Commercial Mortgage Backed Securities (CMBS) are systematically used as a tool for large banks to profit and avoid losses on commercial real estate. They are ruining the markets credibility.
Back in 2006 to 2008 was the worst credit underwriting period in history for commercial real estate loans, especially retail assets, that were sold into CMBS pools. The same as for the RMBS sector....But there have been virtually no loans repurchased by the originating banks that reaped millions from fraudulent loan sales as with RMBS.

Why? The CMBS trusts have been rigged by the trust parties (servicers and trustees) that are charged with managing the assets/loans. As a result pension funds, insurance funds, and investors are left holding the bag on hundreds of millions in losses from retail assets because the trust parties are systematically violating the terms and spirit of their obligations under the trust documents, the pooling and servicing agreements and the prospectus.

Take the definition of controlling class in a CMBS for example of how they have rigged the trust....in 2003 when the banks pushed the rating agencies to change the definition of controlling class note holder. The definition use to be the junior most note holder with at least 25% of original principle outstanding PLUS appraisal reduction amounts. In 2003, starting with the BACM deals, the definition began to be just realized losses excluding appraisal reduction amounts. This created an arbitrage opportunity for the servicers and their usually-affiliated controlling class note holders. Realized loss timing and quantum can be controlled by the servicers and their 'out of the money' junior notes became the controlling class for multiple billion dollar CMBS pools, while those more senior notes that are 'in the money' with skin in the game lost control. 

There was extensive discussion at the rating agencies behind this change and the arbitrage opportunity against the senior note holders was glaringly apparent. Well the rating agencies approved it of course, in a very Enron-esque environment where senior rating agency staff were sleeping with the bankers, etc...you get the picture. 

By 2004 the definition of controlling class was across the board excluding appraisal reduction amounts. By 2005 the crazy underwriting was out of control and by 2006 all rational underwriting standards were out the window. The norm became that banks churn and burn and originate as fast as possible to take the profits, sell the loan, and run. I have numerous examples of banks selling loans with retail collateral where there are inflated appraisal values, undisclosed environmental catastrophes, half completed assets under construction being sold as complete and fully occupied, massive 'cash outs' in loan refinancings being sold as acquisitions, inaccurate historical NOI....the list goes on. Anecdotally, have a look at the number of loans originated in 06 to 08 that were extensively renovated just prior to loan sale to justify lower expenses. 

The trust parties conveniently hid and ignored the sins of the originators and perpetuated the non discovery of the violations and now hide behind statute of limitations to bar action. They do this because they earn more from working out the loans, flipping the loans to their affiliates at a discount, and then selling the loans to the open market. Or they hold on to the assets for their own real estate operating companies. This is the biggest wealth transfer in history from second tier wealthy individuals and companies to the top tier hedge funds and private equity firms that now run the CMBS trusts. 

When senior note holders try and take remedial action they face multiple hurdles. Firstly they must indemnify the trustee for potential losses associated with the proposed remedial action. Secondly the worried note holder cannot identify or communicate with other senior note holders without the trustees' cooperation. The central registrar of note holders is held by the Depository Trust Corporation, a 'non profit' controlled and funded by about 30 of the worlds top banks. Thirdly they face trading restrictions on an already impaired security because servicers deem the information as insider information-this is a scare tactic that has never been tested to my knowledge. 

This is a page straight out of the 'Art of War'. Control the communications apparatus and attack.

More to come..if your interested reach out and say hey!




[{"id": "d4lp7gr", "text": "https://www.dechert.com/How_to_Find_a_Bondholder_DTC_and_Its_Role_in_Structured_Finance_Transactions_04-05-2010/", "replies": [], "depth": 1}, {"id": "d4lpjlz", "text": "http://bloom.bg/1Ytx5TT", "replies": [], "depth": 1}, {"id": "d4m64iy", "text": "CMBS will get funky over the next couple of years....with the retention regulation coming forth end of 2016, and hedge funds/other large holders having quick trigger fingers (at any sign of market volatility) to unload their CMBS positions at discounted prices (as what happened in february), originators will find it harder to compete. CRE buyers will either look for alternate sources of capital or bid lower on assets.", "replies": [], "depth": 1}, {"id": "d4mbpcc", "text": "At the end of the day, the B piece buyer is taking the majority of the risk. If they want to have riskier loans with higher rewards, then so be it.", "replies": [{"id": "d4ms5z5", "text": "B Piece buyers aren't taking that risk when they fund the B piece purchases of notes with CRE CDOs or other peoples money. Furthermore many of the special servicers change during the life time of a trust, changing their incentives because the subsequent special servicers don't have that initial cost and purchase junior, future controlling classes at a discount.\n", "replies": [{"id": "d4mtaph", "text": "Well shit, so you are telling me that all my CMBS guys are worrying about their B piece buyers for no reason?", "replies": [{"id": "d4mvjcy", "text": "Just the opposite...you should be very worried about your B piece buyers. If you're an investor they will pass losses to you on loans that should have never been bought. If you are a borrower they will potentially trap you and take your asset.", "replies": [{"id": "d4mw4g2", "text": "I am talking about CMBS originators.", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "d4mbuu6", "text": "Thanks for writing this up. As someone who's just barely getting his feet wet in CRE, I think its interesting how similar it is to the rmbs crash. Do you see any potential opportunities, or are there certain characteristics that will prevent a repeat of what happened with residential? ", "replies": [{"id": "d4msz98", "text": "Yeah there are opportunities but very unique to the loan/asset. Plus you can use the violations and hold the trust parties feet to the fire for the liabilities they've created for themselves.\n", "replies": [], "depth": 2}], "depth": 1}, {"id": "d4mpbdv", "text": "I really dislike securitization. The root of a stable banking and real estate system is banks keeping their loans on their balance sheets!\n\nIt is a travesty that securitization remained legal and thriving after 2008.", "replies": [{"id": "d4msnxq", "text": "Securitization diversifies risk when used properly, increases liquidity, and lowers debt costs. Its a travesty that the trust parties are not held accountable for their (in)actions. They run circles around the regulators.", "replies": [{"id": "d4mspsc", "text": "Investment banking\nDiving into the mire\n\nWells Fargo leaps into a swamp from which most banks are retreating\nJun 18th 2016 | NEW YORK | From the print edition\n\u00b7          \n\u00b7          \nttp://cdn.static-economist.com/sites/default/files/imagecache/original-size/images/print-edition/2016061\nWHEN Wells Fargo\u2019s competitors were spending fortunes building up big investment-banking operations in the 1980s and 1990s, the bank\u2019s chief executive at the time, Richard Kovacevich, refused to follow suit, joking that the business would be a good one to get into were it not for all the people who worked in it. Instead he concentrated on building up a nationwide network of branches (\u201cstores\u201d in Wells-speak) to take in deposits and sell mortgages, credit cards and insurance. This strategy was vindicated when the financial crisis struck, turning once lucrative investment-banking franchises into millstones. Wells, meanwhile, became the most profitable big bank in America.\n\nBut an odd thing happened in the process. Wells\u2019s strength during the crisis allowed it to snap up Wachovia, a regional bank whose dense network in the eastern part of country perfectly complemented Wells\u2019s in the west. Wachovia also happened to have a sizeable investment bank.\n\nMany assumed Wells would promptly sell the unit, or shut it down. Instead, it has expanded it, even as other banks have been hacking away frantically at their investment-banking arms. In the first quarter of 2007, before the takeover of Wachovia, Wells had no investment-banking revenue at all; Wachovia underwrote $831m-worth of share offerings, putting it twelfth in the American rankings. In the first quarter of this year, Wells underwrote $1.23 billion of share offerings, putting it ninth in the rankings (see chart). It recently bought six stories of a skyscraper under construction in Manhattan, which will include two big trading floors.\n\nWells\u2019s investment-banking operation is still far smaller than those of the giants of Wall Street: JPMorgan Chase, Goldman Sachs, Morgan Stanley and Bank of America. But its equity underwriting in America has surpassed that of Deutsche Bank, which had sought to elbow in to the top ranks. Jamie Dimon, the boss of JPMorgan Chase, recently noted that Wells was \u201cactively\u201d, \u201caggressively\u201d and \u201csuccessfully\u201d building an American investment bank.\n\nThere are clear limits to Wells\u2019s ambition. The Wachovia deal notwithstanding, it is not fond of takeovers, which it believes bring unforeseen problems and employees who will bolt unless rewarded (those dreadful investment bankers again), at a cost that would make its existing staff bitter. It also has limited interest in expanding abroad, since it does not want to have to navigate multiple regulatory regimes. Fully 95% of the employees of its investment bank are in America; 90% of its revenues originate there.\n\nInstead, Wells hopes to grow in America by helping more of its corporate customers buy derivatives, issue debt or equity, or navigate takeovers. Investment banking currently produces about 5% of the bank\u2019s revenues; it says it would like the number to rise to as much as 15%, but no higher.\n\nWells\u2019s sudden enthusiasm for the business may seem counterintuitive, but it has always sold itself as a fast-growing company. Retail and commercial banking are competitive businesses; last year Wells\u2019s revenues were up by a mere 2%\u2014and that was still better than most of its rivals. Regulators are also trying to discourage America\u2019s biggest banks from growing much bigger (Wells is already the third-biggest by assets, with a balance-sheet of $1.8 trillion). There is talk of requiring the biggest ones to hold even more capital, beyond the surcharge already imposed on \u201csystemically important\u201d ones. In that sort of climate, a business which could make more efficient use of existing clients and which holds out the promise (often forlorn) of higher returns on capital is hard to ignore.", "replies": [{"id": "d4mss78", "text": "Wells is one of the larges trustees/master servicers in the CMBS industry\n", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "d4o6okp", "text": "Well then you might want to have B piece buyers that don't scrutinize your loans too closely so they don't catch any mistakes you might make in that loan sale, ya know?", "replies": [], "depth": 1}, {"id": "d4sasrp", "text": "http://imgur.com/49s3VA4\n\nSo have a look at the completion certificate cut for this $19mm loan sold by Natixis into a CMBS trust in 2006. They said the building was completed and almost fully occupied, but the completion certificate wasn't issued until a year later!!! Shockingly brazen!! Furthermore the tenants weren't in occupancy as represented and the appraisal value is questionable!! Basically the loan was in default with a number of its terms when it was sold into the trust. This isn't conjecture folks, these are hard facts!! So post crisis Natixis is using its banking license and is hard at it again. They've originated and sold about $15 billion per annum since the CMBS market recovered from 2014. ", "replies": [], "depth": 1}]