Tag Archives: J.P. Morgan

Condo Project Borrows From Its Future Residents

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By AramilFeraxa – Own work, CC BY 4.0

The Wall Street Journal quoted me in The Luxury Beverly Hills Condo Project Borrowing Money From Its Future Residents (behind a paywall). It opens,

The developer behind one of the country’s most expensive real-estate projects has an unusual request for its condo buyers: Lend us money.

Purchasers of the site’s roughly 150 condo units are also providing debt to help Cain, an investment firm based in London, fund its $10 billion project, known as One Beverly Hills.

The 17.5-acre site, set to be completed in 2029, will include high-end retail such as Dolce & Gabbana, upscale dining, 78 new hotel suites and acres of botanical gardens. The ultraluxury condos will be operated by Aman, one of the world’s leading high-end hotel operators.

The condo owners’ debt takes the form of a bond—the developers call them Founder Bonds—and buyers will receive a return of 5%, according to a person familiar with the matter.

No condo buyers are forced to participate in the bond program. Founder Bonds offer a financial return and the opportunity to assist in the construction of their future home, Cain has told condo buyers.

When the Founder Bond program was launched early last year, 10-year Treasury debt offered less than 5% returns. In recent weeks, however, the 10-year yield has exceeded that level, rising above 5.3% at one point this month. That means Founder Bond holders are now earning less than the yield on Treasurys, which are commonly considered the “risk-free” rate.

But some say this rarely seen financing tool sticks condo buyers with a risk.

The bonds are junior to other debt on the project, which includes a $2.8 billion senior loan led by J.P. Morgan and a $1.5 billion mezzanine loan from VICI Properties. Parts of both loans are conditional on Cain hitting certain sales milestones.

That means that if the condo towers were to fall short of completion—in a city where most luxury buyers are focused on single-family homes and estates—bondholders could be left not only without the penthouse they were expecting, but also without the extra money lent to the developers.

“Even though these are luxury buyers, I would guess they’re going to face more exposure if the project goes bust than they may realize,” said David Reiss, a professor at Cornell Law School, who researches real-estate finance. “They’re getting paid a small amount to take a large amount of risk…but because they’re luxury, they may be able to tolerate the risk better.”

Weaker Reps and Warranties on the Horizon

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Inside Mortgage Finance highlighted a DBRS Presale Report for J.P. Morgan Mortgage Trust, Series 2014-IV3.  This securitization contains prime jumbo ARMS, some with interest only features. So, these are not plain vanilla mortgages.

The report raises some concerns about loosening standards in the residential mortgage-backed securities market, particularly relating to standards for the representations and warranties that securitizers make to investors in the securities:

Relatively Weak Representations and Warranties Framework. Compared with other post-crisis representations and warranties frameworks, this transaction employs a relatively weak standard, which includes materiality factors, the use of knowledge qualifiers, as well as sunset provisions that allow for certain representations to expire within three to six years after the closing date. The framework is perceived by DBRS to be weak and limiting as compared with the traditional lifetime representations and warranties standard in previous DBRS-rated securitizations. (4)

 DBRS noted, however, that there were various mitigating factors.  They included:
Representations and warranties for fraud involving multiple parties that collaborated in committing fraud with respect to multiple mortgage loans will not be allowed to sunset.

Underwriting and fraud (other than the above-described fraud) representations and warranties are only allowed to sunset if certain performance tests are satisfied. . . .

Third-party due diligence was conducted on 100% of the pool with satisfactory results, which mitigates the risk of future representations and warranties violations.

Automatic reviews on certain representations are triggered on any loan that becomes 120 days delinquent, any loan that has incurred a cumulative loss or any loan for which the servicers have stopped advancing funds.

Pentalpha Surveillance LLC (Pentalpha Surveillance) acts as breach reviewer (Reviewer) required to review any triggered loans for breaches of representations and warranties in accordance with predetermined procedures and processes. . . .

Notwithstanding the above,DBRS reduced the origination scores, assigned additional penalties and adjusted certain loan attributes based on third-party due diligence results in its analysis which resulted in higher loss expectations. (4-5)
All in all, this does not sound so terrible. But it is worth noting that the tight restrictions in the jumbo RMBS market appears to be loosening up. As the market cycles from fear to greed, as it always does, it is worth keeping track of each step that it takes toward greed. We can always hope to identify early on when it has taken one step too many.

Borrowers Have “Been Through Hell”

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The Maine Supreme Judicial Court issued an opinion, U.S. Bank, N.A. v. David Sawyer et al., 2014 ME 81 (June 24, 2014), that makes you question the sanity of the servicing industry and the efficacy of the rule of law. If you are a reader of this blog, you know this story.

This particular version of the story is taken from the unrebutted testimony of the homeowners, David and Debra Sawyer. They received a loan modification, which was later raised to a level above the predelinquency level; the servicers (which changed from time to time) then demanded various documents which were provided numerous times over the course of four court-ordered mediations; the servicers made numerous promises about modifications that they did not keep; the dysfunction goes on and on.

The trial court ultimately dismissed the foreclosure proceeding with prejudice. Like other jurisdictions, Maine requires that parties to a foreclosure “make a good faith effort to mediate all issues.” (6, quoting 14 M.R.S. section 6321-A(12) (2013); M.R. Civ. P. 93(j)).  Given this factual record, the Supreme Judicial Court found that the trial court “did not abuse its discretion in imposing” that sanction. (6-7) The sanction is obviously severe and creates a windfall for the borrowers. But the Supreme Judicial Court noted that U.S. Bank’s “repeated failures to cooperate and participate meaningfully in the mediation process” meant that the borrowers accrued “significant additional fees, interest, costs, and a reduction in the net value of the borrower’s [sic] equity in the property.” (8)

The Supreme Judicial Court concludes that if “banks and servicers intend to do business in Maine and use our courts to foreclose on delinquent borrowers, they must respect and follow our rules and procedures . . .” (9) So, a state supreme court metes out justice in an individual case and sends a warning that failure to abide by the law exposes “a litigant to significant sanctions, including the prospect of dismissal with prejudice.” (9)

But I am left with a bad taste in my mouth — can the rule of law exist where such behavior by private parties is so prevalent? How can servicers with names like J.P. Morgan Chase and U.S. Bank be this incompetent? What are the incentives within those firms that result in such behavior? Have the recent settlements and regulatory enforcement actions done enough to make such cases anomalies instead of all-too-frequent occurrences? U.S. Bank conceded in court that these borrowers have “been through hell.” (9, n. 5) The question is, have we reached the other side?

 

HT April Charney