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ULI's Analysis of the Bailout

I found this commentary very compelling. Does this bailout just help Wall Street? If the Treasury buys bonds--including CMBS bonds--will that do anything to help the end borrower at all? Who is actually getting bailed out here? I've heard a lot of support for the bailout from various forces in commercial real estate. Is the industry really fully behind this? It seems that in most other circles--including many, many economists--there's a lot of opposition.

• But most of what will be bought will not be mortgages but parts of various tranches of mortgage backed–securities (MBSs), commercial mortgage backed–securities (CMBSs), collateralized debt obligations (CDOs) made up of MBSs and CMBSs, and structured investment vehicles (SIVs) made up of all the above.

No one knows what is in most of these pools, and heaven knows where the documents are. In time, with enough effort, most of the documents will be found, but not for some time and not all of them—witness the cases where special servicers have been trying to foreclose on a mortgage without original documents, usually unsuccessfully.

• There will be little opportunity to work out the mortgages that make up the pools on which the securities are based, or even to modify the mortgages to help the homeowners, as many people are understandably recommending. Without owning the vast majority of all the tranches of a particular mortgage pool, the Treasury (or its agents) won't be able to modify the contract with the special servicer in charge of the assets (the mortgages) in the pool.

The servicers will still have to follow their contracts and foreclose on defaulted loans instead of modifying them. Well, sure, the Treasury could buy up all the securities based on the pool—if it can find who owns all of them, and if it can find a price that all the holders want to sell.

But unless it owns enough securities, it won't control what happens to the mortgages. It could try to override the pool documents and take over control, and perhaps this is one of the reasons the Administration proposed that nothing they do could be reviewed by a court or administrative agency. However, this is highly problematic.

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