SASB: The (Shotgun?) Marriage of Mortgage and Mezz | Dechert LLP

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There’s lots of causes to construction a big mortgage destined for securitization as a mortgage partly and a mezzanine mortgage partly.  Typically it’s merely that the borrower is needy whereas the capital markets are charry.  In that case, the lender whacks up the credit score right into a mortgage mortgage for SASB execution and assumes (hopes) there’s somebody on the market with ample acumen, optimism or naivete to purchase the mezzanine mortgage.  However generally, there are different causes to divide a mortgage right into a mortgage and mezz.

The Dechert group only in the near past closed a SASB securitization of a stapled mortgage and mezz as a REMIC and so far as we may inform, it had not been achieved earlier than (aside from a single mezz which was REMIC’d a number of years in the past which, quite like a tree falling within the forest that nobody hears, didn’t appear to affect our markets a lot).

To dive a bit into the weeds, should you’re within the SASB market, you already know that these offers are sometimes achieved as REMICs.  That’s what buyers count on.

A query has at all times lurked within the shadows as as to if you may REMIC a mezzanine mortgage.  Many within the tiny coterie of professional REMIC tax attorneys have thought {that a} mezz mortgage was a very good REMIC asset.  This view has been buttressed by favorable IRS positions as to the therapy of mezz loans in analogous instances, albeit in one other context.  The issue, in fact, is that there was nothing on all fours and that may make a tax lawyer twitchy.  Resulting from a sure lack of bandwidth to consider it within the hurly-burly of making an attempt to get issues achieved, some lingering anxiousness amongst the tax bar and the iron-bound conservatism of the securitization market, nobody has tried to do it in an everyday SASB manner.

Within the case at hand, we had been confronted with a borrower that might harvest materials financial savings by transmogrifying a portion of the mortgage right into a mezz.  We additionally had a consumer with the modern bent of thoughts and the audacity to strive one thing new, and so we did.  And it labored.  After some forwards and backwards with underwriter’s tax counsel and lots of collegial brainstorming, we agreed that the mezz was a very good REMIC asset and the transaction may go ahead on that foundation.  So, the tax attorneys went off to get the plumbing proper, however nothing is simple and that was solely step one in getting this transaction achieved.  The subsequent downside was convincing the rankings companies {that a} stapled mortgage and mezz was not credit score unfavorable after which, in fact, convincing the bankers who needed to transfer the iron and assuring buyers that investing was okay.

To get forward of the anxieties we anticipated we’d encounter, we structured the securitization with the mortgage and mezz firmly stapled collectively.  Every monetary asset had the identical rate of interest, the identical amortization schedule (on this case none), the identical curiosity accrual mechanics and the identical maturity.  The securitization was tranched as if it was one complete mortgage mortgage with out individually treating a tranche as tied to the mezz.  In truth, in some circumstances, repayments can be utilized to the mezzanine mortgage earlier than the mortgage, and albeit, I feel that could be a actually good concept as it could trigger an rising portion of the general mortgage to be secured by a lien of a mortgage.  (This could work so long as the mezzanine mortgage didn’t change into unduly small, for a variety of very technical authorized considerations).  Usually, funds had been utilized professional rata and the mortgage couldn’t be paid off earlier than the mezz.  This ameliorated concern that the mortgage would for some motive repay early leaving the bonds solely secured be the mezzanine mortgage.

We argued, in the end persuasively, that every part else being equal, it’s a terrific lender enforcement mechanic to have a portion of the mortgage structured as a mezz and have entry, or a minimum of potential entry, to the extra speedy foreclosures mechanics of a UCC foreclosures.  This could possibly be notably helpful in jurisdictions that present a balky, unwieldy or unamiable foreclosures expertise.

After a little bit of arduous fascinated with these points and different hoary authorized points from the time of the mort gaige in Ol’ England, we satisfied rankings companies, bankers and in the end buyers that the construction was certainly not solely okay, however actually a good suggestion.

From after motion debriefings with the bankers, it appeared fairly clear that the transaction didn’t take any kind of a success within the investor market due to its construction.

I’m satisfied that if the advantages of this construction are extra broadly disseminated and buyers may change into extra conscious and cozy with the construction, a pickup may additionally be achievable from this.

So, the market ought to take into consideration this some.  This shouldn’t be a “tree falling within the forest the place nobody hears it” kind of factor.  It’s definitely a viable different the place there are compelling enterprise causes to construction a portion of the mortgage as a mezz mortgage, and there additionally could be good causes to make use of this construction extra usually to amass the improved treatments of potential mezz foreclosures in reference to these massive loans.

We could also be conservative as an trade, however we’re not moribund and when a good suggestion is validated, we should always embrace it.  We’ll be right here to cheer it on.  Not a lot a shotgun marriage, is it?

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