COMMERCIAL REAL ESTATE
OCTOBER 20, 2010
Agency to Launch Its First CMBS Deal as Bank Failures Mount and the Volume of Distressed-Property Loans Increases
By LINGLING WEI, Wall Street Journal
With more banks collapsing because of commercial real-estate lending, the Federal Deposit Insurance Corp. is working on a new way to sell failed banks' hard-to-value real-estate assets back to the private sector, according to people familiar with the matter.
Up until now, the FDIC has mostly sold soured property loans to investors in partnerships with the agency. These arrangements enticed private investors to buy distressed real-estate assets while giving taxpayers the opportunity to make money should the assets rise in value.
But as the volume of real-estate loans mount, the FDIC now is looking to bundle and sell some of them as commercial mortgage-backed securities, or CMBS. The agency is expected to launch its first CMBS deal, expected to be backed by at least $500 million of performing commercial mortgages, by the end of this year or in January, the people said.
The move comes as the CMBS market is beginning to recover after screeching to a halt during the dark days of the downturn. The FDIC, which is in the process of selecting banks to underwrite the deal, hopes to take advantage of the nascent rebound to maximize returns on assets and limit losses to its deposit-insurance fund.
Since the start of the financial crisis in 2007, there have been 300 bank failures, which wiped out the deposit-insurance fund in the third quarter of last year, putting it at negative $8.2 billion. Problems at many of these banks were caused, in part, by overaggressive lending to owners of offices, shopping malls, apartments and other commercial property.
The FDIC has about $34.1 billion in assets, including those tied to real estate, held by failed banks that are available for sale, according to the agency.
Last Friday, three more banks closed their doors, bringing the total number of bank failures this year to 132: Premier Bank, in Jefferson City, Mo., WestBridge Bank & Trust Co. in Chesterfield, Mo., and Security Savings Bank in Olathe, Kan.
Matthew Anderson, managing director at research firm Foresight Analytics, estimates that soured commercial real-estate loans, including construction loans and those backed by income-producing properties, accounted for 88% of these three banks' nonperforming debt as of the second quarter. Notably, Mr. Anderson said, commercial mortgages have been rising as "a source of distress" for banks in addition to construction and land loans.
In most FDIC deals involving failed banks during the downturn, the agency has lined up buyers to take over loans, deposits, branches and most other assets when the banks have failed. But for some failed banks like Corus Bank, Franklin Bank and IndyMac Bank, the FDIC has decided to sell some hard-to-value assets separately.
The methods being used by the FDIC have their roots in the real-estate disaster of the 1990s. The public-private partnership structure was pioneered by the Resolution Trust Corp., the federal agency formed to clean up the savings-and-loan debacle in the early 1990s. Since 2008, the FDIC has sold residential and commercial loans through 16 such partnerships, with the agency's equity interest ranging from 50% to 80%. Those partnerships bought loans at discounts ranging from pennies on the dollar to more than 80 cents on the dollar of face value.
CMBS also was a product of the last downturn. The RTC also was the first to package mortgages and then sell them as securities to appeal to buyers with different risk tolerances. After that, Wall Street took over, powering the business into a $700 billion market until the latest recession hit.
Now, with the debt market struggling back to its feet, the agency is looking to sell off as CMBS commercial-property loans as another way to dispose of the assets they took over from failed banks.
The FDIC's coming CMBS deal would be different than those sold by Wall Street firms in that it would feature smaller-sized loans, the people said. CMBS deals carry less risk for taxpayers than public-private partnerships, because in partnerships the FDIC takes a big chunk of the equity and provides financing, potentially standing to lose more if the markets decline.
For the broader commercial real-estate market, the renewal of the CMBS market is a critical step in the road to recovery. Owners and developers have relied on the securities market for the bulk of their financing during the past decade. Wall Street is expected to sell up to $15 billion of CMBS this year. That amount pales next to the $230 billion of CMBS issuance in 2007, the record year for the market. But it still amounts to a sharp turnaround from the past two years.
In the most vivid sign to date of a resurgent CMBS market, Goldman Sachs Group Inc. and Bank of America Corp. are expected to sell as CMBS $3 billion of debt tied to the buyout of Hilton Worldwide in the next two weeks, according to people familiar with the deal. That offering would be followed by another $2 billion deal, led by J.P. Morgan Chase & Co. and Deutsche Bank AG, which involves the Extended Stay Inc. hotel chain that recently exited bankruptcy, the people said.
Write to Lingling Wei at email@example.com