Under Pressure, US Commercial Real Estate May Get Relief
The Wall Street Journal reports today that the US Treasury is considering issuing rules that will make it easier for property developers and investors and their loan servicers to restructure commercial real estate debt.
Tax rules make it difficult for borrowers who are current on their payments to hold restructuring talks with the servicers of commercial mortgages that were packaged and sold as bonds., the WSJ reports.
“At present, developers and investors complain that only those who are delinquent can talk to servicers of these bonds, named commercial-mortgage-backed securities, or CMBS. But now the Treasury is considering issuing guidance that would allow servicers to start talking about ways to avoid defaults and foreclosures sooner, possibly at least two years ahead of the maturity date of a loan, these people said. ”
Reuters reports that the default rate of U.S. commercial real estate bank loans reached its highest level in 15 years and is not expected to peak until 2011, according to a report by Real Estate Econometrics.
Meanwhile, Standard & Poor’s announcement of a proposed new ratings model for CMBS is adding to the headaches of the commercial real estate market. FT Alphaville has a good rundown of the story so far.
S&P’s move is seen as a threat to the Federal Reserve’s TALF program since the central bank says only “AAA” bonds are eligible, whereas S&P’s model is likely to result in downgrades of many CMBS below that level.
In a June 4 report on the the potential rating impact of its proposed methodology changes S&P said transactions from the 2007 vintage are likely to experience the greatest impact if the criteria are adopted, “as most tranches currently rated ‘AAA’ with 30% credit enhancement (”super dupers”) would likely be downgraded. The downgraded classes would have a weighted average rating (WAR) of ‘A’. Under our ‘AAA’ stress, losses from this vintage range from 12.3% to 60.4%.”
Linda Lowell at Housing Wire takes S&P to task for the proposed changes:
“Just as markets were beginning to firm, S&P yells fire sale. Investors take losses if they sell, and those who mark to market (money managers, mutual funds, hedge funds, etc.) take losses even if they don’t sell. And crushing the market for credit tranches does nothing to improve prospects for issuers of new, TALF or not, deals hoping to place subordinate cash flows.”
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