These comments are by the Urban Land Institute and Sam Zell regarding the “bailout� or “rescue� bill just approved by Congress and signed by President. They were published in “Feedblitz� on September 26, 2008
ULI’s Analysis of the Bailout
I found this commentary very compelling. Does this bailout just help Wall Street? If the Treasury buys bonds–including CMBS bonds–will that do anything to help the end borrower at all? Who is actually getting bailed out here? I’ve heard a lot of support for the bailout from various forces in commercial real estate. Is the industry really fully behind this? It seems that in most other circles–including many, many economists – there’s a lot of opposition.
But most of what will be bought will not be mortgages but parts of various tranches of mortgage backed–securities (MBSs), commercial mortgage backed–securities (CMBSs), collateralized debt obligations (CDOs) made up of MBSs and CMBSs, and structured investment vehicles (SIVs) made up of all the above.
No one knows what is in most of these pools, and heaven knows where the documents are. In time, with enough effort, most of the documents will be found, but not for some time and not all of them—witness the cases where special servicers have been trying to foreclose on a mortgage without original documents, usually unsuccessfully.
There will be little opportunity to work out the mortgages that make up the pools on which the securities are based, or even to modify the mortgages to help the homeowners, as many people are understandably recommending. Without owning the vast majority of all the tranches of a particular mortgage pool, the Treasury (or its agents) won’t be able to modify the contract with the special servicer in charge of the assets (the mortgages) in the pool.
The servicers will still have to follow their contracts and foreclose on defaulted loans instead of modifying them. Well, sure, the Treasury could buy up all the securities based on the pool—if it can find who owns all of them, and if it can find a price that all the holders want to sell.
But unless it owns enough securities, it won’t control what happens to the mortgages. It could try to override the pool documents and take over control, and perhaps this is one of the reasons the Administration proposed that nothing they do could be reviewed by a court or administrative agency. However, this is highly problematic.
Zell Blames Accounting Rules for Crisis
“This entire crisis could be placed on the accounting system,� Zell told an audience of more than 1,000 assembled on Tuesday at the Four Seasons Hotel. He revealed that he called Treasury Secretary Henry Paulson early this year to ask him to suspend rules forcing banks and other institutions to write down the value of their real-estate mortgage assets — both residential and commercial — to reflect the latest valuations.
So-called mark-to-market accounting, required as part of the post-Enron reforms enacted by Congress, led “to a whirlpool of lower and lower marks,� Zell said. “Without mark-to-market fair value accounting, this crisis would never have reached this level. You took a big problem and made it into a gargantuan problem.�
Zell predicts that the U.S. will sink further into recession by early next year, but he suggests it will be a shallow downturn. “It’s not likely to be as catastrophic as people think,� he said. He expects residential construction to pick up again as the apartment sector is strained by demand. Equity Residential, the Chicago-based apartment REIT he controls, is experiencing 95% occupancy rates currently. “We could probably run at 97%,� he said. “But there are 1 million new households being created each year in this country. I don’t know where these people will live.�
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