2008-10-08, 11:34

How Commercial Mortgage Loans Are Affected By The Emergency Economic Stabilization Act of 2008 Overview

By: Multifamily Real Estate Industry Team
The Emergency Economic Stabilization Act of 2008 (“EESA”) provides up to $700 billion to the Secretary of the Treasury to buy mortgages and other assets from financial institutions.[1] Some aspects of the bill apply more broadly to financial institutions, but the core of the legislation is the Troubled Asset Relief Program (known as “TARP”).

The heart of the credit crisis has been the contagion in the credit markets initially caused by subprime loans and other single-family residential loans which were either originated without adequate underwriting (e.g. so-called “liar” loans) or in which the loan balance now substantially exceeds the collateral value due to the precipitous decline in home values over the last year. The initial focus on the purchase of troubled assets by the Treasury under EESA is therefore likely be on the purchase of residential mortgage loans and securities, including residential mortgage-backed securities (RMBS) secured by residential mortgages.

However, there is also a growing crisis involving commercial real estate loans, particularly commercial real estate loans used to finance land, acquisition and development loans to developers of single-family residential projects and financing for residential condominium projects[2].

The Act addresses the purchase of troubled assets in the form of both residential and commercial mortgages as well as securities backed by those mortgages.

[1] This summary is based on the version of the Act passed by the Senate on October 1, 2008. The House of Representatives enacted the Act without changes on Friday, October 3, 2008.

[2] See, e.g., After Lehman, Banks Jettison Commercial Property, The Wall Street Journal (September 17, 2008). See also Collateralized Damage: Commercial Mortgage Securities Are at a Standstill (July 23, 2008) at www.http://knowledge.wharton.upenn.edu

Link to full alert on the bailout act and how it could affect commercial mortgage loans is found in pdf format at: http://www.wcsr.com/resources/pdfs/capmkt100308.pdf

(This entry posted by Gary Chamblee, a member of Womble Carlyle's Capital Markets Business group)

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