Some Real Estate Loans That Lost All Their Value, and More

The below blurb is the titular topic of this article, but...

You might think that, in making a loan, the worst that can happen is to lose all you lent. But in the wonderful world of commercial real estate, you can do much worse. That is because the securitizations authorize the bank servicing the loans -- in this case the same bank that made the bad loans -- to keep collecting its fees even if the borrower is not making payments. The servicer is also authorized to take out cash from the securitization for other costs, like paying property taxes or making repairs to keep the property from falling apart.

But that's not even the interesting part of this article -- that comes a bit down below, ambush-style (I have to think that Norris is trying to get important facts out here without causing panic or drawing establishment ire):

Until June, prices of existing securities seemed to be rising, and banks were showing more willingness to make commercial real estate loans and hold on to them until they had enough to package into a securitization. But early this year, the American International Group, encouraged by the seemingly solid market, offered to buy back a package of residential mortgage-backed securities that the Federal Reserve Bank of New York had taken when it rescued the insurance giant in 2008. The Fed decided to instead offer the securities to the market.

It turned out that while banks had been happy to mark up values of such securities, they were less interested in actually buying more of them. When the securities began to be sold in June, the low prices being received "kind of shocked the market," said Manus Clancy, senior managing director of Trepp. Investors grew wary of buying new issues, and banks made little money when they securitized the loans they had accumulated. Their desire to make more loans declined, and so did the supply of new securitizations being put together.

Well gee. Weren't we all just supposed to think the imminent "CRE meltdown" had not only been averted by the judicious action of the authorities, but in fact had been permanently "solved" (somehow)? This minor episode would certainly not serve to confirm that. Thus the supposedly-not-like-subprime status of the commercial real estate securitized market that the government and banks have been smugly patting themselves on the back for bringing about appears to be a simple parlor trick brought about by the Fed's willingness to pre-emptively "quantitatively ease" these securities. And this little episode would serve to strongly suggest that the Fed is seriously painted into a corner, and that there is certainly no viable "exit strategy".