From US Capital Trends November '08
Treasury Secretary Henry Paulson’s recent announcement that the Troubled Asset Relief Program (TARP) will not be buying troubled mortgages as originally planned was not taken as good news in the CMBS market: spreads widened considerably. Yields on “super senior” AAA CMBS spiked to an astounding 11%.
However, the news is actually positive for the commercial real estate industry, as banks can now work in earnest to start to resolve their problems. Since the announcement of TARP, banks have been in a holding pattern. Few were willing to sell their troubled real estate loans to the private sector until they understood better what TARP would pay for them, leaving vulture investors frustrated. In addition, some banks were also stalling foreclosures since they were unsure whether TARP would also buy REO or stick strictly to buying troubled mortgages.
"The news is actually positive for commercial real estate as the banks can now work in earnest to start to resolve their problems."
Now, the outcome is becoming clearer, and the consequences of the redefined TARP for commercial real estate are significant. Banks and servicers must now bulk up their workout groups and hire new people. No longer in a holding pattern, lenders can proceed with foreclosures and dispositions at a more rapid pace. Distressed-debt funds may now find themselves under-funded relative to the opportunities that will unfold. For most of the year, distressed-debt funds were proliferating faster than distress situations, but now the sources and magnitude of the opportunities are clear.
While the change in strategy of the TARP may not please everyone, the greater clarity gained from the recent announcement clears the way for banks and the private sector to start taking the steps necessary for a recovery.