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The Commercial Real Estate Bubble By: Adam Levitin & Susan M. Wachter

The Commercial Real Estate Bubble By: Adam Levitin & Susan M. Wachter


The Commercial Real Estate Bubble

Adam J. Levitin

Georgetown University Law Center

Susan M. Wachter

University of Pennsylvania – The Wharton School – Real Estate Department

February 7, 2012

Georgetown Law and Economics Research Paper No. 1978264

Georgetown Public Law Research Paper No. 1978264

Abstract:     
Two parallel real estate bubbles emerged in the United States between 2004 and 2008, one in residential real estate, the other in commercial real estate. The residential real estate bubble has received a great deal of popular, scholarly, and policy attention. The commercial real estate bubble, in contrast, has largely been ignored.

This Article explores the causes of the commercial real estate bubble. It shows that the commercial real estate price bubble was accompanied by a change in the source of commercial real estate financing. Starting in 1998, securitization became an increasingly significant part of commercial real estate financing. The commercial mortgage securitization market underwent a major shift in 2004, however, as the traditional buyers of subordinated commercial real estate debt were outbid by collateralized debt obligations (CDOs). Savvy, sophisticated, experienced commercial mortgage securitization investors were thus replaced by investors who merely wanted “product” to securitize. The result was a noticeable decline in underwriting standards in commercial mortgage backed securities that contributed to the commercial real estate price bubble.

The commercial real estate bubble holds important lessons for understanding the residential real estate bubble. Unlike the residential market, there is almost no government involvement in commercial real estate. The existence of the parallel commercial real estate bubble presents a strong challenge to explanations of the residential bubble that focus on government affordable housing policy, the Community Reinvestment Act, and the role of Fannie Mae and Freddie Mac. Instead, the changes in commercial real estate financing closely mirror changes in the residential real estate financing, which shifted from regulated government-sponsored securitization to unregulated private securitization. This indicates that changes in the securitization market contributed to the problems in both the commercial and residential real estate markets.

[ipaper docId=82373480 access_key=key-feg1rvbu1a2ucxa8oh3 height=600 width=600 /]

 

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Alert To Problems Of Grossly Inaccurate Documents Used In The Land Title Underwriting For Commercial Real Estate Financing – By: David E. Woolley

Alert To Problems Of Grossly Inaccurate Documents Used In The Land Title Underwriting For Commercial Real Estate Financing – By: David E. Woolley


Alert To Problems Of Grossly
Inaccurate Documents Used In The Land Title Underwriting For Commercial Real Estate Financing

By: David E. Woolley
Harbinger Analytics Group

[ipaper docId=82301082 access_key=key-5kdyqvzlns132e68ms1 height=600 width=600 /]

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Handy X-notes allow banks to keep profiting while real estate bonds they sold to investors tank

Handy X-notes allow banks to keep profiting while real estate bonds they sold to investors tank


H/T Pedro da Costa

As always the same players, never fails.

Reuters-

Europe’s muted commercial property debt securitisation market will not return to a multi-billion pounds business until a row is settled over controversial X-Notes, a bond used by issuing banks to protect their slice of profits.

“X-Notes are one of the biggest issues facing European CMBS, because (when the underlying loans fail) investors see the bank that issued the transaction still making a fortune, they’re actually quite hacked off,” one source told Reuters.

[REUTERS]

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Adam Levitin’s Amicus Brief in CMBS Deal | La VILLITA MOTOR INNS v. ORIX CAPITAL MARKETS

Adam Levitin’s Amicus Brief in CMBS Deal | La VILLITA MOTOR INNS v. ORIX CAPITAL MARKETS


Could this be the Ibanez of CMBS?

AMICUS BRIEF IN SUPPORT OF APPELLANT’S PETITION FOR REVIEW

La Villita Motor Inns, J.V., Executive Motels of San Antonio, Inc., and S.A. Sunvest
Hotels, Inc
.

Appellant,

v.

Orix Capital Markets, LLC, Bank of America, N.A. LNR Partners, Inc., Capmark
Finance, Inc., Nicholas M. Pyka as Trustee, Michael N. Blue as Trustee, and Greta E.
Goldsby as Trustee
,

Appellees.

Excerpt:

INTRODUCTION

This case involves a controversy about mortgage servicing. Mortgage servicing is the administration of mortgage loans—the collection of payments and management of defaults—on behalf of third parties. Mortgage servicing is an essential component of mortgage securitization, which is the predominant method for financing commercial mortgages in major metropolitan markets and for financing residential mortgages nationwide.

Continue reading below…

[ipaper docId=53270473 access_key=key-1zkex8darfag1jk7wyxb height=600 width=600 /]

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The Coming Collapse of Commercial Real Estate is Already Here, Says Davidowitz (VIDEO)

The Coming Collapse of Commercial Real Estate is Already Here, Says Davidowitz (VIDEO)


Posted Feb 01, 2011 10:19am EST by Stacy Curtin in Investing, Recession

The U.S. consumer may be on the mend as we head further into 2011, but the same story of resurgence does not apply to many of the U.S. big-box retailers.

From Wal-Mart to Sears to Target to Best Buy, if you look at what is happening in the retail space, “it looks pretty scary,” says retail expert Howard Davidowitz.

Wal-Mart — the world’s largest retailer – has seen six consecutive quarters of negative same-store sales and is now looking to put the majority of its investment capital towards emerging markets.

In the case of Target and Best Buy, they both recently missed major key earnings expectations. Making matters worse, Best Buy “tanked” even without the competition from the now defunct Circuit City, Davidowitz points out.

Tale of Two Stores


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GINNIE MAE ANNOUNCES ADOPTION OF MISMO

GINNIE MAE ANNOUNCES ADOPTION OF MISMO


Ginnie Mae is pleased to announce that it has joined with Fannie Mae and Freddie Mac (GSEs) in adopting the Mortgage Industry Standards Maintenance Organization’s (“MISMO”) Uniform Loan Delivery Dataset (“ULDD”) for delivering loan information to the agencies. The GSEs have been working on this effort; and, announced to their respective program participants that effective September 1, 2011, and forward, all loans delivered to the GSEs will be required to be transmitted to the GSEs using the ULDD specifications.

The mortgage finance industry supports the adoption of standards and common file formats, as they lead to higher quality data, less rework, and lower costs for all participants in the industry, including borrowers.

Continue reading letter below…

GINNIE MAE MISMO

[ipaper docId=45270380 access_key=key-2d8e3lcqmn1a42nlky1q height=600 width=600 /]

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MISMO comments to the SEC on adopting MERS

MISMO comments to the SEC on adopting MERS


Excerpt:

Page 23359 -Is the approach to asset number identifier workable? Should we only require or permit one type of asset number for all asset classes? If so, which one would be most useful? It appears that our proposed naming convention of “[CIKnumber]-[Sequential asset number]” would be applicable to all asset classes. Does the use of an asset number alleviate potential privacy issues for the underlying obligor? Why or why not? What issues arise if the asset number is determined by the registrant? Would there be any issues with investors being able to specifically identify each asset and follow its performance through periodic reporting.

MISMO Response
MISMO does not believe that a single asset numbering system should be required across all asset classes. The industry infrastructure behind each asset class is supported by different systems and business processes. Each ABS participant industry (e.g. residential real estate finance) should be able to utilize an asset numbering system as efficiency and convention dictate, absent a compelling regulatory purpose.

In the mortgage sphere, the MERS Mortgage Identification Number (MIN) has been in use since 1997 and has been assigned to over 65 million loans. The MIN is a combination of a unique loan identifier for the originating lender plus the loan’s internal file number. It is available for residential, multifamily and commercial loans. It can attach to a mortgage as early as the application for a loan. The MIN is then used to track a loan throughout its life cycle, from application through monthly servicing activities until final loan payoff. It is used also used within the loss mitigation and Real Estate Owned (REO) processes. The MIN is well integrated within all facets of the real estate finance industry.

The adoption of a new, different, and/or conflicting numbering system would result in greater confusion, unnecessary system development costs, longer lead times for compliance and decreased transparency by making it more difficult for industry participants to track assets across multiple data and reporting systems. The real estate finance industry would be required to add the new asset number to all of its applications, databases, and file transfers between applications. In certain situations, a new asset number may have unintended consequences in the primary residential mortgage market. If a lender has to decide at the time of application whether to employ the MIN or some other loan numbering system based on the lender’s estimation that the borrower may not qualify for a conforming loan (loans meeting the criteria of Fannie Mae or Freddie Mac) or governmental mortgage (loans meeting the criteria of FHA, VA, or the Rural Housing Service), then the Proposal could unintentionally steer applicants to particular loan types. Alternatively, if a lender starts down one path and then needs to re-key an application, the chances for error increase.
The MIN is the only universally accepted identifier for loans in the mortgage industry across the entire lifecycle of the loan. The major participants in the residential mortgage industry utilize the MIN. Fannie Mae, Freddie Mac and Ginnie Mae all utilize the MIN. MISMO encourages the SEC to adopt the MERS Mortgage Identification Number (MIN) as the primary loan identifier for real estate finance ABS.

As long as the proposed data elements cannot be associated with a specific individual, there should not be privacy concerns with this information being made publically available. In anticipation of this requirement, MERS has designed and will implement a public version of the MIN that issuers would use in their public disclosure file format that could not be used to identify an individual associated with the required data.

To address the possibility of duplicate loan identifiers across different ABS industries (e.g. real estate finance and credit cards), a unique identifier can be provided with file submissions to denote a particular asset class, avoiding the drastic impact of imposing a whole new numbering system on an industry.

[ipaper docId=42072634 access_key=key-agtoyaj6evcxfh7lkuv height=600 width=600 /]

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"Who is the Real Party in Interest as Plaintiff in foreclosure cases?"

"Who is the Real Party in Interest as Plaintiff in foreclosure cases?"


 Again, the million dollar question is, “Who is the Real Party in Interest as Plaintiff in foreclosure cases?”

PPIP Funds’ Toxic Asset Holdings Hit $10 Billion

04/21/2010 By: Carrie Bay DSNEWS.com

Private equity investment funds, in collaboration with the U.S. Treasury, have relieved the market of $10 billion in souring real estate assets, purchased through the federal government’s Legacy Securities Public-Private Investment Program (PPIP).

PPIP was unveiled just over a year ago, under the guise of the original intention of the government’s $700 billion bailout package when it was sold to Congress – to remove so-called toxic mortgages from the system.

The program has been widely criticized for its slow start, though new data from the Treasury shows it’s beginning to gain momentum. Still, some market-watchers say the delay means PPIP, at best, will have only a marginal impact, since private-investor appetite for distressed assetdeals is growing and the previously gridlocked secondary mortgage market is starting to show signs of movement.

The Treasury published its second quarterly summary of PPIP activity Tuesday, which showed that the PPIP fund managers’ holdings nearly tripled compared to the previous three months. As of March 31, 2010, the eight funds participating in the program had acquired just over $10 billion in eligible assets, compared to $3.4 billion at the end of 2009.

About 88 percent of the PPIP portfolio holdings, or $8.8 billion, are non-agency residential mortgage-backed securities (RMBS). Twelve percent, or $1.2 billion, are commercial mortgage-backed securities (CMBS). Of the RMBS assets, nearly half fall into the Alt-A loan category.

By the Treasury’s calculations, the PPIP investment funds have $25.1 billion of total purchasing power, which includes $6.3 billion in private capital. The Treasury has matched the private equity contribution dollar-for-dollar, and also provided $12.5 billion in debt capital.

The Treasury cautioned that because the funds are in the very early stages of their three-year investment periods, it’s premature to draw any meaningful conclusions about individual performance, but the report did include some preliminary stats on each fund’s returns so far.

The fund managed by Angelo, Gordon & Co. and GE Capital Real Estate is registering the highest rate of return at 20.6 percent.

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