50 On The Dollar & Agency Agita

Steady, Freddie

Due Diligence: It’s no longer just a slogan.
 
Some more deets on how the promised agency crackdowns on loose lending practices are playing out: Freddie is now conducting an asset management review of financials against new deals before they are submitted, sources told The Promote. Fannie had issued a rhyming directive effective mid-June, when it asked lenders to analyze a property’s sales history and show support for increased value. Agency staffers have recently been using public records to verify sales data to see if a property has been flipped 🐬 , one source said, and in general are asking far more dotting i's and crossing t's type questions.

Agencies (cont.)

All the extra hoops are slowing down the process and leading to angsty borrowers 😢 (Moreover, with agencies pushing for more direct deals at the brokerages’ expense, borrowers get less hand-holding.)

Fannie has also been putting small-balance loans through the wringer, sources said: it’s now asking originators to evenly split premiums w/ the agency –“a yuuge, yuuge deal,” as one lender described it.

All this skull-cracking has been interpreted as the agencies getting serious about preventing further mortgage fraud, but Fannie & Freddie have other masters they’re looking to pacify: note buyers for Fannie loans, and B-piece buyers for Freddie’s loan pools. 🌊

Mea Culpa

Speaking of mortgage fraud: Fredrick Schulman and Chaim “Eli” Puretz have pleaded guilty to 1 count of conspiracy to commit wire fraud affecting a financial institution. The DOJ had alleged that Schulman, Puretz and co-conspirator Mark Silber had teamed up to buy the Williamsburg of Cincinnati for $70M using a stolen identity 😍. The investors then flipped the apartment complex to Barry Drillman for $96M, and Fannie funded a $74M loan based on that higher fugazi price. (Silber pleaded guilty to the same count last month - the complaint has him saying some great stuff: “If there is no price anywhere then it’s good. Please make sure [Madison] knows that one mistake kills the deal…”)

Trying to keep a running list of all the players that Judge Dredd has come for:
Roco co-CEO Tyler Ross, Drillman, Aron Puretz, Jacob Deutsch, Silber,  and now, Schulman and Eli Puretz.  

50 On the Dollar

Ready Capital, key lender to multi syndicators Tides (Sean Kia, Ryan Andrade) and GVA (Alan Stalcup), is in contract to sell $462M of its distressed debt book, the firm said in its Q2 earnings statement. That’s the good news – the bad is that the debt, plus another $130M in the pipeline, is expected to sell for 50 cents on the dollar, Ready execs said during the earnings call. Multi loans were the primary cause of that dragdown.

The lender did manage to get the delinquency rate on its $6B+ bridge loan book down to 6.3% in Q2 from 10% in Q1. Loan sales helped w/ that, as did mods for extremely cooperative borrowers,” chief credit officer Adam Zausmer said. Ready deals in “static” CRE CLOs, making it less nimble in addressing problem deals and requiring a special servicer’s blessing to modify loans. In May, Zausmer said that the firm was “certainly encouraging them [the servicer] to have a greater sense of urgency,” one of the more illuminating lines about where things stand.

Zooming out: MSCI ID’d $81B of apartment loans at risk of distress, compared to $67B for offices, even though the latter asset class is seeing a lot more current distress. CRE CLOs (around $75B in O/S debt) remain the key pain point: CRED iQ’s latest crunch shows that distress in that product hit 10.8% in July. Rmember that CRE CLOs - players in the space include Ready, Arbor, MF1, and Benefit Street – were one of the key mechanisms to juice the multifamily buying spree of ‘21/22, so this tracks.

And this isn’t just about the floating-rate reaper, btw: CRED iQ’s Mike Haas filtered out the impact of pricier debt and found that 46% of CRE CLOs were still not generating the NOI quoted in loan docs. 🙃 

The Boys of Summer

It’s Equity Residential’s turn to make a splash: The firm is dropping nearly $1B on a 11-complex, 3,500+ unit Sunbelt portfolio, per WSJ, the largest purchase of its kind by a public REIT in 7Y. The seller is Blackstone, which has been making mammoth apartment acquisitions of its own, including the $10B purchase of AIR Communities in April (per CMA, it just lined up another $1B of CMBS debt from a Wells-led consortium to fund that deal).

Equity, w/ 80K units nationwide, liked that the portfolio was located (Atlanta, Denver, DFW) in high-growth markets, CIO Alec Brackenridge told the publication, and noted that the units were on avg. 8Y old.

It’s been said before but worth repeating: Between Blackstone, KKR, Brookfield, and now EQR, we’re looking at about $15B in multi megadeals in a matter of months. So many mutual hugs 🤗 (More here)

Bonus: Snippets from large landlords’ earnings here 

Govt. Dibs on Housing Deals

This is quite something: A new (effective this week) Colorado 🏔️ law gives local govts. a quasi ROFR on the sale of affordable housing properties as well as a ROFO on certain (>30Y old, 15-100 units) market-rate properties. Generally, govt. interventions like these are seen by industry folk as throwing cold water 🪣 on the market – you’re essentially hamstringing private buyers – and there was a fair bit of lobbying against it.

“It can really throw a monkey wrench into your ability to sell an affordable deal,” one Colorado MF operator said of the ROFR. A seller would have to get an offer, present it to the local muni, and then wait for a potential counter. It also opens up the ability to game the system, the operator added – you could technically find some rando to write you an offer “and see if you can bid the city up.” 👏 

The market-rate ROFO also caught the industry off guard, the operator added. Title cos. are starting to add language that sellers need to warrant that they’ve gone through the process of informing the local municipality. The seller is required to give notice to the govt. before engaging a broker or listing the property, but not all mom-and-pops will likely do this right, and their brokers won’t necessarily advise them to. The bill (24-1175 here) sunsets at the end of ‘29. More deets from lobbying firm Brownstein here.

Quickies

• The Promote/Iman Jalali Chicago Happy Hour: 9/10 - RSVP here

• 📽️ Is this the biggest NYC development clusterfuck in recent times?

• Edgy hedgie: Bill Ackman weighs taking Howard Hughes private 

• Rabbinic rancor: The battle for control of YJP 🍞

• Deutsche seizes Chicago tower from José Cuervo mogul 🌵 

• Double-dipping while at Freddie 

• Victor Sigoura & partner Nahla land $195M construction loan for UES condo. Lender = JVP, which kicked off our Quiet Kings series

• Sam Sprei is back! Buys back Brighton Beach rental from Madison Realty Capital after losing it to the lender in bankruptcy (Sprei’s partner on that previous deal was a certain Chaim Miller, who you definitely need to read about)  

Unquotable Quotes