearth of capital and their market share went from less than 1/2 to nearly 3/4.

"The market share held by Fannie Mae and Freddie Mac (“GSEs”) expanded significantly from less than 40% historically to more than 70% in 2009".

Interesting.

We're halfway there people.  The first half of structured-product investing is to understand and make assumptions about the collateral; that being the multifamily loans that serve as the assets for the CMBS bonds.  The second half, and dare I say, sometimes the most important, is understanding how much cash will be generated from those assets and how much cash YOU (the individual tranche) is due to receive.

Please remember this important piece from the Multifamily Overview pdf that I linked to above:

1. In MBS executions, lenders deliver loans to Fannie Mae in exchange for an MBS that is backed by the mortgage loan.

The A1A class is the MBS that is backed by the multifamily mortgage loans contributed to the CMBS trust by the originators (typically banks, such BAML, Wells Fargo, etc).  In a lot of deals, the A1A class is essentially stuffed into the deal and that tranche carries no guarantee by Fannie Mae, but is instead supported by subordination from the entire pool of assets in the Trust (including non-Multifamily assets).  

From Nomura:

1. The A1A Class: The practice of "carving-out" a multifamily tranche started in approximately 1998, and still happens in selected deals today. 
1. The collateral is split into two groups, and a AAA-rated bond is created that is primarily backed by 100% multifamily loans.
2.  Freddie Mac and Fannie Mae are the only known buyers of this tranche, and the bond is created to conform to the investment rules specified in their charters.

Seriously, take a look here, as to how this all looks when jammed into the securitization.  Notice how in the "Notes" column, it says "multifamily carve-out."

Hopefully that makes a little more sense.  But what initially perplexed me the first time I heard of A1As was why they were there to begin with and also, if they received credit enhancement from the subordinate bonds in the deal?  In most cases, they do.

1. In response to investor worries about falling subordination levels in CMBS conduit/fusion deals, dealers started to break up the triple-A rated class into super-senior, "mezzanine," and "junior parts. In the structure shown in Figure 3, classes A1, A2, A3B, A3FL, A4, ASB, and A1A have 30% credit support from subordination and are called "Super Duper Seniors." 

Basically, since Fannie and Freddie are the only real buyers of A1A bonds (and hence, they finance the multifamily housing collateral), these particular tranches are made AAA in order to protect Fannie and Freddie from default risk.  Pretty good trick.  

Do remember however that:

1. Because of its position on the capital structure, if there are defaults in the multifamily loans, generally the bond will get cash from other property types as well, so the name “multifamily carve-out” can be slightly misleading. 
2. Also, if other property types default, cash may be taken from the “multifamily carve-out” to help make other AAA rated bonds whole. 

Honestly, a round of applause to Nomura for consistently doing a good job on structured products primers.  Cheers.

Hopefully the Real Estate Finance Intelligence article makes more sense at this point.  I suggest you give it another look.

Until next time.

~ Jingle Male

The Carnage

Hurricane Sandy did damage, no doubt to the Eastern segment of the financial district.  One of the buildings I walk by every day is 199 Water Street, also known as One Seaport Plaza.  Anchored by Abercrombie and Fitch and having BGC, Aflac, and Aon as its tenants; this building was something nice to look at.  Less than a block away from the Seaport itself, it is still under repair and I wonder how this will impact MSC 2007-HQ11.  Abercrombie and Fitch is still not up and running.  Want to get an expensive egg sandwich and coffee at Europa?  Forget about it.  BGC Partners was moved to Cantor's mid-town office for a stint as Jack Resnick & Sons tried to return the real-estate to it's pre-Sandy glory.

According to Moody's "the property was 98% leased as of March 2012, compared to 100% at the prior review and 97% at securitization." One Seaport represents 11% of MSC 2007-HQ11.  Just saying.  But beyond the questionable cashflows this collateral will eke out going forward, Hurricane Sandy poses larger questions for the insurance district in downtown NYC.  Why would any prospective tenant want to secure a major lease in the area after what happened?

GGP/Howard Hughes got lucky that their beauty was spared the destruction that a lot of the area's businesses could not escape.  It still pains me that I can't get my daily cup of coffee at the Flavor's at Water and John Street.  That business is a great franchise by the way and unfortunately, it looks like it will not be coming back. 

It's no secret that AIG is probably not going to roll it's lease at 180 Maiden Lane and despite SL Green doing a solid job of turning the lights back on after Sandy in about a month's time; it's hard to blame AIG for wanting to find a more secure and stable location.

I'm not sure if tenants will shift away from the Eastern side of FiDi or stay away from it altogether.  Two months out and still, not all the lights are up and running.  This could bode well for Midtown but let's see what kind of concessions property owners will make.  Their hand is weak, and wet.


~Jingle Male

AIG considers suing US for onerous bailout terms

Greenberg has filed a lawsuit already, and he is asking the board to weigh in and join him in suing the US government for around $25 billion (roughly equal to the 'profit' they made on the bailout) because they charged onerous interest rates (14%) and other unfair terms.

My first, second, and last reaction is Wow. It takes some gall to turn around and sue the government when you chose to accept their assistance - and AIG did choose that path, unlike some of the banks who allegedly were effectively forced to take the government assistance and enter into mergers. Some nerve.

The more important takeaway though, is that the government circumvented established bankruptcy law that is set up to handle a situation where a company has made bad decisions and is in financial ruin. No company should be labeled TBTF, if they fail they should go through bankruptcy and have the assets and liabilities lined up and whittled down at discount prices exactly as the law is set up to do currently. Instead the US came in and prevented a bankruptcy - which was well deserved - AIG was neck deep in CDS on mortgage product that was undergoing extreme dislocations and was vastly mispriced. It's not as if other investors didn't see it coming and have a completely opposing opinion and made gazillions of dollars.

AIG's CMBS

AIG continues to sell CMBS. They're 3Q holdings show that the majority are BBB-rated or lower (that's got to hurt their RBC reserves).

They're total holdings include $17 billion *traditional* CMBS, $1 billion in ReREMICs, $152mm in Agency, and $934mm in *other*

Bloomberg is reporting that they wrote down another $6.46 billion. I'm not seeing anything additional from their first quarter *other-than-temporary* write down of $55mm, though. They did have some unrealized losses (much less than a billion) that were offset by some of their gains from sale. We'll have to take a closer look at their report.