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A Bondholder Vendetta & More Agency Policing

JPMorgan targeted by bondholders, Fannie/Freddie demand more, plus: Blackstone cub pounces

Author

Hiten Samtani
August 05, 2024

A Bondholder Sittuationship

Bondholders are suing JPMorgan for allegedly failing to disclose key info about the Sitt-owned Palmer House

Which Joe Sitt were we dealing with? That’s the Q at the heart of an intriguing lawsuit filed by CMBS investors at one of Chicago’s most storied hotels. Their target? JPMorgan, which originated the debt.

In 2020, Sitt’s Thor Equities had defaulted on its $333M CMBS loan at the 1,641-key Hilton Palmer House. Bondholders – including BlackRock & MetLife – moved to foreclose but the process is still mired in litigation, and it’s likely that the courts won’t allow bondholders to repo big chunks of the property, per Bloomberg. The new action against JPMorgan is a way to hedge that loss.

Bondholders (Cont.)

Here’s why: In the 2000s, Thor had subdivided the complex into 3 parcels and assigned ownership of 2 of them to affiliates. Those affiliates have filed a counterclaim to the parcels, the suit states, complicating the foreclosure process. Though JPMorgan was aware of this byzantine ownership structure, bondholders allege, it failed to disclose it, despite this being critical info in case of a default. (“A half truth,” as the Yiddish proverb goes, “is a whole lie.”)

“If, in the Cook County Litigation, the court interprets various agreements related to the Loan and governing the operation of the hotel consistent with the arguments advanced by borrower and its affiliates, then there were breaches of the representations and warranties,” the suit states.

Bondholders have also sued Thor in New York, but it’s the JPM case that’s far more interesting, as it asks Qs about what obligations CMBS originators have to bondholders - something that will come up a lot in these next messy few months.

More Fannie/Freddie Fallout?

Fannie and Freddie have been pushing lenders to take mortgage fraud more seriously - snippets from a 6/14 dispatch

Fannie and Freddie continue to turn the screws on lenders: Per WSJ, agency lenders would have to do their own vetting of financial info related to borrowers, and would also need to do more due diligence about whether the sponsor has enough cash and that their funds came from legit sources. The two GSEs owned or guaranteed roughly 40% of the $2.2T multifamily mortgage market as of last September, per WSJ’s analysis of their filings, so every tweak they make has a huge impact on the industry.

What I’m unclear about: Is this a whole new diktat, or a reiteration of what Fannie already said in June, when it asked DUS lenders to more tightly screen for newbie sponsors and bad press, and asked them to ensure sales were “truly arm’s length.” At the time, it also said lenders would be responsible for checking whether higher sales prices were supported by financials.

As we’ve discussed here for months, the agencies are cracking down on mortgage fraud, and one of their key targets has been brokerage hanky-panky. Partly as a result of this, lenders have been putting a lot more love into building out mortgage brokerage capabilities in-house, and the talent has flowed from brokerages —> lenders.

Remember that in Q1, multi debt originations were at their lowest levels since ‘15, per Newmark, with just $33B of debt originated – compare that to $82B in Q1 ‘22. Both the GSEs and banks retreated considerably, but CMBS deals helped fill some of that void: a separate analysis by CMA showed that multi loans accounted for $6.7B, or nearly 15%, of the collateral for nonagency CMBS offerings so far in ‘24 (as of June).

Multifamily Musings

The country’s biggest rental landlords dished during earnings

Some notables from megalandlord and lender earnings calls (h/t @jayparsons for flagging some of these):

Camden’s Ric Campo: “Everyone in multifamily is waiting for something:” Ops waiting for bad debts to drop below pre-pandemic levels; deal teams waiting for “standoff between buyers and sellers to end”; then channeled Tom Petty: “the waiting is the hardest part” 🎸 Also noted that w/ the firm’s stock at $120, “that’s an implied cap rate of 6.5-6.7%.” He then noted that most current multi deals were happening in the low 5s, and also highlighted KKR’s disclosure that the Quarterra megadeal was done at a low 4% cap. “I think that the public markets are slow to bring cap rates down to where the real market is today.”

MAA: Looking to swoop in on fully entitled sites where the developer hasn’t been able to score ground-up financing. Also downplayed the specter of federal rent control, noting that the bulk of its business is in states that have a ban on local rent control.

Arbor: Reported $1B in delinquencies in Q2, up 10% from Q1. Loan mods, however were down to $733M from nearly $2B. CEO Ivan Kaufman said about 40% of delinquent debt could be modded, and that foreclosures would be a big part of the playbook. The firm still pulled in nearly $48M in profit, though the figure is down 38% YoY. Said v little about the reported FBI/DoJ probes into its practices. 

And now, an interesting crunch from RealPage

RealPage data shows avg. HH size is at its lowest level since ‘16

Avg. tenant household size through May ‘24 was at its lowest level since ‘16, down 3% YoY, the firm’s chief economist Carl Whitaker shared. “We might now be seeing some ‘decoupling’ happening - and it appears to be at least one influence behind today's remarkably strong absorption figures.” Basically: Landlords need fewer people to fill up the units, which is a pretty, pretty good situation.

Blackstone Cub Pounces

Tyler Henritze’s Town Lane partnered w/ Cousins on an Atlanta office buy

Blackstone cub 🦁 Tyler Henritze’s Town Lane, which raised $1.25B in a ludicrously quick 9 months, has made its first major office deal: In partnership w/ REIT Cousins, it paid $83M ($158/foot, all-cash) for a 526K sf tower in Midtown Atlanta. The seller, Manulife, paid $118M ($224/foot) back in ‘04. In July, it paid down a chunk of its maturing debt on the property and scored a short extension, likely paving the way for this sale. Town Lane owns 80% of the property, and Cousins will run PM and leasing.

Quickies

Unquotable Quotes

“That’s the toughest part of it.”

- Arbor’s Ivan Kaufman, on how nearly a third of the lender’s $1B in delinquent debt could go REO.