- See more at: http://blogtimenow.com/blogging/automatically-redirect-blogger-blog-another-blog-website/#sthash.Q6qPkwFC.dpuf Understanding the Players in the Milbank Securitization Portfolio | Bronx News Networkbronx

Wednesday, April 21, 2010

Understanding the Players in the Milbank Securitization Portfolio

First the facts: A new lawsuit brought by Legal Services NYC – Bronx will attempt to place responsibility for deplorable conditions at buildings owned by private equity investor Milbank Real Estate to the Trustee, Wells Fargo. At a press conference in front of one of 10 buildings owned by the troubled investor and part of a huge commercial mortgage backed security, Council Speaker Christine Quinn, Borough President Ruben Diaz, Jr., and Councilman Fernando Cabrera joined tenants, organizers and lawyers to announce the filing of the lawsuit.

As opposed to trying to impersonate a journalist (I'm the deputy director of University Neighborhood Housing Program, a nonprofit), I’d like to give some background to the situation and explain why the lawsuit, if successful, could be extremely significant nationwide. (You can read the press release, see coverage in the New York Times, read a piece by AP, and get another look in City Limits.)

As prices for apartment buildings in the Bronx and throughout New York City skyrocketed during the housing boom, private equity investors purchased thousands of buildings, including large concentrations in upper Manhattan and the west Bronx. The high sales prices were justified by notions of increasing the rent rolls in the buildings – in other words, speculation that existing tenants could be replaced by higher rent paying tenants. This strategy has failed in many buildings, including high profile cases like the Riverton in Harlem and Stuyvesant Town / Peter Cooper Village. The vast majority of bad investments were made in lower profile buildings, often in the outer boroughs, and frequently where conditions have deteriorated as owners who got in over their heads could not afford to make repairs, let alone pay the mortgage.

In some of these buildings, like the 10 Milbank buildings in this lawsuit, the mortgage was securitized, meaning it was packaged with many other mortgages into a giant pool, carved up into different slices (known as tranches), assigned risk scores by ratings agencies, and sold to investors through Wall Street.
In this case, the bank that originally was responsible for the bad loan – Deutsche Bank -- never intended to be the lender of record (other than a second mortgage they put on the property, known as mezzanine financing, that they have supposedly written off as a loss). Rather, they decided to package the $35 million mortgage into a huge $3.5 billion security (this one known as COMM 2006-C8 that includes financing for the Mall of America) shortly after the buildings were purchased in November 2006.  

According to mortgage records on the City Register, the new lender of record was LaSalle Bank, but only as Trustee.  If you had asked LaSalle, one of Bank of America’s many acquisitions, if they were the mortgage holder, they would have said no, and that the real owner of the loan could be considered the (very amorphous group of) investors (which probably include many of us in our retirement accounts and pension funds).  

The security documents also set up other players including the Master Servicer (in this case Midland Loan Services) to manage the loan payments and act in the interest of the lender.  In addition, a Special Servicer is named to deal with properties that go into default on their mortgage payments. All of these relationships are governed by what are known as Pooling and Servicing Agreements, or PSAs. If you are confused, that may be by design. This website gives pretty decent definitions of the various entities involved in these transactions. 

If you pay attention to the news coverage on the Milbank lawsuit, you won’t hear Deutsche Bank’s name much, and you probably won’t hear LaSalle’s at all. That’s because LaSalle sold control of the mortgages, or the trusteeship, to Wells Fargo in early 2008.  So, even though Wells Fargo had nothing to do with making the loan in the first place, and might claim they aren’t really the mortgage holder, as the trustee they are now technically the lender of record.  

When the Milbank buildings went into default in early 2009, responsibility for collecting payments and dispersing funds was transferred to the Special Servicer. In this case, Florida-based LNR Partners, a child of the home building company Lennar Corporation, is the Special Servicer. As these buildings have gone fully into foreclosure proceedings, another party, a court-appointed receiver is also involved. Yet because the buildings were allowed to deteriorate to such an extreme point that many units sit vacant and un-rentable, the receiver does not have sufficient funds to operate the building and make the necessary repairs.

LNR Partners should, in this case, be able to put up cash for the receiver to make repairs, since Milbank appears to have abandoned a number of the buildings in their portfolio. But as news outlets continue to report, LNR has its own share of financial distress, and they are not supplying necessary funds to the receiver.

What the lawsuit filed today hopes to accomplish is to assign responsibility for remedying deplorable conditions in the building to the lender of record, Wells Fargo.  If successful, transferring responsibility to a Trustee, not just a traditional lender, would be unprecedented.  Traditional lenders have in some instances taken responsibility for making repairs in foreclosed properties in the past, as it was in their own financial interest as the potential next owner of the property.   

Trustees have managed to escape this type of responsibility up until now and, if the lawsuit is successful, it could have a huge impact on both private homes and apartment buildings in foreclosure that are part of securitized mortgages.  It could change the nature of Pooling and Servicing Agreements that currently mandate servicers to maximize profits for the investors above all else.  From a neighborhood and tenant perspective, this change would be a greatly welcomed.


  1. Prices of apartments are increased day by day. It's good if we do investment in Apartments/condos.

  2. If the lawsuit is successful, what impact will it have on rental prices?


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