Thursday, February 25, 2010

Kennedy Wilson Venture Buys $342M Loan Portfolio

GlobeSt.com

Last updated: February 24, 2010 05:25pm

By Bob Howard

BEVERLY HILLS, CA-A venture of locally based Kennedy Wilson and an international financial institution has acquired a $342 million portfolio of loans from a large regional bank.The portfolio is composed of residential, hotel, retail, office, land, multifamily and other assets predominantly located in Southern California.

The acquisition is the first by a newly formed investment platform that Kennedy Wilson has created with an international financial institution. The venture will focus on acquiring sub-performing and non-performing commercial real estate loans and originating commercial whole loans and bridge/permanent multifamily loans.

Mary Ricks, vice chair of Kennedy Wilson, calls the acquisition "a game-changing transaction for our company," which is sourcing deals through a proprietary network, including its existing banking relationships. According to William J. McMorrow, chairman and CEO of Kennedy Wilson,the company sourced and closed the deal in 30 days, start to finish.

The acquisition of the $342 million loan portfolio is the latest in a series of steps that Kennedy Wilson has taken in recent months with respect to the distressed asset markets. The company said in September, for example, that it would become a subsidiary of Naples, FL-based Prospect Acquisition Corp. under a reverse merger to combine new capital from Prospect with its existing capital to "support and acquire distressed assets" in a business plan designed to take advantage of market conditions created by the latest downturn in the real estate cycle.

Following the merger with Prospect, Kennedy Wilson reported that it raised $110 million in new equity via the merger. It said at the time that the merged company would have “significant capital to take advantage of distressed opportunities in the real estate market and grow its auction services and property management businesses.

TIAA-CREF to Sell $503M Diversified Loan Portfolio to Newly Formed Starwood Property Trust

February 24, 2010

Edited: Jennifer Brenner

argussoftwareblog.com

Source: Starwood Property Trust


Starwood Property Trust, a real estate investment trust focused primarily on originating, investing in, and financing commercial mortgage loans and other commercial real estate-related debt investments, has signed a definitive agreement to acquire a $503 million portfolio of performing commercial mortgages from TIAA-CREF for approximately $510 million, plus accrued interest.

The fixed-rate portfolio consists of 18 senior first mortgage A-notes and 2 junior first mortgage B-notes (collectively, the "Loans") secured by retail and office assets totaling 4.5 million square feet across 10 states. The weighted average debt yield on the portfolio is 17.7% with a weighted average remaining term of 1.7 years and a weighted average coupon of 7.75%. The debt service coverage ratio on the portfolio is approximately 1.8x.

The portfolio is approximately 96% occupied and has expected tenant rollover of 5.7% and 5.2% in 2010 and 2011, respectively. All of the notes in the portfolio were originated prior to 2003 and the owners of the assets are predominantly publicly traded entities and well-known real estate private equity firms.

"This is a very significant investment for our company," commented Barry Sternlicht, CEO of Starwood Property Trust. "With the acquisition of this high quality loan portfolio, Starwood Property Trust will have deployed approximately $800 million of the capital we initially raised in August. The focus of our investments is safety and yield, and this investment's high debt yield and relatively short duration should allow us to reinvest capital as the loans mature or provide a built-in pipeline of originations. Almost 20% of this portfolio will mature within one year and as such these assets are an extremely attractive alternative for cash. They also can be modified, extended or rolled into new term debt and can be levered short term, if necessary. In total this acquisition aligns with our investment strategy and provides meaningful support to reexamine our dividend policy."

The acquisition is expected to close by the end of February 2010, subject to a delayed closing on certain of the Loans.

The portfolio has a targeted levered return of between 11.0% and 13.0%. Starwood is currently in advanced discussions to implement financing in the near term.

Starwood is a newly formed company that is focused primarily on originating, investing in, financing and managing commercial mortgage loans and other commercial real estate-related debt investments. Starwood Property Trust, Inc. is externally managed and advised by SPT Management, LLC, an affiliate of Starwood Capital Group, and intends to elect to be taxed as a real estate investment trust for U.S. federal income tax purposes.

Wednesday, February 24, 2010

A Tale of Three Deals: FDIC Transactions are Evolving


FDIC’s First Generation Deals


The failure of IndyMac on 7.11.08 was among the first wave of bank failures occurring at the very beginning of the recent financial meltdown that spanned the last two years. The FDIC took over IndyMac Bank then sold the bank and assets to OneWest (sale closed on 3.19.09).

As evidenced by the 180 failures that have followed IndyMac, the FDIC's response and the structure of failed bank transactions have continued to evolve during this turbulent financial period.

In all likelihood FDIC took a big haircut on the asset when sold to OneWest (OneWest agreed to purchase all deposits and approximately $20.7 billion in assets at a discount of $4.7 billion). Given the sorry state of the economy and financial markets mid 2008, the assets were marked down dramatically. Overreaction was the natural reaction in 2008.

The FDIC’s February 12, 2010 press release indicates that there is no "loss sharing" on the first tier of the deal with OneWest. Only after $2.5 billion in losses will the FDIC reimburse OneWest.

"Loss Sharing" is a public/private partnership between the FDIC and a healthy bank where the FDIC covers an amount of the losses incurred by a bank acquiring failed bank assets in exchange for possible upside to be shared with the FDIC that might result from the acquiring bank's expert asset management and improved economic conditions.

As the FDIC stated: “OneWest has not been paid one penny by the FDIC in loss-share claims. The loss-share agreement is limited to 7% of the total assets that OneWest services, and OneWest must first take more than $2.5 billion in losses before it can make a loss-share claim on owned assets….The FDIC has yet to make a single loss share payment to OneWest.”

OneWest has $27 billion in assets according to the OneWest website.

New Generation Deals

Operating more like an investment bank, today the FDIC more often than not arranges the merger of healthy and failing banks and does not take over the failed bank prior to the sale to a third party. This is considered the less costly path. And the financial markets are more settled, for now.

The First Federal (closed 12.18.09) and La Jolla Bank (closed 2.19.10) sales to OneWest are the latest generation FDIC deals. The FDIC sold all deposits and most assets were purchased by OneWest Bank in California. The FDIC and OneWest agreed to share future losses on most of the assets.

In the case of the La Jolla Bank failure, the FDIC and OneWest agreed to share future losses on $3.3 billion of the La Jolla Bank's assets. In this transaction unlike IndyMac, realized losses on the initial tranche will be shared 80% by the FDIC and 20% by OneWest beginning with the first dollar of realized losses. In the case of the COMMERCIAL AND OTHER ASSETS SHARED-LOSS AGREEMENT of the La Jolla Bank sale, the “Stated Threshold” or potential first loss tranche total just over $1 billion.

An FDIC "Loss Sharing" Industry has Sprung Up


THE COMMERCIAL REAL ESTATE MARKET IN 2010

As of the end of 2009, over 700 U.S. Banks were included in the FDIC’s Problem Bank List. There were 140 bank failures in 2009 and 20 as of the first two months in 2010. By the end of 2009 the FDIC entered into 94 loss sharing agreements covering assets totaling $122 billion. The bulk of failed bank assets have been placed into these structures.

"Loss Sharing" is a public/private partnership between the FDIC and a healthy bank where the FDIC covers an amount of the losses incurred by a bank acquiring failed bank assets in exchange for possible upside to be shared with the FDIC that might result from the acquiring bank's expert asset management and improved economic conditions.

In 2010 alone an additional $11.6 billion in loss sharing agreement were entered into with acquiring banking institutions. A loss sharing industry sprung up in 2009 as a response to complicated and sensitive set of procedures regarding the FDIC oversight of bank failures. It is our opinion there may be in excess of 200 additional bank failures in 2010 alone and the market for assets under Loss Sharing agreements will exceed $300 billion, cumulatively. The "Loss Sharing" field is complicated, arcane and exploding.

FDIC Budget Constraints

The New York Times on February 23, 2010 analyzed the financial condition of the FDIC:

"the federal deposit insurance fund has been severely depleted. At the end of 2009, it carried a negative balance of $20.9 billion.

The insurance fund is in better shape than such numbers might suggest, however. Officials estimate that bank failures would drain about $100 billion from the fund from 2009 through 2013. But of that amount, a total of roughly $80 billion in losses were recognized last year or projected for 2010. By that math, the agency is expecting an additional $20 billion of losses over the next three years.

After slipping into the red last fall, the F.D.I.C. moved swiftly to refill its coffers. The agency imposed a special assessment on banks that gave it an immediate $5.6 billion cash infusion. That assessment was in addition to the ordinary payments that banks make to the F.D.I.C. fund.

In September, the F.D.I.C. ordered banks to prepay quarterly assessments that would have otherwise been due through 2012. That provided an additional $46 billion to restore the fund to normal. For accounting purposes, the agency will add that money to the fund in small doses over the next 13 quarters, which explains the current negative balance.

Together, these moves buy time for the agency to determine its next steps in the event its losses worsen. In such a case, banks might be called on to chip in more money, either through new special assessments, prepaid fees or premium increases. F.D.I.C. officials said no such plans were in the works."


Creative Structures are Being Tested

Further from the New York Times today, the agency has been creative in stretching and ultimately raising funds:

"To protect the fund, the F.D.I.C. also has found creative ways to bring in more money. On Tuesday, Ms. Bair said that the agency would soon issue bonds backed by the assets of failed banks and guaranteed by the government. The program aims to attract nontraditional buyers of bank assets, like insurance companies, pension funds and mutual funds"....

The F.D.I.C. has also tried to entice private equity firms and other investment groups to bid for insolvent banks, with mixed success. The agency is betting that more potential buyers will ultimately result in higher prices."


CREFA Conclusions and Questions

The public private marriage in the banking industry is one of necessity. Unless the agency decides to tap its Treasury line of credit, the capital constrained FDIC has no choice but to court private equity to help clean up the bank mess.

Private equity may find the Failed Bank Asset "Trading Rules" contained in Loss Sharing Agreements restrictive. The FDIC, up to now, has not wanted to promote private speculation in problem assets or in failed banking franchises. Also, transparency required by the FDIC may not be transparency private equity is accustomed to or desires.

This we do know: the FDIC is on a budget. A cash strapped FDIC will not let loss sharing reimbursement funds go out the door to acquiring banks unless the acquiring bank reimbursement requests (loss share certificates) are very well documented. The science of this process continues to evolve.

Tuesday, February 23, 2010

Vegas House Bargains Dry Up

REAL ESTATE

FEBRUARY 23, 2010

Even in a Foreclosure Capital, Deal Hunters Face Long Odds as Supply Dwindles

By JAMES R. HAGERTY, Wall Street Journal

LAS VEGAS—Jonathan Griffin, Michael Pawlak and Chris Iuso all are chasing bargains on foreclosed homes here.

It should be easy. Las Vegas is one of the foreclosure capitals of the U.S., with about one in four households behind on house payments or in mortgage foreclosure. Yet all three of these shoppers—a professional real-estate investor, a county official with federal funds designated for stabilizing neighborhoods and an installer of security systems who needs a new place to live—are frustrated.

"I thought it would be a heck of a lot easier," said Mr. Iuso, a renter who wants to buy a home but has been outbid eight times, usually by investors able to pay cash.

Bargain hunters here and in many other metropolitan areas are up against a paradox. By far the biggest wave of foreclosures since the Great Depression was expected to be a bonanza for anyone with cash or the ability to get a loan. But prospective home buyers say it is increasingly difficult to find foreclosed homes at attractive prices in desirable neighborhoods.

Supply is shrinking largely because of federal and state efforts to help millions of distressed homeowners avert foreclosure, which have delayed many likely foreclosures, keeping the homes off the market for now.

The bargain chase is even tougher for those buying with a loan. Investors with cash have an advantage in that their offers aren't conditional on obtaining a loan so banks often prefer selling to them than taking the risk that another offer will fall through. They are also often quick to react when bargains appear.

So while it is still relatively easy to find a home for a few thousand dollars in Detroit, few want to move there. In the more-desirable Orange County, Calif., bidding wars are the norm on foreclosed homes.

Although the percentage of borrowers behind on payments continues to grow, the number of homes lost to foreclosure in California—and thus available for resale—fell 19% in 2009 from a year earlier to 190,360, according to MDA DataQuick, a real-estate data provider. The number of foreclosed homes owned by banks or mortgage investors and available for sale nationwide dwindled to 617,000 in December from a peak of 845,000 in November 2008, estimates Barclays Capital.

To those frustrated by the drop in supply, John Burns, a prominent real-estate consultant based in Irvine, Calif., counsels: "Just be patient. They're coming." His firm, John Burns Real Estate Consulting, estimates that five million households, currently behind on mortgage payments, will end up losing their homes, dumping supply on the market over the next few years. In Las Vegas, this "shadow" inventory of pending supply is enough to last 18 months, the firm estimates.

But there is also lots of demand, especially from investors, for those homes. As a result, Mr. Burns says home prices are likely to level out rather than plunge further, assuming that mortgage rates don't rise sharply and the economy continues recovering. But if mortgage rates do surge and the economy goes into another swoon, he says, there is a "massive risk" of a sharp drop in home prices.

Mr. Iuso, the installer of security systems, isn't waiting. He is looking for a home priced at $120,000 to $150,000. "There really isn't much inventory to chase," Mr. Iuso said. His agent, Bryan Mitchell of Re/Max Associates, says some bank-owned homes have attracted more than 20 offers within days.

Investors have complaints, too. "This market has been kind of saturated" by people looking for deals, says Mr. Griffin, the investor, who bought camouflaged duck-hunting blinds to protect his employees from the wind and sun as they sit through foreclosure auctions held in a parking lot in downtown Las Vegas. More than 50 people show up daily for the auctions, about triple from the year earlier, says Mr. Griffin.

Mr. Griffin represents and advises scores of investors who are trying to buy foreclosures here. Among Mr. Griffin's regular clients is Rutt Premsrirut.

"Last summer you could make good margins," said Mr. Premsrirut. At so-called trustee sales of homes in foreclosure cases, he could win with bids at around 70% of the estimated market value. Now, he says, with more bidders, homes are likely to go for 85% to 90% of resale value. After accounting for real-estate commissions, repairs and other costs, that leaves little margin for error.

Also competing with the investors is Mr. Pawlak, head of community-resources management for Clark County, which includes Las Vegas. Mr. Pawlak leads a team charged with spending about $30 million of state and federal money awarded to the county to purchase foreclosed homes.

The federal money comes from the $6 billion Neighborhood Stabilization Program created by Congress in 2008. That program is supposed to help local organizations buy and repair foreclosed homes so they don't drag down neighborhoods. Those organizations then sell or rent the homes to people with low or moderate incomes.

Mr. Pawlak says he is handicapped in vying with private investors. For one thing, federal rules require that he buy homes at a discount of at least 1% to appraised value. Appraisers are often more cautious than buyers in estimating values. He also can't make an unconditional offer because the rules require his staff to check for toxic wastes, pests and compliance with building codes, among other things.

"We're competing against people who say, 'I'll take 50 properties, sight unseen,' and we just can't do that," Mr. Pawlak said.

Given strong demand from private buyers, why should the county be in the market at all? Mr. Pawlak says his program tries to ensure homes are occupied by stable owners or renters. Investors, he says, won't necessarily repair homes thoroughly and find long-term occupants with a stake in the neighborhood.

Write to James R. Hagerty at bob.hagerty@wsj.com

List of Troubled Banks at 16-Year Peak, F.D.I.C. Says

February 24, 2010

By ERIC DASH, New York Times

After weathering the nation’s worst run of bank failures in nearly two decades, the Federal Deposit Insurance Corporation announced Tuesday that it had added 450 institutions to its list of challenged lenders in 2009 and warned that the industry was likely to remain under stress.

The number of so-called problem banks rose to 702 at the end of 2009, compared to 252 at the beginning of the year. Both the number of troubled institutions and their total assets are at the highest level since 1993, putting enormous strain on the government-administered insurance fund that protects customer deposits.

The F.D.I.C. does not disclose which banks it considers at risk. Lenders on its list are not necessarily in imminent danger of failure.

With banks failing in growing numbers, the F.D.I.C. said its insurance fund fell deeper into the red, ending 2009 with a deficit of $20.9 billion. That position was nearly $38.1 billion weaker than a year earlier. The bulk of that decline reflects funds that the F.D.I.C. is setting aside to cope with future losses.

In its annual report on the banking industry, the agency suggested that many of the nation’s 8,100 lenders essentially broke even during 2009 but that many remained in fragile condition. Many smaller lenders, in particular, are struggling. Bad credit card, mortgage and corporate loans escalated in the final months of 2009 — the 12th consecutive quarterly increase — albeit at a slower pace. Fewer than a third of banks reported a net loss for the fourth quarter, which officials held out as a glimmer of good news.

“There is incremental improvement,” said Sheila C. Bair, the F.D.I.C. chairwoman, said in a news conference in Washington Tuesday morning. “We are seeing some encouraging signs here. Over all, the banking system is challenged but stable.”

Last week, the Federal Reserve raised the rate it charged banks for emergency loans, suggesting Fed officials believe that the overall industry has recovered from the worst days of the financial collapse. Federal regulators are also expected to withdraw several government support programs shortly. But with high unemployment levels and few signs the housing market has bottomed out, the broader outlook for many banks remains murky at best.

Collectively, banks posted a $914 million profit in the fourth quarter, compared with a $2.8 billion profit in the third quarter.

For all of 2009, the banking industry posted a $12.5 billion profit, far below the $100 billion in annual profits that the industry raked in two years earlier at the height of the boom. Although the financial industry benefited from ultra-low interest rates, most banks also faced record loan losses. Many midsize and community lenders, which do not have big trading businesses, suffered big losses last year. Officials worry that they will be reluctant to lend to small businesses and other customers until they replenish their coffers. “Large banks need to step up to the plate here,” Ms. Bair added.

The troubles may get worse in the coming months. Once the Fed starts tightening credit, banks will no longer be able to rely on the easy profits of the last two years to cushion their losses. The extra strain could cause dozens of additional banks to fail, just as similar interest-rate swings hurt many lenders after the saving-and-loan crisis.

So far, the F.D.I.C. has seized and sold about 20 banks in 2010, compared with 140 bank failures in 2009. That was the largest number of failures in 17 years. Analysts expect at least several hundred more small lenders to collapse over the next few years, a prospect that seems more likely given the surge in the number of problem institutions last year. The number of problem banks rose by 150 in the fourth quarter alone, bringing it to nearly 1 in 11 lenders.

That is putting significant pressure on the F.D.I.C. fund, which safeguards deposits. Banks pay premiums that insure individual accounts for up to $250,000, but the crushing load of bank failures last year left it severely depleted. The fund had a negative $8.2 billion balance at the end of the third quarter as it slipped into the red for the first time since the early 1990s, the agency said.

Since the bulk of the insurance fund’s losses stem from money previously set aside to cover future bank failures, it can continue to operate in the red. But the F.D.I.C. began taking steps to shore up the fund last year — and make up a projected $50 billion shortfall.

Last fall, officials ordered its thousands of member banks to begin prepaying their annual assessments, which would have otherwise been due through 2012. That move is expected to add about $45 billion to the insurance fund coffers. Officials have imposed a special assessment fee and have begun striking more loss-sharing agreements, which lowers the amount of cash the agency lays out up front.

Some analysts say they still believe that the agency may need additional cash. The F.D.I.C. has the ability to access an emergency line of credit from the Treasury Department if conditions worsen, though officials are reluctant to do so. Such a move would draw a spate of bad publicity and would run the risk of unnerving consumers.


In late August, Ms. Bair said she did not expect to have to tap that line of credit immediately, although she did not rule it out. “I never say never,” Ms. Bair said at the time.

Monday, February 22, 2010

CRE Price Slide Slowing?

DOW JONES NEWSWIRES

U.S. commercial real-estate prices rose again in December, signaling a possible end to big price declines, Moody's Investors Service said.

The Moody's/Real Commercial Property Price Indices rose 4.1% for the month, the second monthly increase in a row and the biggest month-to-month increase in the nine year history of the indexes. The market has shown some signs of life recently, with the first increase in over a year seen in November.

"Although we are unable to conclude that the bottom to the commercial real estate market is here, we do believe that the period of large price declines is over," said Moody's managing director Nick Levidy on Monday.

Overall, 716 transactions totalling $9 billion were recorded in December.

Still, prices were down 29% from a year earlier and 40% from two years earlier as of Dec. 31. They are 41% below their peaks.

Quarterly national property type indexes show three of the four major property types recording price gains in the fourth quarter, with only retail posting a slight decline of 1.5%. Offices had the largest gain, at 7.9%, while apartments improved 7% during the quarter and industrial increased 5.6%. For the year, however, the four property types had declines of 19% to 23%.

In the top 10 metropolitan areas, which account for 50% to 80% of the transactions in the national property type indexes, apartment prices fell 2.1% in the fourth quarter and industrial prices were down 2.8%. Retail posted a 3.1% increase, while offices rebounded with a big 27% increase after declines of 20% in the third quarter and 10% in the second quarter.

Regionally, the West fared better than the national price index in all of 2009 in three of the four property types, with offices the exception. Western office prices fell 26% in 2009, versus a national decline of 20%. In the fourth quarter, western office values dropped 5.7%.

Saturday, February 20, 2010

FDIC Deals: OneWest bank profit: $1.6 billion

As IndyMac, it sold last year for less than that. Investors win, but the FDIC could still lose nearly $11 billion on bad loans that the Pasadena institution made before its sale.

By E. Scott Reckard, Los Angeles Times

February 20, 2010

The billionaires' club of private financiers who took over the remains of IndyMac Bank from the Federal Deposit Insurance Corp. turned a profit of $1.57 billion last year on the failed mortgage lender -- more than they invested less than a year ago.

Yet under the sale agreement, the federal deposit insurance fund still could lose nearly $11 billion on bad loans that the Pasadena institution made before it was sold last March and renamed OneWest Bank.

"This is one hell of a deal for those owners, but hardly a good deal for the banking industry, which pays the FDIC's bills," said Bert Ely, a longtime consultant to banks.

In taking over IndyMac's assets, the investor group, led by Steven Mnuchin of Dune Capital Management, put up $1.55 billion to revitalize the bank. Other investors included hedge-fund operators George Soros and John Paulson, bank buyout expert J. Christopher Flowers and computer mogul Michael S. Dell.

OneWest's financial results were filed with regulators Friday. Regulators and the investors declined to comment on the profit.

IndyMac failed in July 2008 after depositors, worried about its souring portfolio of complex mortgages, rushed to pull out cash. IndyMac specialized in loans that didn't require much borrower documentation, such as verification of income. And it became one of the earliest high-profile meltdowns in the mortgage market, which helped lead to a crisis that threatened to undermine the nation's financial system.

The run on deposits occurred too quickly for the FDIC to find another bank to take over the failing institution, forcing the agency to operate IndyMac for eight months. During that time, FDIC Chairwoman Sheila Bair oversaw the creation of an anti-foreclosure effort that became the model for the Obama administration's loan-modification program.

In selling the lender, the regulator agreed to absorb a large majority of the potential losses not yet recorded in IndyMac's loan portfolio.

The investors pledged to continue to restructure borrowers' loans.

They also said they would expand OneWest into a larger, solid retail bank. In December, they bought First Federal Bank of Los Angeles when it failed. OneWest's financial results for the fourth quarter do not include FirstFed figures.

The OneWest profit was reminiscent of those earned by aggressive investors who paid low prices for assets of numerous savings and loans that failed in the 1980s. But this time, such profit may make the FDIC a lightning rod for criticism of the government's efforts to clean up the latest debacle.

"It makes you wonder whether the [FDIC] loss is due to the acquirer getting too sweet a deal," Ely said.

As a privately held bank, OneWest does not have to report its financial results to shareholders. But like all U.S. banks and savings and loans, it makes regular reports to regulators. Its fourth-quarter results were released Friday by the Office of Thrift Supervision.

This and previous reports show that OneWest made after-tax profits of $194.9 million in last year's first quarter, $202.7 million in the second quarter, $495.2 million in the third and $680.3 million in the fourth. The entire earnings were retained at the bank; no dividends were paid out.

The huge gains included a fourth-quarter entry of $830 million for assets other than a bank's main source of income, interest on loans. There was no explanation for the huge gain on the report, which has far fewer details than a public company's financial reports.

"I'm dumbfounded," Ely said. "These are just incredibly sweet numbers, but you can't see what's behind [them]. The public policy question is, why are they so good? Particularly given the magnitude of the loss estimated at the FDIC."

Andrew Gray, an FDIC spokesman, wouldn't comment on the results. But he said that the FDIC invited "80 or 90" institutions to bid for IndyMac's remains, at the height of fears of a systemic financial meltdown, and that it took the offer that represented the smallest loss to the insurance fund.

Should OneWest's losses turn out to be less than expected, the deposit insurance fund would lose less than anticipated, he said.

The FDIC found itself defending its arrangement with OneWest under unusual circumstances last week when a video on YouTube kicked up a stir by accusing it of cutting a loss-share deal that was overly favorable to the investors.

In the video, two men discussed a specific example of a foreclosure sale that they said was motivated by the desire to profit from the loss-sharing arrangement.

But the FDIC issued a statement noting that the investors must shoulder the first $2.5 billion in losses on OneWest loans and that the insurance fund has yet to pay a penny for any OneWest losses.

scott.reckard@latimes.com

Friday, February 19, 2010

Paul Volcker Says Mortgage Market Will 'Have To Be Reconstructed'

Shahien Nasiripour

shahien@huffingtonpost.com | HuffPost Reporting

First Posted: 02-19-10 04:07 PM | Updated: 02-19-10 04:42 PM

Former Federal Reserve Chairman Paul Volcker said the nation's home mortgage market is in trouble and will have to be "reconstructed."

"It's totally dependent, heavily dependent on government participation," Volcker said Friday in an interview with Bloomberg Television. "It shouldn't be that way. That's going to have to be reconstructed."

The federal government was responsible for up to 95 percent of all new home mortgages in the fourth quarter of 2009, said Guy Cecala, publisher of Inside Mortgage Finance, a leading industry publication.

"Anyone who looks at the numbers says, 'My God, look what it's come to,'" Cecala said in an interview Friday.

While Volcker hopes the nation's home mortgage finance system lessens its dependence on taxpayers, Cecala said it's going to be nearly impossible for a significant change to take place over the next year.

"We can't," Cecala said. "It certainly can't change in 2010. It's like saying we're going to make some improvements in the Titanic after it's hit the iceberg."

There were $390 billion in new mortgage originations, including home equity lines, in the last quarter of 2009, according to Cecala's firm. Excluding the home equity lines, Fannie Mae, Freddie Mac, the Federal Housing Administration and the Veterans Administration stood behind up to 95 percent of those mortgages. Just a few years ago the government was responsible for about 40 percent of all new home mortgages, Cecala said.

By buying up mortgages from lenders, Fannie and Freddie control about $5.5 trillion in home mortgages, according to their federal regulator. That's nearly half of all outstanding mortgage debt in this country. Their share of the mortgage market is nearly double what it was 20 years ago. They were effectively nationalized in September 2008.

Cecala noted that in 2005, the amount of private mortgage-backed securities exceeded the total output of Fannie, Freddie, FHA and the VA combined. That year there was about $613 billion in private bonds that contained creditworthy mortgages (excluding subprime). In 2009, there was just $5.5 billion.

Attracting lenders and investors back into mortgage finance, without the promise of a government guarantee, will be key to lessening the federal government's involvement. That means getting Fannie Mae and Freddie Mac to dial back their taxpayer-subsidized purchases and guarantees of mortgages.

"Fannie Mae and Freddie Mac were not a good idea in the first place," Volcker said. "This hybrid public, private thing sooner or later was going to get you in trouble -- and it sure got us in trouble big time," he said. "I hope we don't go back to that model."

Cecala said that unless the private securitization market returns, it'll be hard for the federal government to dial back its involvement. While analysts expect an uptick in private mortgage securitizations this year, Cecala said it won't be enough.

The government "needs to provide a way to support the...market, and I don't know how they're going to do it without some sort of government guarantee," Cecala said. One approach could be for the government to guarantee mortgages held and securitized by banks, and then slowly decrease the level of that guarantee until confidence fully returns.

Last month, House Financial Services Committee Chairman Barney Frank (D-Mass.) vowed to get rid of mortgage giants Fannie Mae and Freddie Mac as part of an overhaul of the country's taxpayer-supported system for financing home loans.

"The remedy here is to, in fact, as I believe this committee will be recommending, abolishing Fannie Mae and Freddie Mac in their current form and coming up with a whole new system of housing finance," Frank said. "That's the approach, rather than a piecemeal one."

The Obama administration expects to outline its future plans for Fannie and Freddie later this year.

Charlie Rose - Paul Volcker

9/30/2009


Luxury and Leisure's Black Eyes: Top of the Market Deals Go Down

Bank to take prime commercial property in Beverly Hills

British developers had paid $500 million for the site of the former Robinsons-May on Wilshire Boulevard in 2007. They had planned to develop condominiums and a hotel on the eight-acre parcel.


By Roger Vincent, Los Angeles Times

6:53 PM PST, February 18, 2010

Jet-setting British developers are set to lose their prized real estate on a prime stretch of Wilshire Boulevard in Beverly Hills on Friday as a bank controlled by Mexican billionaire Carlos Slim completes a foreclosure.

The property slipping away from brothers Nicholas and Christian Candy is the site of the former Robinsons-May department store at 9900 Wilshire Blvd., next door to the Beverly Hilton Hotel at the boulevard's intersection with Santa Monica Boulevard.

The Candy brothers, who planned to develop condominiums and a hotel, made headlines in 2007 when they bought the eight-acre parcel for $500 million. The jaw-dropping sum made the transaction one of the largest in the history of Los Angeles County.

Local real estate observers had trouble making sense of the price because the seller, Beverly Hills-based New Pacific Realty Corp., had paid $33.5 million for the property three years earlier. The Candys, though, had a track record of building super-premium residences for the mega-wealthy.

"Candy & Candy in the U.K. is what Tiffany is to jewelry here," Laurie Lustig-Bower of brokerage CB Richard Ellis said at the time. "Therefore, they believe they will achieve record prices for their condos."

But the real estate market has changed dramatically for the worse in recent years. Still, Lustig-Bower said Thursday, "I do believe that this is a great piece of real estate."

Now, Christian Candy's CPC Group is in default on a $365.5-million loan from lenders controlled by Slim's Banco Inbursa, according to court documents.

A subsidiary of CPC Group is expected to transfer title to the lenders Friday, sources told Bloomberg News. Nicholas Candy confirmed in an e-mail that he expected to relinquish title to the site Friday.

CPC Group is best known for One Hyde Park in Central London, where buyers of the expensive flats included Russian oligarchs, oil barons, Saudi princes and A-list movie stars, according to the English press.

When they bought the Beverly Hills property, the Candys said they would proceed with the previous owner's plans to raze the empty department store and build a condominium and retail complex designed by Richard Meier, architect of the Getty Center.

The city approved the project in 2008. Later that year, with condo sales stalling and financing sources drying up, the Candys said they hoped to incorporate a five-star hotel into the design by eliminating some of the 235 approved condos.

roger.vincent@latimes.com


Fortress Said to Need $150 Million to Keep Resorts

February 19, 2010, 09:46 AM EST

By Cristina Alesci, Bloomberg

Feb. 19 (Bloomberg) -- Fortress Investment Group LLC may have to contribute at least $150 million to Intrawest ULC, the owner of the Olympics’ Alpine skiing venue it bought in 2006, to avert bankruptcy or foreclosure, according to a person with knowledge of the negotiations.

Intrawest’s creditors yesterday postponed an auction of the company’s assets by one week to Feb. 26. The deal, which avoids a sale of the owner of the Whistler Blackcomb skiing center during the Winter Games, doesn’t address creditors’ demands that Fortress add equity to Intrawest, said the person, who declined to be identified because talks were private.

Lehman Brothers Holdings Inc., Davidson Kempner Capital Management LLC and Oak Hill Advisors LP are in a group of lenders seeking control of Intrawest after the company missed final payment on a $1.4 billion loan in December. Intrawest struggled under a debt load even after layoffs and expense cuts. The lenders’ administrative agent, Wilmington Trust FSB, had initially slated an auction for today that also included stakes in Mont Tremblant in Quebec and Stratton Mountain in Vermont.

“They negotiated a reprieve but it’s still a black eye,” said Steven Kaplan, a professor at the University of Chicago Booth School of Business who studies buyouts. “Investors are being asked to throw more good money after bad, which they can’t be happy about.”

Lilly Donohue, a spokeswoman for New York-based Fortress, declined to comment. Kimberly Macleod, a spokeswoman for Lehman, also declined to comment.

Equity Marked Down

Investors in Fortress’s Fund IV, Fund IV Co and FICO funds saw their collective $1.7 billion equity stake in Vancouver- based Intrawest reduced to 4 cents on the dollar as of Oct. 31. Two of the funds put in an additional $345 million in October 2008 to keep lenders at bay and infuse cash into the company.

Fortress fell 1 cent to $4.18 at 9:37 a.m. in New York Stock Exchange composite trading. It has dropped 6.1 percent this year, compared with the 1 percent decline by the Standard & Poor’s 500 Index.

“Although the investment has already been written off, they’ll likely have to repair relationships with some investors that have particular exposure to Intrawest in their funds in order to raise more money from them,” Roger Freeman, a Barclays Capital analyst, said in an interview.

Ski and Golf

Booth Creek Ski Holdings Inc., which operates resorts in Northern California and New England, isn’t interested in buying Whistler, said Julie Maurer, vice president of marketing and sales.

Intrawest, founded in 1976, runs ski and golf resorts in Canada and the U.S. It sells vacation timeshares through its Club Intrawest unit and owns Canadian Mountain Holidays, the world’s largest heli-skiing operation, according to its Web site. Heli-skiing runs are reached via helicopters rather than ski lifts.

The potential sale of the resort hasn’t been an issue for the athletes during this week’s competition, said Chris Rudge, chief executive officer of the Canadian Olympic Committee in Vancouver.

“For athletes, the Whistler experience has been tremendous,” Rudge said in an interview. “They’ve built a great village up there. No realistic individual would believe that anyone engaged in a business auction would step in and interrupt the Games.”

Reducing Debt

Intrawest has been selling some of its smaller resorts to pay down debt. Those sales, including Panorama Mountain Village and Sandestin Golf and Beach Resort, will raise about $65 million, according to the person. Intrawest agreed in November to sell its interest in Copper Mountain for about $100 million to Powdr Corp. of Park City, Utah.
“An auction at this point is unlikely,” said Daniel Fannon, a San Francisco-based analyst at Jefferies & Co. Fortress wants “to maintain a level of control for when times are better again,” he said.


--With assistance from David Scanlan and Christopher Donville in Vancouver and Nadja Brandt in Los Angeles. Editors: Josh Friedman, Larry Edelman

To contact the reporter on this story: Cristina Alesci in New York at +1-212-617-2000 or Calesci2@bloomberg.net.

To contact the editor responsible for this story Christian Baumgaertel at +1-617-210-4624 or cbaumgaertel@bloomberg.net

Thursday, February 18, 2010

Today's Bankers Not Regulated Enough?

ON THE PBS NEWSHOUR -- February 17, 2010

Wednesday's NewsHour

MAKING SENSE: Paul Solman continues his series "Making Sense" of financial news by interviewing a former banking regulator who thinks today's bankers are not regulated enough.

Wednesday, February 17, 2010

Commercial Real Estate Losses and the Risk to Financial Stability

Congressional Oversight Panel

FEBRUARY OVERSIGHT REPORT*

February 10, 2010

*Submitted under Section 125(b)(1) of Title 1 of the Emergency Economic Stabilization Act of 2008, Pub. L. No. 110-343

Executive Summary

Over the next few years, a wave of commercial real estate loan failures could threaten America’s already-weakened financial system. The Congressional Oversight Panel is deeply concerned that commercial loan losses could jeopardize the stability of many banks, particularly the nation’s mid-size and smaller banks, and that as the damage spreads beyond individual banks that it will contribute to prolonged weakness throughout the economy.

Commercial real estate loans are taken out by developers to purchase, build, and maintain properties such as shopping centers, offices, hotels, and apartments. These loans have terms of three to ten years, but the monthly payments are not scheduled to repay the loan in that period. At the end of the initial term, the entire remaining balance of the loan comes due, and the borrower must take out a new loan to finance its continued ownership of the property. Banks and other commercial property lenders bear two primary risks: (1) a borrower may not be able to pay interest and principal during the loan’s term, and (2) a borrower may not be able to get refinancing when the loan term ends. In either case, the loan will default and the property will face foreclosure.

The problems facing commercial real estate have no single cause. The loans most likely to fail were made at the height of the real estate bubble when commercial real estate values had been driven above sustainable levels and loans; many were made carelessly in a rush for profit. Other loans were potentially sound when made but the severe recession has translated into fewer retail customers, less frequent vacations, decreased demand for office space, and a weaker apartment market, all increasing the likelihood of default on commercial real estate loans. Even borrowers who own profitable properties may be unable to refinance their loans as they face tightened underwriting standards, increased demands for additional investment by borrowers, and restricted credit.

Between 2010 and 2014, about $1.4 trillion in commercial real estate loans will reach the end of their terms. Nearly half are at present “underwater” – that is, the borrower owes more than the underlying property is currently worth. Commercial property values have fallen more than 40 percent since the beginning of 2007. Increased vacancy rates, which now range from eight percent for multifamily housing to 18 percent for office buildings, and falling rents, which have declined 40 percent for office space and 33 percent for retail space, have exerted a powerful downward pressure on the value of commercial properties.

The largest commercial real estate loan losses are projected for 2011 and beyond; losses at banks alone could range as high as $200-$300 billion. The stress tests conducted last year for 19 major financial institutions examined their capital reserves only through the end of 2010. Even more significantly, small and mid-sized banks were never subjected to any exercise comparable to the stress tests, despite the fact that small and mid-sized banks are proportionately even more exposed than their larger counterparts to commercial real estate loan losses.

A significant wave of commercial mortgage defaults would trigger economic damage that could touch the lives of nearly every American. Empty office complexes, hotels, and retail stores could lead directly to lost jobs. Foreclosures on apartment complexes could push families out of their residences, even if they had never missed a rent payment. Banks that suffer, or are afraid of suffering, commercial mortgage losses could grow even more reluctant to lend, which could in turn further reduce access to credit for more businesses and families and accelerate a negative economic cycle.

It is difficult to predict either the number of foreclosures to come or who will be most immediately affected. In the worst case scenario, hundreds more community and mid-sized banks could face insolvency. Because these banks play a critical role in financing the small businesses that could help the American economy create new jobs, their widespread failure could disrupt local communities, undermine the economic recovery, and extend an already painful recession.

There are no easy solutions to these problems. Although it endorses no specific proposals, the Panel identifies a number of possible interventions to contain the problem until the commercial real estate market can return to health. The Panel is clear that government cannot and should not keep every bank afloat. But neither should it turn a blind eye to the dangers of unnecessary bank failures and their impact on communities.

The Panel believes that Treasury and bank supervisors must address forthrightly and transparently the threats facing the commercial real estate markets. The coming trouble in commercial real estate could pose painful problems for the communities, small businesses, and American families already struggling to make ends meet in today’s exceptionally difficult economy.

Tuesday, February 16, 2010

Former Bank of America and Wachovia Executives Raising Money to Scoop Up Failed Banks

February 15th, 2010

US Banking News

In an attempt to buy up the growing number of failed banks, executives who used to work for Bank of America (NYSE:BAC) and Wachovia are trying o raise $1 billion to acquire them from the Federal Deposit Insurance Corp. (FDIC), according to the application.

The new entity will be called Blue Ridge Bank N.A., and will be headed up by Milton Jones Jr., ex-Georgia market president of the company, who will be chief executive office of Blue Ridge Bank, if its application to the FDIC and Office of the Comptroller of the Currency is accepted.

Other former Bank of America and Wachovia executives working to get the new company going are Walter Davis from Wachovia, who was the executive vice president of retail credit and direct lending there; past president of corporate and investment banking at Bank of America, Edward Brown III; and Charles Williams, who used to work as chief administrative officer of Bank of America’s capital markets division.

Heading the Board of Directors would be Edward Brown III, with other possible directors including Robert Brown, who was a board member at Wachovia, as well as a current director for Aflac Inc., Robert Wright.

This is by far from the first group of investors putting together capital to ready themselves for what should eventually become a difficult position for the FDIC to hold as far as continuing to ask fairly top dollar for the failed banks.

With an estimated 200 banks expected to fail in 2010, and a total of 552 banks listed on the FDIC of troubled banks, the assets of $345 billion held by those banks alone is enough to get a lot of new players in the game, and with the FDIC fighting to not have to tap the $500 billion credit line available form the Treasury, and the Deposit Insurance Fund basically in the red, there will growing pressure to sell assets at bargain prices, and these companies will be there for when that happens.

Projections from the FDIC is the Deposit Insurance Fund will be hit with at least $100 billion in losses by the end of 2013.

Still, even at some of the discounted but still decent prices being won by the FDIC, some of the banking assets are still a good base for any bank holding company to launch a new company with, as the failed assets are gotten rid of and the best assets used as a foundation to build on.

So far private equity firms had struggled for the most part to acquire the failed lenders, as their business model of turning a quick profit flies in the face of what the FDIC is attempting to do with the assets of these banks, which they prefer to be taken up by existing banks.

The problem for banks, as seen by some of the major banks which bought other failing big financial institutions, is they can themselves become a drag on the company, and to buy them is without a doubt is a risk; there is a reason the banks failed after all.

A reason you’re starting to see these former bank executives associated with raising money to buy up the failed lenders is to increase the chances of getting approved by the FDIC and Office of the Comptroller of the Currency.

This is obviously what Blue Ridge has done, and a number of others have been gravitating toward to lessen the resistance to their bids and give them a much better chance of successfully winning them.

Sunday, February 14, 2010

FDIC, Dealers Huddle About CMBS

February 12, 2010

Commercial Mortgage ALERT

Several dealers have started preliminary discussions with the FDIC about its plans to securitize commercial mortgages assumed from failed banks.

The talks are aimed at helping the agency understand the nuts and bolts of commercial MBS underwriting, according to market players. Firms that have participated in the discussions include Bank of America, Deutsche Bank, J.P. Morgan and RBS. When it is ready to proceed, the FDIC presumably will issue a formal request for proposals for dealers interested in underwriting
securitizations.

The FDIC hasn’t said officially that it will use securitization as an exit strategy for some of the commercial real estate it has inherited, but market players think some transactions are likely to result. A spokesman said the agency “is actively reviewing the role that securitization may play in the future, but there have been no decisions made on the structure, timing or size of any securitization transactions.”

The spokesman indicated that the agency will weigh on a case-by-case basis whether it will get a better return by securitizing or selling loans. The FDIC often retains a stake when it sells loans en masse.

Regulators seized 140 banks last year, and the FDIC expects the total to be higher this year. Commercial real estate assets make up 10% of bank assets on average. The spokesman was unable to provide a total for agency-held commercial real estate assets, which represent about 10% of the average bank’s assets.

In the early 1990s, the FDIC and a sister agency, Resolution Trust Corp., relied heavily on securitization to dispose of commercial real estate seized from banks and thrifts.

Friday, February 12, 2010

Lennar Completes Loan Transactions With FDIC

Lennar completes transactions with FDIC to work out distressed loans

The Associated Press

MIAMI

Developer Lennar Corp. said Wednesday it has completed transactions with the Federal Deposit Insurance Corp. under which the homebuilder and the independent government agency will resolve about 5,500 distressed real estate loans.

Lennar and the FDIC, which insures bank deposits, will hold equity interests in two portfolios of loans with a combined unpaid balance of $3.05 billion, Miami-based Lennar said. The transactions include about 5,500 distressed residential and commercial real estate loans from 22 failed bank receiverships.

For about $243 million, Lennar indirectly acquired 40 percent managing member interests in limited-liability companies created to hold the loans.

The FDIC is retaining the remaining 60 percent stake, and is providing $627 million in financing at zero percent interest for seven years.


A subsidiary of Lennar, Rialto Capital Advisors, will conduct the day-to-day management and workout of the distressed loan portfolios.

Lennar President and CEO Stuart Miller said acquiring and working out distressed real estate loans was a large and profitable part of his company's business during the real estate slump in the early 1990s.

Miller said Lennar is "pleased to return to this business and honored to partner with the FDIC."

He said Lennar has "been carefully preparing to invest in this space for the last two years."

The transactions with FDIC are expected to add to the company's earnings this year, Miller said.

Lennar announced the transaction after the close of trading Wednesday, when its shares rose a penny to $15.61.

Copyright 2010 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

Copyright © 2010 ABC News Internet Ventures

Tuesday, February 9, 2010

East West Bank Shops Big Loan Portfolio

Commercial Mortgage ALERT

February 5, 2010

East West Bank is marketing $244.5 million of commercial mortgages, most of them backed by condominium properties in California.

The offering is the latest in a series over the past year by the Pasadena, Calif., bank, which is handling the marketing campaign itself.

Many of the 30 loans in the current offering are distressed, investors said. In addition to the California collateral, a few loans are backed by office buildings and land in New York, Arizona and suburban Seattle. About one-third of the portfolio has already matured. The other loans have maturity dates extending as far out as 2018.

Among the largest loans is a $28.4 million recourse loan on a new condo property just outside San Francisco, in Daly City, Calif. The three-year floater was originated in 2006 for a local firm that developed the property, which contains 72 condos, 11,000 square feet of retail space and 129 parking spaces. The borrower defaulted after construction was completed last July. East West Bank is expected to be busy in the secondary loan market this year, as it works through the distressed assets it assumed from United Commercial Bank of San Francisco.

After the $10.9 billion-asset United Commercial failed in October, the FDIC sold about $10.2 billion of its assets to East West Bank via a loss-sharing agreement. East West is expected to shed some of the bank’s troubled assets.

As of Sept. 30, the parent of United Commercial had $5 billion of commercial real estate assets, consisting of $2.3 billion of commercial mortgages, $1.5 billion of construction and land loans and $1.2 billion of multi-family loans. Nineteen percent of those loans were nonperforming.

By comparison, the $12.5 billion-asset parent of East West Bank held $5.7 billion of commercial real estate loans, of which only 2.9% were nonperforming. East West’s portfolio contained $3.6 billion of commercial mortgages, $1.1 billion of construction and land loans and $1 billion of multi-family loans.

FDIC Preps Massive Loan Offerings

www.crenews.com

February 5, 2010

The FDIC is unveiling three large portfolios of residential and hotel loans that it seized from failed banks. Another portfolio and possibly two more are said to be right behind them, but details of those could not be learned.

Deutsche Bank late last month, started distributing preliminary offering material for a portfolio of $420.1 million of performing and nonperforming hotel construction loans that were previously held by Silverton Bank of Atlanta.

And Stifel Nicolaus will soon launch marketing for two portfolios of residential mortgages. One will contain about $500 million of mixed-quality home loans and the other about $1 billion of nonperformers. Deutsche is expected to take offers for its portfolio on March 10, while.

Stifel could take offers for at least the $500 million portfolio by the end of March. The bid deadline for the larger portfolio probably won’t take place until April. Exactly how each offering will be structured is still being worked out, but the expectation is that FDIC will solicit offers for equity stakes of up to 40 percent while providing some level of financing. That model relies on elements of the federal government’s proposed public-private investment partnership, or PPIP, program.

Deutsche and Stifel are among 14 advisers FDIC tapped last November to spearhead the offering of failed bank assets through its structured portfolios. But they are among only six that have so far handled nine such portfolios totaling $11.8 billion.

Stifel previously handled the sale of a stake in a $560 million portfolio of mixed-quality home loans to PennyMac, while Deutsche previously handled the sale of a stake in a $1 billion portfolio of mixed-quality commercial mortgages to a Colony Capital
venture.

The Deutsche portfolio, which is farther along than the offerings Stifel is working on, is comprised of construction loans against hotels that Silverton originated through its Specialty Finance Group operation. That unit had lent against projects such as the W Hotel Downtown in Atlanta, for which it provided $85 million, and the Landmark Hotel in Charlottesville, Va., to
which it committed $23.7 million.

The portfolio will be divided into two components, one containing 22 whole loans with a balance of $162.4 million and the other having 41 loan participations with a balance of $257.7 million.

FDIC Problem Loan Portfolio “Financing” Strategies Analyzed

FDIC Multibank Structured Transactions:

FDIC financing provided for the Multibank Structured Transactions (large “structured” FDIC assets sales) increases the capitalization or perceived sale proceeds of an asset sale transaction versus a lower “all cash” transaction. It allows the Managing Partner of the newly formed venture (an LLC), entered into with the FDIC, to leverage their return as well. The FDIC hopes to realize higher gross assets values over the much extended investment horizon of the structured sale (five years plus) rather than receiving a lower cash yield in today’s depressed CRE market.

FDIC Loss Sharing:

Likewise, under Loss Sharing, the FDIC provides initial cash subsidy to the acquiring bank (gobbling up the failed bank), credit enhances the failed bank problem portfolio by way of subsidizing the losses of the acquiring bank over time “in trade” for an extended resolution time horizon and the hope of a higher “unstressed” resolutions. In a Loss Sharing Agreement, the acquiring bank “warehouses” problem loans that will be slowly restructured or refinanced (or foreclosed on) at a later date, when economic conditions are forecast to have improved. The acquiring bank is, in essence, "financing" a portion the FDIC problem assets by taking an IOU or receivable from the FDIC for future possible losses that the FDIC hopes it will not need to pay back because the market and values will have bounced back.

‘Blind Pools’ Falter as Ziman, Callahan Plan Property Comeback

Bloomberg News

Feb. 9 (Bloomberg) -- Richard Ziman and Timothy Callahan want to raise money in the equity market after selling their real estate companies for a combined $12 billion before the property crash. Investors may balk at bankrolling their return.

Ziman, former chairman of Arden Realty Inc., and Callahan, who ran Trizec Properties Inc., have each filed to offer shares in so-called blind-pool companies, which seek to raise money before owning any assets. They plan to use proceeds from the deals to acquire discounted office properties, hoping their talent and track records will lure investors.

Their timing may be wrong. Recent blind-pool stock sales have been cut in size or canceled, or the shares are treading water, amid a slump in demand for initial public offerings. Meanwhile, real estate owners are trying to hold onto distressed or defaulted properties rather than unload them at fire-sale prices, leaving few buying opportunities.

“Blind pools have huge negatives and only make sense if they have the perfect management and the perfect opportunity,” Mike Kirby, chairman of Newport Beach, California-based Green Street Advisors Inc., a research firm focused on real estate investment trusts, said in an interview.

Almost $1 billion of commercial real estate-related IPOs registered as blind pools have been withdrawn or postponed in the past year, according to data compiled by Bloomberg. An additional $3.9 billion of deals are in the pipeline. Five of the seven blind pools that raised about $2 billion did so before October, the data show.

Terreno Flops

Terreno Realty Corp., a San Francisco-based fund formed to buy industrial properties, postponed a $200 million sale Jan. 25 after reducing it by a third, and cut it again yesterday by 13 percent. The company is set to price the offering today, according to Bloomberg data.

Fairfield, New Jersey-based Chesapeake Lodging Trust raised 40 percent less than it sought, and the stock’s total return including reinvested dividends is down 5.5 percent after its Jan. 22 debut. Pebblebrook Hotel Trust, based in Bethesda, Maryland, is up 0.45 percent since going public Dec. 8.

Blind pools are risky because “the commercial market is in abysmal shape” and investors are worried the economic recovery will sputter amid high unemployment, said Robert Edelstein, a professor specializing in real estate at the University of California at Berkeley’s Haas School of Business.

The U.S. employment picture showed signs of improvement in January, with the jobless rate unexpectedly falling to 9.7 percent from 10 percent the previous month, the Commerce Department said Feb. 5. Unemployment touched a 26-year high of 10.1 percent in October.

Commercial real estate transactions declined 64 percent last year to $52 billion, data from researcher Real Capital Analytics Inc. show.

Distressed ‘Overhang’

Sales of commercial mortgage-backed securities, or CMBS, fell to $12.2 billion in 2009 from a record $237 billion in 2007, removing a major source of financing for building owners, according to JPMorgan Chase & Co. in New York, the second- largest U.S. bank. Delinquencies for loans packaged into CMBS rose to a record 6.5 percent in January from 1.5 percent a year earlier, Trepp LLC, a New York-based research firm, said Feb. 1.

Only 14 percent of an estimated $150 billion in distressed U.S. commercial real estate has been taken back by lenders, according to Jessica Ruderman, director of research services at New York-based Real Capital.

“There’s an overhang of real estate that no one is quite sure what will happen with,” Edelstein said. “The market is starting to recognize the complexities of owning troubled real estate.”

Ziman and Callahan sold their companies a year before the collapse of subprime residential mortgages led to the worst financial crisis since the 1930s and a more than 40 percent decline in commercial property values from their 2007 peak.

Beating REIT Index

Ziman, 67, was chairman of Arden Realty when Fairfield, Connecticut-based General Electric Co. agreed to buy it for $3.2 billion in December 2005. Arden, which Ziman founded in 1990, had 116 office properties with 18.5 million square feet in Southern California.

The Los Angeles-based company went public in October 1996 and returned 326 percent to shareholders, including dividends, through the announcement of the GE deal, according to a Dec. 18 IPO prospectus filed by Ziman’s new company, Halvern Realty Inc. That compares with a 237 percent return by the MSCI US REIT Index.

Halvern, based in Los Angeles, is seeking to raise as much as $400 million, according to its filing with the U.S. Securities and Exchange Commission. The company intends to buy and manage Southern California office properties and will be organized as a real estate investment trust. REITs must distribute at least 90 percent of their taxable income to shareholders, and don’t pay corporate taxes on that amount.

Zell’s CEO

Callahan, 59, was chief executive officer of Chicago-based Trizec Properties from 2002 until it was bought for about $9 billion by New York-based Brookfield Properties Corp. and Blackstone Group LP of New York in October 2006. He was CEO of billionaire Sam Zell’s Equity Office Properties Trust, also in Chicago, from 1997 to 2002.

Under Callahan, Trizec returned 189 percent, compared with a 125 percent gain by the REIT Index, according to a Dec. 11 prospectus by his new company, Callahan Capital Properties Inc. Equity Office returned 89 percent while he was in charge, twice the rate of the index.

Callahan’s REIT plans to buy prime office properties initially in Boston, Los Angeles, New York, San Francisco, Seattle and Washington, according to its filing. The Chicago- based company may raise as much as $500 million in the IPO.

Ziman declined to comment, citing the so-called quiet period required before an IPO. Callahan didn’t return calls seeking comment.

IPO Slump

The IPO market is slumping after the largest stock-market rally since the 1930s revived deals in the last four months of 2009 from a record slowdown that followed the credit crisis.

This year, Boca Raton, Florida-based FriendFinder Networks Inc.’s $240 million initial offer and Los Angeles-based Imperial Capital Group Inc.’s $113 million sale were pulled; Cambridge, Massachusetts-based Ironwood Pharmaceuticals Inc. cut its share price by 30 percent; and Fort Lauderdale, Florida-based Patriot Risk Management Inc. delayed a $204 million deal.

The Standard & Poor’s 500 Index has lost 5.1 percent in 2010, including dividends.

U.S. IPOs will triple in 2010 to $50 billion, according to an estimate by Barclays Plc, the second-largest U.K. bank. Even with a projected rise, real estate investors may favor trusts that already own buildings rather than blind pools, said Craig Guttenplan, a New York-based REIT analyst for CreditSights Inc.

“People are really wary of those,” Guttenplan said.

REIT Appeal

The load, or commission, for blind pools can reach 14 percent and covers underwriting and legal fees and general costs, according to Green Street Advisors’ Kirby. Terreno had a 10 percent load, one reason the IPO didn’t pass an “economic merit” test, he said.

U.S. office REIT share prices are trading at 7 percent above the underlying value of their real estate and are a safer investment than blind pools, Kirby said.

Blind pools face competition from other investors. Private- equity managers raised $21.4 billion for 50 North America real estate funds last year, according to data compiled by Preqin Ltd., a London-based research firm. Barry Sternlicht’s Starwood Capital Group LLC in Greenwich, Connecticut, has $900 million in a hotel fund, managing director Marc Perrin said Nov. 6 at a real estate industry meeting.

Capital Raises

The REIT boom that began two decades ago raised almost $27 billion in initial share sales from 1993 through 1998, according to the National Association of Real Estate Investment Trusts in Washington. More than 150 real estate companies went public in that period, and “few” of them were blind pools, said Michael Grupe, executive vice president for research.

Last year, facing tight credit markets and needing to pay down debt, almost 90 existing REITs raised more than $21 billion in secondary share offerings, the most since 1997, NAREIT data show. Companies also raised more than $10 billion in unsecured debt.

Still, buildings aren’t changing hands, and even established REITs can’t find deals because owners expect values to rise following the government’s massive support of capital markets, according to Dan Fasulo, managing director of Real Capital.

“I don’t think we’re going to see the wave of distressed opportunities that everyone thinks is out there,” Fasulo said. “Lenders aren’t in a forced position at all. They’re not giving the good stuff away.”

To contact the reporters on this story: Dan Levy in San Francisco at dlevy13@bloomberg.net Brian Louis in Chicago at blouis1@bloomberg.net .

Update from the MBA Conference in San Diego

2.9.10

Life company's lent $12B last year and have $30B for this year. Everyone will be fighting for the same type of conservative deal so expect spread compression. Some life companies will need to get creative to get out their money. 10 yr money ranges from 5.75% to 6.50%. Lender's are very anxious about tenant rollover.

Investors don't have good places to put their money so there's a strong interest in CMBS coupled with the perception that we are at or near the bottom. Take your cash flow after reserves and cap at a debt yield of 10 to 12% and that's your loan amount (min loan amount of $10M) with a rate of 6.50 to 7.50% 10/30, non-recourse with all the annoying bells & whistles. This program will continue to evolve quickly provided new security pools continue to be well received by investors.

Banks hold the lion share of the debt maturing in the next few years.

Monday, February 8, 2010

From the FDIC: Loss-Share Questions and Answers

"What is loss sharing?

Loss sharing is a feature that the Federal Deposit Insurance Corporation (FDIC) first introduced into selected purchase and assumption (P&A) transactions in 1991. Under loss sharing, the FDIC agrees to absorb a portion of the loss on a specified pool of assets in order to maximize asset recoveries and minimize FDIC losses. Loss sharing reduces the immediate cash needs of the FDIC, is operationally simpler and more seamless to failed bank customers and moves assets quickly into the private sector.

Does loss sharing put the taxpayer on the hook for additional losses down the road?

When the FDIC calculates the estimated cost of a failure, it takes into account all expected losses on the assets covered in loss share agreements. These current market assumptions are built into the cost of failure at resolution. Thus the cost of all expected future payments are recognized at the time of bank failure and no losses are deferred. Any loss sharing payments are made from receivership funds from the specific failed bank or thrift or, if those are insufficient, from the FDIC's Deposit Insurance Fund. The Deposit Insurance Fund is funded by assessments paid by insured banks and thrifts. It is not taxpayer funded.

How does loss sharing work?

The FDIC uses two forms of loss sharing. The first is for commercial assets and the other is for residential mortgages.

For commercial assets, the agreements typically cover an eight-year period with the first five years for losses and recoveries and the final 3 years for recoveries only. FDIC will reimburse 80 percent of losses incurred by acquirer on covered assets up to a stated threshold amount (generally FDIC's dollar estimate of the total projected losses on loss share assets), with the assuming bank picking up 20 percent. Any losses above the stated threshold amount will be reimbursed at 95 percent of the losses booked by the acquirer.

For single family mortgages, the length of the agreements tend to run for 10 years and have the same 80/20 and 95/5 split as the commercial assets. The FDIC provides coverage for four basic loss events: modification, short sale, foreclosure, and charge-off for some second liens. Loss coverage is also provided for loan sales but such sales require prior approval by the FDIC. Recoveries on loans which experience loss events are shared in the same proportion as the original loss.

Does the FDIC receive any benefits if the acquiring bank makes money on the covered assets?

Yes. If asset losses are lower than anticipated, then the FDIC receives the majority of the benefit. The acquirer will reimburse the FDIC for the difference either at 80% or 95% depending on what was booked.

What types of losses on the assets are covered, and when does the FDIC reimburse the buyer for those losses?

The FDIC covers credit losses as well as certain types of expenses associated with troubled assets (such as advances for taxes and insurance, sales expenses, and foreclosure costs). The FDIC does not cover losses associated with changes in interest rates.

For single family loans, the acquirer is paid when the loan is modified or the real estate or loan is sold. For commercial loans, the acquirer is paid when the assets are written down according to established regulatory guidelines or when the assets are sold.

How do you know that the FDIC is getting the best deal with loss sharing?

When the FDIC is preparing the sale of a failing bank or thrift, the FDIC reaches out to numerous potential bidders for the deposit franchise and the institution's assets. The sale relies on a competitive bidding process. In addition, the FDIC uses financial advisors to estimate asset values.

After bids are received, the FDIC selects the least costly option. To facilitate that analysis, the FDIC dictates the terms and conditions of a loss sharing, and the assets to be covered when bidding a failing bank. This allows the FDIC to more quickly analyze and compare each of the bids to determine which is the least costly to the insurance fund. The terms and conditions also enable the FDIC to monitor the agreements effectively.

Isn't loss sharing more costly? If not, then how does it save money? Aren't you still selling the assets?

Loss share saves the FDIC's insurance fund money. In today's markets, asset prices are low, and the prices frequently include steep liquidity and risk discounts. These agreements enable the FDIC to sell the assets today, but without requiring that we accept today's low prices. Instead, the FDIC sells to acquirers in a way that aligns their incentives with the FDIC and reduces the liquidity and risk discounts. The acquirers have the capacity and incentive to service the assets effectively and minimize losses.

How big is the loss share program? How much money has the FDIC saved?

Through year-end 2009, the FDIC has entered into 94 loss sharing agreements, with $122 billion in assets under loss share. The estimated savings exceed $29 billion, compared to an outright cash sale of those assets.

Why don't you use loss sharing for all failures?

Loss share agreements are just one way the FDIC has for selling assets of a failed bank, and may not be the best alternative for every troubled bank. For each resolution, the FDIC analyzes all available alternatives and accepts the least costly bid. Sometimes the results indicate that the loss share bids are more costly, and sometimes the FDIC does not receive a loss share bid.

What type of oversight does the FDIC have over these agreements?

FDIC periodically conducts on-site reviews of records of covered losses and overall compliance with the agreement. It also requires assuming banks to provide quarterly reports to ensure compliance with the program and to monitor the performance of the assets. Lastly, the FDIC must approve the bulk sale of any covered assets, and the loss share coverage is not transferable to the new owner.

For agreements that cover single family loans, must the assuming bank honor the FDIC's loan modification program?

The FDIC requires that buyers modify loans under two approved programs: the national Home Affordable Modification Program or the FDIC's standard modification program, which is based on the modification program applied by the FDIC at IndyMac Federal. Both programs adjust the current loan terms to achieve an affordable payment by first reducing the loan interest rate, then extending the loan term, and, where necessary, offering forbearance or forgiveness of principal. The goal is to provide an affordable monthly payment based on a debt to income ratio for housing equivalent to 31 percent of the borrower's gross monthly income (including taxes and insurance payments). Under both programs a modification is offered only if it is cost effective.

The acquirer can propose an alternative loan modification program that will achieve the goals of providing affordable payments consistent with cost effectiveness. If the FDIC concurs, then it can adopt the alternative program.

Where can I get additional information about the history and use of loss share?

In 1998, the FDIC published the book "Managing the Crisis" detailing the FDIC and RTC experience from 1980 through 1994. Chapter 7 is devoted to loss share and can be accessed at: http://www.fdic.gov/bank/historical/managing/"



Last Updated 1/11/2010

Friday, February 5, 2010

Cracking the Code: Finding An FDIC Loss Sharing 'Ninja'

CRE Financial Advisors is not so sure that commercial real estate is very close to turning the corner. The good news is that CRE innovation is emerging from the ashes of commercial finance and transforming a rapidly changing and treacherous landscape.

As of the end of 2009, over 700 U.S. Banks were included in the FDIC’s Problem Bank List. There were 140 bank failures in 2009 and 20 as of the first two months in 2010. By the end of 2009 the FDIC entered into 94 loss sharing agreements covering assets totaling $122 billion. The bulk of failed bank assets have been placed into these structures.

"Loss Sharing" is a public/private partnership between the FDIC and a healthy bank where the FDIC covers an amount of the losses incurred by a bank acquiring failed bank assets in exchange for possible upside to be shared with the FDIC that might result from the acquiring bank's expert asset management and improved economic conditions.

A loss sharing industry sprung up in 2009 as a response to complicated and sensitive set of procedures regarding the FDIC oversight of bank failures. It is our opinion there may be in excess of 200 additional bank failures in 2010 alone and the market for assets under Loss Sharing agreements will exceed $300 billion, cumulatively.


January 2010: More Billion Dollar Deals- FDIC’s Multibank Structured Transaction closes on 1.7.2010

FDIC Receiverships sold via Public/Private Partnerships

Where did the assets come from and where are the failed bank assets going? What is the structure of the deals?

The following are the transaction details from the FDIC press release:

“The FDIC as Receiver for the failed banks conveyed to the LLC a portfolio of approximately 1200 distressed commercial real estate loans, of which seventy percent were delinquent. Collectively, the loans have an unpaid principal balance of $1.02 billion. Seventy-five percent of the collateral of the portfolio is located in Georgia, California, Nevada and Florida. The participating FDIC receiverships provided financing to the LLC by issuing approximately $233 million of corporate guaranteed notes. Colony Capital paid a total of approximately $90.5 million (net of working capital) in cash for its 40 percent equity stake in the LLC, which equals approximately 44 percent of the unpaid principal balance of the assets. As the LLC's managing equity owner, Colony Capital will provide for the management, servicing and ultimate disposition of the LLC's assets.

The bid received from Colony Capital Acquisition, LLC, was determined to be the offer that resulted in the greatest return to the participating receiverships. All of the loans were from banks that have failed during the past 18 months….closed on a sale of an equity interest in a limited liability company (LLC) created to hold certain assets out of 22 failed bank receiverships.

The sale was conducted on a competitive basis with bids received on December 17, 2009. A total of 21 groups submitted bids to purchase a 40 percent ownership interest in the newly formed LLC. The participating FDIC receiverships will hold the remaining 60 percent equity interest in the LLC.”

The winning bidder was Colony Capital Acquisition, LLC, a division of Colony Capital, LLC. Colony Capital, LLC is a private, international investment firm focusing on real estate-related assets and operating companies globally and has raised $9.2 billion of equity capital since the beginning of 2006.

How are these deals structured?

At sale, the FDIC places the receivership assets into a new entity in partnership with the winning bidder. In the case of the Colony Structured Transaction, Colony purchased a 40% LLC interest for $90.5 million, implying a total equity value of $226.25 million for the deal and a total capitalization of $460 million including the FDIC financing provided.

The Key Points of the Structured Transaction

Bids are taken and LLC Membership Interest is sold to 3rd party (thereafter, the “LLC Interest Holder” or in this case Colony). Bidders must be pre-qualified, have demonstrated financial capacity and the ability to manage and dispose of similar loan portfolios, and have certified eligibility to purchase FDIC receivership assets.

LLC Interest Holder must provide a guaranty of its and LLC’s obligations by a substantial entity that owns a majority interest in the LLC Interest Holder (or such other guarantor as is acceptable to the FDIC). The FDIC financed roughly 50% of the sale or $233 Million the Colony deal.

Cash flows from the loans, after deducting the monthly management fee and advances for such things as taxes, insurance, and property protection expenses, are allocated between the Participant and the LLC, with the Participant entitled to its percentage interest (60% FDIC/40% Colony initially and shifting as specific profit thresholds are reached).

The Receivership (FDIC) has the right to require the sale of all remaining LLC assets when the aggregate unpaid principal balance of the loans has been reduced to 10 percent of the balance at closing or upon the 7th anniversary of the effective date of the Participation and Servicing Agreement whichever occurs first.

These deals are structured for the long term!

FDIC Asset Liquidation Trends

At least two other large Multibank Structured Transactions (structured sales) are currently in process as well as many smaller portfolio sales. Over $30 billion an additional receivership assets are being shed from the FDIC books via structured and unstructured receivership asset sales.

A more significant liquidation method gaining ground is the FDIC’s loss sharing agreement (“LSA”), a preferred method for the FDIC to dispense with failed bank loan portfolios in conjunction with the acquisitions of failed banks. Over $100 billion in LSA asset volume were included in 140 bank failures in 2009 and in January 2010, the 15 US banking institutions shuttered during the month involved a total of $10.9 billion in combined assets and the loss share transactions in 13 of these cases covered a total of $7.3 billion in loans.

Wednesday, February 3, 2010

January 2010 Recap: More Billion Dollar Deals- Horizon Bank

Horizon Bank of Bellingham Washington, shut down on January 8th 2010, was the first 2010 US bank failure. It was closed by the Washington State Department of Financial Institutions (FDIC, the receiver) and sold to Washington Federal Savings and Loan Association of Seattle, WA. Horizon had $1.3 Billion assets and $1.1 Billion in total deposits. CRE assets (real estate construction loans and land development loans) contributed to the bank's problems.

Interestingly the buyer, Washington Federal, reluctantly took TARP funds in 2008 at Treasury's (can't say no) insistence and the bank later regretted the stigma attached to the perception of being one of the "bailed out" institutions. Clearly the PR cost outweighed the capitalization benefit. The much larger $12.6 Billion Seattle-based institution managed their balance sheet convincingly enough and raised $350 Million of new equity in September 2009 with an eye to acquiring weak players in their backyard.

The loss sharing agreement between the FDIC and Washington Federal (an FDIC arrangement with the acquiring bank to assume a share future loan losses) totaled $1 Billion in assets.

Tuesday, February 2, 2010

January 2010 Is Over and the Failed Bank Statistics Are In

Posted 2.2.2010

January 2010 came to a close and 15 US banking institutions were shuttered during the month involving a total of $10.9 Billion in combined assets. The average size of closed institution in January was $727.5 Million. The FDIC entered into loss-share transactions (an FDIC arrangement with acquiring bank to assume a share of future loan losses) in 13 cases covering a total of $7.3 Billion of failed bank assets or roughly two thirds of the $10.9 Billion failed asset total. The January cost to the Deposit Insurance Fund ("DIF") was $3.4 Billion.

Monday, February 1, 2010

Six banks fail, in Florida, Georgia and California

By Hibah Yousuf, staff reporterJanuary 31, 2010: 7:50 PM ET

NEW YORK (CNNMoney.com) -- Regulators shuttered six banks on Friday, notching up 15 failed banks in the first month of in 2010.

The biggest to fall was First Regional Bank in Los Angeles, which had deposits of $1.87 billion. The others were Community Bank and Trust in Cornelia, Ga.; Florida Community Bank in Immokalee, Fla.; First National Bank of Georgia in Carrollton, Ga.; Marshall Bank in Hallock, Minn.; and American Marine Bank in Bainbridge Island, Wash.