In the 1990s Ethan Penner was the primary driver in the creation of the Commercial Mortgage-Backed Securities market while at Nomura Securities. In doing so he created a market which issued $96.7B worth of securities last year alone.
But now that COVID-19 has introduced uncertainty for real estate owners and a CMBS bailout is being discussed in Congress, Penner’s verdict is that CMBS should not be bailed out.
In an essay, Penner argues that the central structural problem with CMBS is that it leaves borrowers without a negotiating partner to workout distressed loans. Instead, CMBS holders must try their luck with a Special Servicer, who is structurally incentivized not to extend forbearance to borrowers. Uncertainty over the property’s fate leads to neglect and asset devaluation.
The real estate industry should have learned the lesson in 2008-10 that CMBS creates this unproductive friction; he writes, “The real estate industry learned very well in the GFC [Great Financial Crisis] that if you borrowed through the CMBS format and ran into problems you’d have no one to deal with and you’d be very frustrated and impaired.”
Consequently, prudent property owners fled the CMBS market for traditional loans; the remainders represented those who refused to learn:
Borrowing from the CMBS system became a forum for mostly the greedy and risk-loving, or the clueless, none of whom deserve a bailout. 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. CMBS borrowers are corporate entities or wealthy individuals who should have known better and who took risks they must now pay for. These businesses should be allowed to fail.
Read Penner’s entire essay here.