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Is The CMBS Witching Hour Upon Us? Serving Families Throughout Massachusetts and Connecticut
witchng hour coffee cup

Unfortuntately, the life of a foreclosure defense attorney can be an ongoing 24-7, emergency proposition. Such has been the case for me over the last year. Much of that unpaid I might add.

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Although, today even though I am “relaxing” by planning responses to pleadings in two separate matters, with deadlines of Tuesday and Friday, I felt compelled to draft a post this morning.

The current economy is a perplexing dichotomy. On the one hand the stock market appears to be on a current rocketship to the moon, yet on the other hand prices for consumer goods appear to be getting beyond the reach of the average consumer. I was shocked today when I went into the local grocery store and found out that a small container of bluberries costs $7.00.

However, a true tsunami, and current festering malignancy, involves the current state of the Commercial Mortgage Backed Securities (“CMBS”) market.

Thanks to the pandemic [and there are those that have very different views of the genesis of that situation], businesses found that having that Fifth avenue location in Manhattan might not be that “essential”. Working remotely became ubiquitous. Businesses saw the relief from overhead that eschewing that “downtown location” afforded them, and began to terminate office space in droves.

Of course those that owned these business properties that hoseted that “office space” had levereged their investments in real estate through procurement of mortgage loans. It is these Mortgage Loans that are the coduit for the sale of CMBS to institutional investors. The concept of CMBS is the monetization of a projected future money stream (mortgage payments), to create off balance sheet assets (Special Purpose Vehichles, Special Purpose Entities) [usually through the use of New York Common Law Trusts, or Delaware Statutory Trusts to hold title to the real estate asset]. This is the “wonder” of “structured finance” (Thank you Frank J. Fabozzi).

Securitization actually has its genesis from a very troubling history that will be the subject of my future posts / publications (see “South Sea Bubble”). Like the “South Sea Bubble”, [at least with respect to RMBS] the Government is also involved, albeit opaquely], as Fannie Mae, Freddie Mac, and Ginnie Mae, buy the highest credit rated borrowers from underlying tranches within private label RMBS from underlying private lable securitization trusts. These Governmental emtities then create their own securities sold to Investors, which is accompanied by a “guarantee”. The borrower usually never sees any connection to the entities throught the use of mortgage servicers, and mortgage subservicers.

Fannie Mae and Freddie Mac were formerly “Governmental Sponsored Entities” (“GSE”). However, On July 30, 2008, President George W. Bush signed Public Law 110-289, the Housing and Economic Recovery Act of 2008 (HERA), which established FHFA, giving the Agency authority to place regulated entities into conservatorship or receivership. [See History of FHFA Conservatorship].

In February 2013, I was asked (as part of a group of individuals) to take part in a four (4) day event before the FHFA in Washington D.C., in which the FHFA sought input from stakeholders, and other professionals involved with the Mortgage Market, related to the FHFA Conservatorship. I was asked to present to the federal government on securitization from the perspective of the residential homowner borrower. Subsequent to this event, the FHFA entered into a $5.1 Billion Dollar settlement agreement with most of the major U.S. Financial Institutions involved with the securitization of mortgages, and the related fraudulent activities involving the same, and monies from Fannie Mae and Freddie Mac. [Spoiler Alert - There was no compensation provided to me, outside of air fare and lodging for the February 2013 presentation]. I also subsequently presented to the Securities and Exchange Commission related to activities of Deutsche Bank in a case I was arguing before the Massachusetts Superior Court at that time.

Under the securitization model, everything is hunky dory as long as static historical norms remain. But where the “Great Recession” effect on residential mortgage backed securities (“RMBS”) was severe, the “Great Pandemic” is having an even more devastating effect on CMBS, which may turn out to be a death knell to the CMBS Market in the near term. And the latter may have a cascading effect on the RMBS Market.

Indeed, in an interview with former Fox New Host Tucker Carlson in April 2023, Elon Musk stated; “Commercial real estate is melting down fast,”and “Home values [are] next.” Musk went on to say “We really haven’t seen the commercial real estate shoe drop. That’s more like an anvil, not a shoe.. So the stuff we’ve seen thus far actually hasn’t even — it’s only slightly real estate portfolio degradation.”

While Musk’s projections for the end of 2023 have not completely materialized, I believe it is merely a matter of time before that hand grenade explodes. The reason? It is an indisputable fact that Office leasing is not going to increase anytime in the near furture. Further, unlike residential mortgage loans, the maturity date on commercial loans is trypically five (5) years. We are now approaching that five (5) year window on loans that were taken prepandemic.

Fitch Ratings has stated that U.S. Commerical Real Estate Deterioration will increase in 2024, led by Office space.

While recent data appears to reflect a very small (almost imperceptible) improvement in the CMBS outlook, I believe this is an artifice that is being erected during the time leading to the 2024 election season.

Indeed, cracks are already starting to appear, as there were five (5) U.S. Bank failures in 2023. The Government had to act quickly to prevent this from cascading into a banking collapse. Granted that these failures involved high net worth individuals, however it is worth noting that the financial foundation undergirding our financial markets is beginning to crumble.

Just recently, New York Community Bancorp (NYCB) shocked Wall Street when it slashed its dividend, reported a surprise quarterly loss, and stockpiled millions for future loan losses. The stock of the Hicksville, N.Y.-based lender fell 37% on this past Wednesday and another 11% on the next day, dragging the rest of the sector down with it.

Interestingly, NYCB is largely a commercial real estate lender, and there have been concerns about the pain for such banks as office and multifamily apartment properties fall in value due to elevated interest rates and the effect of a pandemic that emptied out many city-center buildings.

Financial publications are trying to downplay the NYCB development, however, it would be wise to seriously consider the implications of this situation as it plays into the overall hand grenade that is the ultimate CMBS collapse.

Respectfully submitted for your consideration

Glenn F. Russell, Jr.

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