Randomly Noted

We haven’t heard much recently on the commercial real estate front other than some big workouts have been done for loans of some high profile deals before the financial crisis hit. Today, Fitch Ratings issued a report that makes it clear that while the commercial real estate market may have shown signs of improvement in some parts of the country, in others it remains a problem.

Fitch downgraded a series of mortgage passthrough securities today because of problems with some of the underlying loans. We know how hard hit the housing sector has been and how related companies suffered as well. But perhaps no town has suffered as much as High Point, NC.

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We learn today that giant insurance company Allstate has sued BankAmerica and its Countrywide Financial unit over a bum investment. It seems Allstate bought $700 million of Collateralized Debt Obligations from Countrywide which were backed by residential mortgages originated by the mortgage lender. Allstate believes Countrywide misrepresented  the quality of the portfolio.

Well, we don’t know yet the merits of this case – and we don’t know exactly what Countrywide disclosed in the offering documents for this CDO (were these stated-income mortgages? was performance of the mortgages listed in the documents? default rates? delinquencies?) To be sure, Countrywide originated some really bad mortgages and it is entirely possible that some of those made their way into the CDO Allstate bought.

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At first, it’s hard to tell if BMO Financial Group’s $4.1 billion acquisition of Marshall & Ilsley is about a strategic expansion of business in the U.S. or an opportunistic buy of a bank beat up by bad real estate loans.

The answer is it is probably both. Marshall & Ilsley has lost money for nearly two years because its loan portfolio – heavily commercial – soured across the board. But it has a strong deposit footprint in Wisconsin, Minnesota, Florida and Arizona.

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Over the past couple of weeks, Moody’s Investors Service has been downgrading more pools of commercial mortgage backed securities. And buried in releases of a couple of those downgrade notices comes word that a loan on famous New York City office building landmark has moved into special servicing.

The building is 666 Fifth Avenue and it was built in 1957 by Tishman Realty & Construction. It at one point had Citigroup as a major tenant, with a “Citi” logo replacing the numbers “666″ on the side of the building. Kushner Properties bought the building for nearly $1.8 billion near the top of the NYC real estate market in late 2006.

And now there appear to be some issues with that loan.

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General Electric reported earlier today that its earnings and sales were a little softer than everyone expected them to be although orders for new equipment and services grew in the third-quarter – a sign business is picking up.

But one of the clear challenged that remains for GE is its real estate portfolio in its GE Capital unit. The company reported today that its real estate business lost $405 million. Now, that’s better than the $538 million loss in the year-ago quarter, but it shows that the weight of bad loans continues to drag down GE Capital.

The company also noted that it has $1.4 billion in non-performing loans, so, more losses are likely. It wrote off $222 million of losses from that real estate loan portfolio.

Wells Fargo reported earnings today and in general, it said it thought the corner has been turned in terms of deterioration of credit quality in its lending portfolios – generally lower writeoffs and money set aside to cover bad loans. But, while things may be looking better, money still is being lost in these portfolios. And when it comes to commercial real estate, it continues to show stress. Wells Fargo reported that its nonperforming commercial real estate assets rose to 4.09% of total loans in the first quarter. That’s up from 3.77% in the 4Q and 3.22% in the quarter before that.

Improvement in general. But that commercial real estate market is still hurting pretty badly.

Debt Coming Due In A Market Not Friendly To Refinancings

If you believe we are at, or near, a bottom in the commercial real estate market, Excel Trust has a deal for you. This real estate investment trust plans to raise between $240 million and $270 million in an initial public offering to go out and buy retail properties on the cheap.

What’s a little different about the Excel deal is that it has lined up 16 retail properties to buy upon completion of the IPO. Other REITs that have looked to take advantage of the distressed commercial real estate market raised the money first and then planed to go bottom fishing. So with Excel, you know which properties are being bought and can make an investment decision on that rather than investing in a blind pool.

The 16 properties are 93.5% leased and the company has a pipeline of other properties, too. Given the large amount of commercial mortgage backed securities coming due this year and next, Excel believes those will have a difficult time getting refinanced and therefore there will be even more sales at distressed prices. As Excel says in its offering documents, it believes it can buy “Class A” properties at “Class B” prices. Class A are defined as those in prime locations.

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There are a number of elements of the Morgan Keegan mutual fund fiasco that are plain outrageous. Start with making up prices for securities in a number of Morgan Keegan’s mutual funds. Continue with those made up prices often coming from the manager of the funds himself.

Yes, lying to investors is downright criminal and its good to see regulators from FINRA to the Securities and Exchange Commission go after the people involved. But to me, what is more troubling is an allegation put forth by four state regulators who also investigated what was going on with these funds – that the managers of these funds often bought securities that they never bothered to attempt to understand.

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The New York Fed on Maiden Lane

The Securities and Exchange Commission today approved a rule today designed to reduce the risk in markets like those for asset-backed securities. But some real questions remain as to whether the new rule would really prevent much of anything.

Basically, the SEC wants issuers of asset-backed securities to retain at least 5% of the securities they are offering. As SEC Chairman Mary Schapiro says: It will force them to have some “skin in the game.”

But will making issuers have “skin in the game” really make them more responsible in evaluating risk?

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The New York Fed yesterday revealed some details of its Maiden Lane holdings – funds that were set up to assume some of the crappy assets that weighed down Bear Stearns and AIG. And when you take a close look through the more than 150 pages of holdings, you see that the taxpayer is really sitting on a bum portfolio of securities, ranging from commercial real estate loans to bad residential mortgage securities to collateralized debt obligations.

But one eye opener for this blogger – it looks like among the Bear Stearns securities the Fed (and therefore you and I) assumed were credit default swaps. And swaps that were connected to mortgage insurers. Is it possible that on one hand Bear Stearns was putting together packages of bum mortgage securities it was selling to investors while at the same time betting that the insurers who were backing these and similar securities were going to run into trouble (which of course they did)? At a minimum, it all looks very odd.

To see the Fed report, click here and then go to the bottom of the Fed press release to access the three PDF files on the Maiden Lane holdings. The first PDF details the Bear Stearns holdings.