Peter E. Fisch and Harris B. Freidus from the New York Law Journal attempts to put the current real estate situation in historical context, comparing today's downturn to the one in the early 1990s. While the article mentions how "lax underwriting standards" preceded both times, these two events are nevertheless distinguishable for the following reasons:
1. The current situation is more "globally pervasive" than the earlier downturn. While what happened in the U.S. adversely affected the world economy today, foreign investors and lenders helped the U.S. economy in the early ninties.
2. Capital structures today are more complicated, limiting the amount of solutions in the case of a problem loan. Complexities include the pooling of commercial mortgage-backed securities and the many participants, such as mezzanine lenders, that are involved in real estate transactions.
3. The government response in the early nineties differed in that it was more responsive with "liquidating distressed real estate-related assets and mortgage loans" and promoting write-downs through the creation of the Resolution Trust Corp. This helped establish market value and more "participation by the private sector." In contrast, the government today has been less aggressive on demanding financial institutions to mark-to-markets their assets. From this lack of pressure arose a new term, "pretend and extend," where lenders avoid "impairing their balance sheets" by extending or modifying troubled loans.
However bad the current situation, the authors optimistically report "the terror that gripped commercial real estate market participants" is lessening. Sellers are marketing properties, lenders and investors are more willing to work with new transactions, and these transactions are closing to help reopen the market. In addition, buyers, sellers, and lenders have strategically lessened the impact of the economic downturn through creative and resourceful transactions. Nevertheless, Fisch and Freidus remind the readers that future downturns could be avoided if one reflects upon the cyclical "lessons of the past."
*Any information on all blog entries should not be construed as legal advice. If you have any legal issues, please consult an attorney.