CMBS Pioneer Slams Bailout Bill as Handout to ‘Greedy’ Borrowers

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(Bloomberg) — The financier who pioneered the use of commercial mortgage-backed securities is railing against a proposed federal bailout for the market he created, in part because it would help deep-pocketed landlords such as Tom Barrack’s Colony Capital Inc. Ethan Penner, who rose to prominence at Nomura Securities in the 1990s, argues in an essay that it’s “wrong, plain and simple” for Congress to spend taxpayer money rescuing borrowers who sold bonds to buy malls or hotels. Instead, these properties should be allowed to go into foreclosure if their owners can’t make mortgage payments. “Borrowing from the CMBS system became a forum for mostly the greedy and risk-loving, or the clueless, none of whom deserve a bailout,” Penner wrote in the essay on Medium.

“Commercial real estate is a game for professionals and governmental aid ought to be reserved for segments of our society that are in real need.” The CMBS market hasn’t benefited much from the trillions of dollars the Treasury Department and Federal Reserve have pumped into the U.S. economy. While the lowest-rated junk bonds have recovered to pre-pandemic prices, one popular index of commercial real estate debt continues to show a high probability of default.

A bipartisan bill introduced last week promises aid to CMBS borrowers whose property revenue has dropped by at least 25% since March 1 — if they haven’t defaulted. The government would guarantee bank financing at a 2.5% interest rate for as much as 10% of the outstanding balance on mortgage loans. Among the big investors who’d stand to benefit from the legislation are Barrack’s Colony and Ashford Hospitality Trust Inc., which has lost more than 80% of its stock market value this year. Barrack was among the first to call for CMBS relief in late March. On a conference call last week, Ashford Chief Financial Officer Deric Eubanks said the bill would be a “huge help for us.” Penner, 59, has been called the father of CMBS for his role revolutionizing the way commercial property is financed.

When banks largely stopped lending money for buildings following the savings and loan crisis, Penner, then at Nomura, opened an untapped pool of investor capital by adapting the securitization techniques of the residential mortgage market. He now runs Mosaic Real Estate Investors, which has about $1 billion invested in equity and credit assets. While CMBS boomed into a $550 billion industry, one critical flaw emerged: the lack of flexibility when borrowers run into trouble. There’s no single lender to call, just a third party that represents bondholders with varying interests, and strict contracts make modifying the loans in a securitization pool difficult.

Recognizing this, many real estate investors turned to insurers or private-credit funds that are more inclined to renegotiate a loan agreement. That’s potentially an advantage now that Covid-19 has shriveled cash flows, tenants are filing for bankruptcy and debt defaults loom. If those who relied on CMBS to lever up a hotel or shopping center end up losing the property, that to Penner sums up the essence of free-market capitalism. “CMBS borrowers are corporate entities or wealthy individuals who should have known better and who took risks they must now pay for,” he wrote.