The first day of the 2009 MBA’s Commercial/Multifamily Servicing and Technology conference has ended.
It has been a long day, filled with attending panel presentations and meetings with people over meals, in the halls and at receptions. It started at a 7:30 breakfast and ended @ 10p (when I refused to join a group that headed toward B___n Street).
Attendance this year seems down by @ 40%-50% from prior years. Indeed, several companies told me that they would not be attending this year. And many companies seem to have sent only 1 or 2 people this year; instead of the usual 4 or 5.
It is late, and if I don’t get this down-load out soon, tomorrow will hit with more panel presentations and meetings – and I’ll "lose" these data points. They are in the order collected by me during the day – and so they are NOT ordered by relative importance. Here is the down-load (remember, this is a blog and not a thesis or brief; and it is very late).
(One other preliminary and important thought: if your boss requires that you prepare a memo on the conference, consider this permission to cut’n paste as you wish . . . . )
From the opening general session:
- during the next 2-3 years, the commercial mortgage finance industry will focus on servicing & asset management, which will be the new front line for the industry
- unemployment remains a key leading indicator of the performance of real estate as an asset class (and since unemployment is expected to increase, it will take several years for the asset class to recover)
- while defaults presently are @ 3%, some predict that the default rate will increase to 6%; consequently, special servicing will become busier, and the need for greater transparency will be increased (in order to support better decision making) (Note the Fitch report described below.)
- one speaker articulated five areas of focus for the industry: (1) greater transparency (with "real time" property performance data); (2) the need for high quality and detailed physical asset condition inspections; (3) greater focus on customized business plans for each asset, which points to the need for more expertise by special servicing; (4) the increase in defaults will strain human resources at companies (and require greater recruiting, more training and better integration); and (5) companies must be better at understanding macro trends and changes
From a session on developments in Washington, DC:
- expect more changes and experimentation by policy makers
- accounting issues include: (1) FASB 140 (true sale changes); (2) FIN 46(r) (balance sheet consolidation with the "primary beneficiary" of securitization vehicles); and (3) FASB 157 (fair value); all due to "FASB’s perceived suspicion" of real estate structures
- REMIC reform will take a back seat to other issues at Treasury
- Single Purpose Vehicle (or single purpose entities) and separateness covenants: the General Growth Properties bankruptcy will be an initial stress test of this "bankruptcy remote" structure; although one panelist labeled the GPP structure as "SPE light with bad cash management." Another panelist called the GPP case simply "bad facts, which should not be followed by other situations." (This last point puzzles me: a clever borrower might view the GPP case not as "bad facts" but as a "helpful road map.")
- One panelist expects to see a new securitization in 3rd or 4th Q of 2009. Wow. Given all of the accounting and structure "issues" detailed during the day, anticipated increase in the default rate, etc. – a securitization in 2009 would be . . . well . . . wow.
- Federal limits on executive compensation are a huge problem for investors; and are chilling the market by impeding companies from participating in Federal programs
- Terrorism insurance needs to be addressed . . . but the Executive Branch needs to cut programs – not increase the funding of them.
- Welcome to the "Age of Regulation"
From a panel session on dealing with troubled securitized loans:
- even life companies are starting to see their mortgage portfolios in distress (so they are focusing in-ward on their portfolios; and not outward to refinance CMBS loans)
- the demand for new commercial mortgages exceeds the supply
- long term, fixed rate interest mortgages are limited in amount
- property values are difficult to establish
- debt service coverage & loan-to-value criteria are very conservative (and thus underwriting is tough)
- CMBS structures do not offer refinancing (with only a limited ability to extend)
From a panel session on today’s servicing challenges:
- servicers are surprised that subordinate lenders do not understand their rights (relative to the rights of the first-lien secured lender)
- communication among the lenders in the credit stack can be "challenging" (Wow; that was an understatement. I’ve seen some deals where the disparate balance sheets and agendas of the lenders present the biggest hurdle to resolving a distressed project. The project and the borrower can almost be an afterthought)
- valuation is a huge problem: every party at every point of the debt stack and the equity stack needs a goodreliable value in order to make decisions. No value=No decisions=No peace
- as reported by Fitch Ratings in an April 29, 2009 special report, CMBS special servicing volume increased by more than 5.0X in the 15 months ending March 31, 2009 (from $4.6B at 12/31/07 to $23.7B at 3/31/09). And these figures do not address distressed bank debt, nor distressed life insurance company debt. More wow.
Taken together, I come away from the day with much the same impression as I did on that day three session at the EU conference last fall: no one is clapping.
Time to go to bed.
If you have your own comments, or follow up questions, please post a comment below.
P.S.: Returning to the eating theme from my posting on Tuesday, and before I get some sleep – here’s another good restaurant in New Orleans: Herbsaint Bar and Restaurant. This is the second restaurant recommended to me by a New Orleans native. I now understand. It is very, very good. Not as fancy as Nola; much more stylish than Jacques-Imo’s. And not in the French Quarter. Together, all three restaurants will pull me back to New Orleans.