Doug Cornelius .com

The White House and Congressional Leaders finalized the Bailout Bill: Current draft of the Economic Emergency Stabilization Act of 2008. (from the Wall Street Journal) It will be interesting to see how it progresses through the House and Senate. I expect to see a lot of salesmanship as politicians try to weave into their current political campaigns.

What does it actually do?  Read this summary from the WSJ.com: Shape of Massive Bailout Bill Starts to Develop Definition. 

Disclaimers

Mark Gongloff reports in WSJ.com that U.S. commercial banks are keeping more of the loans they make on their balance sheets.

Total assets at U.S. commercial banks swelled to $11.12 trillion in early April, up from $9.94 trillion a year ago, according to Federal Reserve data that are updated every Friday. Last month, the growth rate of bank assets hit its fastest growth pace in 28 years.

As Mark states, one of the problems that occurred in the CMBS market was that lenders were not keeping an interest in the loans they originated. They were just producing the paper to package into a stream of CMBS offerings. Banks forgot that they were making loans and that the loans would have to be managed.

Prior to the CMBS, when negotiating documents, the “no” response was that the change would reduce the value of the paper. I was not hearing that it would affect the lender’s ability to manage the loan.

Fran Mastroianni of Goodwin Procter LLP, published a story in Real Estate Investment & Finance: The Case for Exotic Notes in Commercial Real Estate Transactions.

“PIK (payment-in-kind) Notes and Toggle Notes, which began as alternative debt instruments with safety valve features attractive to the real estate industry, became a life jacket keeping overly aggressive financially engineered deals afloat. Their use has temporarily retreated but their intrinsic value as sophisticated real estate finance tools almost guarantees that they will reemerge as the debt crisis subsides.”

Parke Chapman wrote a primer in the National Real Estate Investor on CMBS, CDO and the commercial debt markets.

Some highlights:

Q: What led to the formation of the first commercial real estate CDO in 1999?

A: Commercial real estate CDOs were a major innovation in part driven by the need to diversify risk after the 1998 Russian financial crisis sparked a global liquidity crunch. Unlike CMBS, which adhere to strict rules on the type and quality of collateral, the commercial real estate CDO market allowed lenders and investors to introduce a debt vehicle with more flexibility. What this means is that commercial real estate CDO managers can swap collateral out of the pool, making these highly managed pools of debt.

Q: What types of loans back CMBS and commercial real estate CDOs?

A: Two key differences center on the fixed- and floating-rate nature of the collateral. Commercial real estate CDOs are typically backed by floating-rate loans whereas CMBS collateral is backed by first-mortgage loans. A commercial real estate CDO can be backed by all sorts of collateral. CMBS, preferred equity and construction loans are commonly held by commercial real estate CDOs. REIT bonds and various other types of exotic debt such as second-lien loans and unsecured debt can get lumped into these pools.

mortgage
CMBS
CDO