Tuesday, February 23, 2010

FDIC 'Safe Harbor' Provisions For Securitization

The FDIC's proposed rule is designed to isolate, from the failure of a bank, the underlying assets of securities held by the bank. The treatment by the FDIC of assets transferred by a bank in connection with a securitization, and the subsequent failure of the bank, is an underlying building block for securitization - simply because investors will NOT buy CMBS bonds if the underlying loans may be stripped from the CMBS pool, if the bank that originated the loan goes into FDIC conservatorship or receivership.

Under the proposed new rule, the safe harbor would be amended to include numerous preconditions regarding a transaction’s capital structure, disclosure, documentation, origination and compensation.

Yesterday, the Commercial Mortgage Securities Association (CMSA) joined the American Securitization Forum, the Mortgage Bankers Association and the Securities Industry and Financial Markets Association in submitting a comment letter to the FDIC concerning the FDIC's 'Safe Harbor' rule

The CMSA' e-mail announcing its comment letter included the following statement:

"[The] CMSA suggests that the FDIC work in concert with Congress, the Obama Administration and the other agencies that are developing securitization reforms to ensure that FDIC's safe-harbor efforts do not lead to a regulatory framework of conflicting or overlapping requirements that may impede the restoration of functioning credit markets."

Which lead to the following observations:

  • The changes needed to restart the CMBS model (referred to as "CMBS 2.0") are not easy
  • Unlike at the creation of the CMBS model in the early '90s, the financial crisis and the role of CMBS 2.0 in it is a political process - which means a large number of parties have a voice in the process
  • Mid-term elections mean that Congress will NOT address this critical component of the credit crisis once the heavy campaigning begins in August.
  • Which leads to the conclusion that in 2010, we will NOT see a return to a meaningful CMBS market.

In other words, no CMBS for the small commercial real estate borrower.

Friday, February 12, 2010

January Increase In CMBS Delinquency Rate To 5.42% Largest On Record

The January Moody's CMBS delinquency rate hit a record at 5.42%, after posting the largest one month increase (50 bps) in history. While the deplorable state of CMBS is not a secret to anyone following RealPoint's monthly delinquency data, getting confirmation from a pro-cyclical firm such as Moody's should be enough to wake up some of the optimists that even thought "everyone is talking about the commercial real estate" collapse, nothing is being done to actually fix the underlying causes.

The breakdown of the various delinquency rates by property types and vintages is presented below.

Anyone thinking that the rate of deterioration in CMBS is moderating, please take a look at the chart below which shows the magnitude of the monthly change in the delinquency rate.

The delinquency by vintage demonstrates a very bimodal distribution, where while the weakness in the 2006-2008 vintages is to be expected, the dramatic spike in 1998-2000, and particularly 1999, is a novel phenomenon.

The reason for this is described by Moody's:
The 1999 vintage had the worst performance in 2009, partly due to ten-year loans from that cohort coming due and attempting to refinance in an unfavorable economic environment. The delinquency rate for the 1999 vintage was 3.59% a year ago and currently stands at 22.52%. We expect to see a significant increase in the delinquency rate of the 2000 vintage in 2010, as the ten year loans mature in an improving, but still credit constrained environment.
Unlike recent vintages, which are delinquent mostly in the 60+ day past due category, the anniversary vintages (1998,1999) are delinquent mostly due to maturity default.
Earlier vintages are experiencing a mix of all three types of delinquency. As discussed above, the 1999 and 2000 vintages have a significant share of maturity defaults from ten-year loans. Likewise, the 2004 and 2005 vintages have a large proportion of maturity defaults due to five-year loans.
The capital to pay down, refi maturities is just not there. This has a very negative implication on the CRE market, where REITs are trading on the assumption that capital (refi or otherwise) for any and all CRE ventures is again freely flowing.

Below is a summary of delinquency rates by state:

And here is a brief overview of recent remittances and the top 10 newly delinquent loans. We will present an extended remittance list shortly.

Full Moody's report

Source: Zero Hedge

Wednesday, February 3, 2010

The Fringe Benefits of Failure

J.K. Rowling, author of the best-selling Harry Potter book series, delivers her Commencement Address, “The Fringe Benefits of Failure, and the Importance of Imagination,” at the Annual Meeting of the Harvard Alumni Association. (harvardmagazine.com)