Thursday, March 27, 2008

Random (and live) CMBS thoughts

I'm listening from Bourbonnais to a live ALI-ABA program on CMBS. Here's some thoughts, which I will update during the day:

Increased leverage is a big concern; commercial and multifamily mortgages are currently 23% of GDP, an all-time high. Credit, liquidity and information risk has all been mispriced. Has the mark been overshot? Pulling back to 2005 levels to a level when mortgage capital was in line means a 10-15% correction in prices using technical analysis. The market is not going to hell in a handbasket. Delinquencies should increase (they've been SO low), but this is NOT the makings of the 1930s.

I'm learning a little here about exactly how the tranches work for the coupon clippers; interesting to see that side of the deal.

All the lawyers speaking so far are lender's counsel. I'm hoping that changes later in the program. A lender's counsel talking about less due diligence almost made me spit out my lunch.

Beware of LTV reps in the current market, be they pure tax reps or not. And reping over something (meaning making a rep that you know it is not true because you assume it will never come up)? Man, I could not ever advise a client to do that. (Nor would these folks, although there are "override" issues such as zoning that sometimes are overlooked because of local custom.) Borrowers should say that something is not true, but that this fact will not have a material adverse impact, thus averting a fraud claim.

This should be self-explanatory and I shouldn't have to say it, but it bears repeating it anyway: if you are not a tax lawyer, don't try to re-write the tax provisions. And also remember that CMBS is not for flippers because of the required two-year lockout period during which you cannot defease a loan in a pool. (I once had a client learn this the hard way. But your buyer can still assume the loan, which is still a pain.)

Reminder: drafting a good non-consolidation opinion is painful. Very painful.

How do I get into the independent director business? Really? How do I? I guess the rating agencies are starting to shy away from this requirement or at least make it easier to comply with it.

Okay. I quit. I need a nap. Enjoy your day.

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