The Emergency Economic Stabilization Act of 2008: Possible Impacts on the Real Estate Market
President Bush signed the Emergency Economic Stabilization Act of 2008 (the “EESA”) on October 3, 2008. The EESA is effective immediately with the goal of restoring liquidity and stability to the United States financial system, primarily as it relates to the current credit crisis among many financial institutions and the troubled residential and commercial mortgaged-backed securities markets.
EESA Applies to “Troubled Assets” of “Financial Institutions”
The EESA authorizes the Secretary of Treasury (the “Treasury”) to establish a Troubled Asset Relief Program (“TARP”) that can purchase or guarantee up to 0 Billion (which will be available in three stages) of “troubled assets” from any “financial institution”. The EESA broadly defines “financial institution” to mean any institution, including, but not limited to, any bank, savings association, credit union, security broker or dealer, or insurance company, established and regulated under the laws of the United States or any State, territory, or possession of the United States and having significant operations in the United States. Similarly, “troubled assets” are broadly defined to include, among other things, residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before March 14, 2008.
The EESA provides the Treasury with broad authority to establish and implement the TARP. However, numerous aspects and details of the TARP are not specified in the EESA, including key provisions such as the purchase price for the troubled assets, and will be established in the coming weeks by the Treasury. The procedures and guidelines for purchasing such troubled assets are to be established no later than 45 days after the enactment of the EESA, with the possibilities including direct purchases, auctions and reverse auctions. The Treasury is also authorized to establish a program to guarantee the timely payment of interest and principal on such troubled assets, including mortgaged-back securities, and the Treasury may collect premiums from the financial institutions for providing such guarantees.
EESA Provisions of Interest to Real Estate Lenders, Real Estate Borrowers, and Real Estate Managers and Funds
The troubled assets covered by the EESA are primarily residential and commercial mortgage loans and related assets. Implementation of the EESA will likely provide opportunities for many real estate market participants.
Real Estate Lenders. Most major real estate lenders and holders of mortgage debt should qualify as financial institutions under the EESA. A primary purpose of the EESA is to assist these financial institutions in clearing troubled mortgage assets off their balance sheets. While it is uncertain exactly which financial institutions will be selling which troubled assets to the Treasury, mortgage assets for which the market has been unstable or non-existent are among the intended assets. A selling financial institution will generally be required to give the Treasury either a warrant for common or preferred stock or a senior debt instrument. In addition, any financial institution that sells troubled assets to the Treasury will be subject to certain limitations on executive compensation. The EESA also authorizes the SEC to suspend and to study the mark-to-market accounting rules that apply to certain financial institutions. It is hoped that once these financial institutions are able to sell many of their troubled mortgage assets to the Treasury, it will clear the near standstill in these markets and these financial institutions will be in a position to make new mortgage loans.
Real Estate Borrowers. Many residential and commercial real estate borrowers will likely see their mortgage loans and/or securities backed by their mortgage loans transferred into the TARP. The Treasury probably will soon be one of the largest holders of the real estate mortgages and mortgage-backed securities in the country. The Treasury may become the new lender under the mortgage loan, or if the Treasury purchases interests in loans or mortgage backed securities, its rights will often be subject to complex agreements such as pooling and servicing agreements, participation agreements, and/or co-lender agreements. Consequently, many borrowers’ requests for loan modifications or workouts, construction or reserve draws or advances, lender consents, and similar matters in many cases may be directed to the new owners of the mortgage loans or securities. The identity, expertise, flexibility and responsiveness of the responsible Treasury personnel are among the many details left to be established. The Treasury is directed to implement a plan that seeks to maximize the assistance of homeowners, to attempt to minimize foreclosures, and to consent to reasonable requests to modifications of residential mortgages. If the EESA is successful in restoring liquidity to the credit markets, then real estate borrowers should eventually see a return to a marketplace where multiple lenders are again actively competing for quality real estate loans; however, everyone expects credit and underwriting standards on new residential and commercial mortgage loans to be more stringent than on the troubled mortgage loans that led to the passage of the EESA.
Real Estate Managers and Funds. The EESA authorizes the Treasury to hire asset managers, presumably with significant real estate and mortgaged-backed securities expertise, to assist in purchasing and managing the troubled assets acquired by the Treasury. The procedures for selecting such asset managers will be established shortly by the Treasury. The EESA also authorizes the Treasury to sell the troubled assets it acquires. Similar to the RTC period of the early 1990’s, it is possible that a significant portion of the troubled mortgage assets will eventually be resold by the Treasury to real estate investors and real estate funds. Real estate funds have raised billions of dollars to acquire distressed real estate assets in the past couple years, and the Treasury will likely be a significant source of assets that could be acquired by these real estate funds.
If you have any questions concerning this Legal Update, please feel free to contact any member of our Real Estate Group in Los Angeles at:
Pircher, Nichols & Meeks
1925 Century Park East
Los Angeles, California 90067
The PN&M Legal Update is published as a service to our clients and friends. It is intended to provide general information and should not be acted upon without first obtaining professional advice appropriately tailored to your individual needs.