The 5% holdback will be manageable. Other issues will get worked through. The real problem is the rating agencies. Before FinReg was passed, there were monitors recently appointed at the agencies to watch over every aspect of the underwriters and other areas. There is a whole new layer of oversight. That was bad enough. Now FinReg has mandated that the agencies can be held liable for damages due to their ratings. This is the tort lawyers full employment act. There is no jury I have ever seen that is capable of even understanding how ratings work or how underwriting is done. Claiming to a jury that the agency should have known or should not have issued the high rating will not be hard to claim and almost impossible to defend after the fact.
Here is the result. The agencies have become ultra conservative. If you look at what has been approved so far it is only the best quality deals at reasonable leverage. They have been one asset or several high quality assets, but not anything else. While there will be future deals with more smaller loans and probably lesser quality than what was done thus far, the quality will still be high. The days of wide open conduits is over for at least several years.
There are hundreds of billions of CMBS loans now on extend and pretend. Likewise there are hundreds of billions more of bank and finance company loans that will also need to be refinanced. Given the new clamp down on the agencies there is no possible way that even most of this is going to get refinanced at anywhere near the proceeds required to refinance these loans. In addition, the economy is not growing at a rate that will overcome this deficit of values. Given all the new costs of doing business, all the new regulations, the vilifying of all financial service professionals, and all the new taxes Obama and Nancy have levied on us, there is little chance that the economy can grow the real estate business out of this problem. All of the new oversight, and new costs of being a lender will just crimp lending even more. FinReg is a liquidity damper as it was finally approved. As usual, Congress took a good thing-financial regulation- and made a mess of it. By 2012, when Obama is voted out of office, the damage will already be done.
It is now very likely that many real estate properties will not be able to refinance their extended loans. That means a lot more equity is going to be required, or there will be a lot more loan portfolios coming to market from servicers and banks over the next two years at a discount, and then the foreclosures will commence. Just look at the housing market and learn the lesson. Reality is, values are not returning to old 2007 levels and dealing with the write offs are going to be required. Home foreclosures are reaching record levels four years after the housing market turned down. No amount of government programs, extensions, modifications or whatever, is making any real difference. Market value has to be recognized at some point, and the sooner the better. This is no different for commercial loans. The restrictions on the rating agencies will materially constrain CMBS lending and the financing will just not be there to deal with the problem. We have a long way to go.
While you are at it, look at section 342 of the bill. The Maxine Waters quota and discrimination clause. It requires that every government agency (29 of them) dealing with financial services, set up an office of diversity to reach out to hire diverse staff. It requires inclusion, not just preventing discrimination. It is also extended to anyone doing business with these agencies. Yes that means you. This is not the old, make sure there is no discrimination and everyone gets an equal chance officer. This is an office that requires what amounts to quotas of anyone but white men. That means you are required to hire by gender and race, and not by quality. It means we now will dumb down every agency by looking to fill quotas and not quality. I suggest you find a transvestite with a black mother and Chinese father, who is also handicapped, so you meet your quota all in one shot. We now have reverse discrimination against white guys embedded in the legislation. This is one of those times when I love being an entrepreneur.
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Joel Ross
Joel Ross began his career in Wall St as an investment banker in 1965, handling corporate advisory matters for a variety of clients. During the seventies he was CEO of North American operations for a UK based conglomerate, and sat on the parent company board. In 1981, he began his own firm handling leveraged buyouts, investment banking and real estate financing. In 1984 Ross began providing investment banking services and arranging financing for real estate transactions with his own firm, Ross Properties, Inc. In 1993 Ross and a partner, Lexington Mortgage, created the first Wall St hotel CMBS program in conjunction with Nomura. They went on to develop a similar CMBS program for another major Wall St investment bank and for five leading hotel companies. Lexington, in partnership with Mr. Ross established a hotel mortgage bank table funded by an investment bank, and making all CMBS hotel loans on their behalf. In 1999 he formed Citadel Realty Advisors as a successor to Ross Properties Corp., focusing on real estate investment banking in the US, UK and Paris. He has closed over $3.0 billion of financings for office, hotel, retail, land and multifamily projects. Ross is also a founder of Market Street Investors, a brownfield land development company, and has been involved in the acquisition of notes on defaulted loans and various REO assets in conjunction with several major investors. Ross was an adjunct professor in the graduate program at the NYU Hotel School. He is a member of Urban Land Institute and was a member of the leadership of his ULI council. In 1999, he conceived and co-authored with PricewaterhouseCoopers, the Hotel Mortgage Performance Report, a major study of hotel mortgage default rates.
