The real estate industry is beginning to find creative solutions around funding shortfalls as it faces the current liquidity crisis.

As lending becomes more scarce and increasingly expensive, some segments of the mortgage market are turning to securitization for liquidity. For example, servicing advance facilities are becoming increasingly popular as a type of financing within the US residential mortgage-backed security (RMBS) sector, according to analysis by Toronto-based credit-rating agency DBRS.

Servicers may be obligated to advance missed payments to RMBS trusts monthly, but DBRS noted full reimbursement of the advances may take months or years. And servicers need liquidity sooner rather than later.

Servicing advance facilities enables servicers to securitize their rights to advance reimbursements at high investment-grade rating levels and receive funds up front, DBRS said in the report.

"Most servicers need to advance in RMBS structured finance transactions, however this can become expensive for servicers that are weak financially because typically they need to borrow from third parties at high rates in order to fund the advances," Kathleen Tillwitz, senior vice president of US structured finance at DBRS, tells HousingWire.

"With delinquencies continuing to grow," Tillwitz adds, "servicers need to advance more often and for longer periods of time before they get reimbursed. As a result, servicing advance transactions are replacing expensive lending facilities and keeping servicers liquid because they get paid up front in the deal."

Elsewhere in the commercial real estate market, Barclays Capital is seeing signs of hope in non-securitized debt markets. In particular, Barclays recently noted the Teachers Insurance and Annuity Association – College Retirement Equities Fund — or TIAA-CREF — lent $145m against the 1.3m square-foot Graybar office building in Manhattan. The property's owner, a real estate investment trust (REIT), plans to use the proceeds to pay off a $108m loan set to mature late next year.

"In addition, we have seen a continued thaw in the unsecured debt markets, as noted by several REIT debt raises this week including Mack-Cali, Duke Realty Corp., and Simon Property Group," Barclays said in a report.

But the commercial real estate development industry continues to struggle with credit issues, particularly this week with Maguire Properties, which Moody's Investors Service notes continues to experience ongoing levels of high effective leverage and declining performance. It's also struggling to cover dividends out of its operating cash flow, indicating a possible need for short-term funding.

As a result of the credit uncertainties at Maguire, Moody's on Tuesday put on review for possible downgrade a number of commercial mortgage-backed securities (CMBS) with exposure to Maguire's properties.

The affected CMBS — with trusts out of Bear Stearns, Banc of America, Credit Suisse, Greenwich Capital, Wachovia Bank, JP Morgan Chase and Morgan Stanley — bear vintages from 2004 to 2007. Maguire's properties accounted for anywhere from 6% to 18% of the outstanding deal balance involved in the reviews. The total volume of structured securities affected in the reviews is worth $6.7bn.

Write to Diana Golobay.

For full insight into how the private market is solving its own financing issue, please see the upcoming September issue of HousingWire magazine. On sale here.

Last September, Lehman Brothers filed the biggest bankruptcy case in US history. Now, an upcoming decision by a US bankruptcy judge could set a precedent for how entities are paid when one of the parties in a collateralized debt obligation (CDO) becomes insolvent.

The case pits Lehman against Bank of New York Mellon (BK: 20.23 +1.15%) UK subsidiary BNY Corporate Trustee Services, acting on behalf of Australian asset manager Perpetual Investments, who entered into a credit default swap with Lehman.

The contract, as written, provides for the investors to get paid before Lehman, since its bankruptcy constitutes a default. A UK judge upheld that interpretation and ruled in BoNY’s favor.

But Lehman petition the US bankruptcy court to intervene, citing the provision violates the US bankruptcy code’s anti-deprivation principle, which in essence protects a bankrupt entity from losing assets it would have normally have access, absent the bankruptcy.

The outcome of the case will have far-reaching effects that will go beyond the Lehman’s dispute. If the US judge rules in Lehman’s favor, it has the potential to affect all CDOs with US-based counterparties.

“If the court is to reject provisions of the documents as written, it will also put in question many aspects of structured finance deals, including ultimate recovery,” Moody’s Investor Services said in a recent Weekly Credit Outlook report.

This isn’t the first time Lehman’s has faced this issue during its bankruptcy. A similar transaction involving the Ballyrock CDO and its trustee, Wells Fargo (WFC: 29.60 +1.89%) is also making its way through the US bankruptcy court.

Write to Austin Kilgore.

When the Treasury introduced the Troubled Asset Relief Program (TARP) last fall, its goal was to provide funds to institutions so they could clear the toxic assets off their books. But by the time the legislation creating TARP was passed in October, Treasury went with a different strategy, distributing funds to banks so they could build up loss reserves.

Even as banks are beginning to repay the government for the TARP investments, many of those bad assets remain on the books.

It’s nearly impossible to accurately enumerate the toxic assets on banks books, according to the 145-page August oversight report “The Continued Risk of Troubled Assets,” issued Tuesday by the Congressional Oversight Panel.

“In order to advance a full recovery in the economy, there must be greater transparency, accountability, and clarity, from both the government and banks, about the scope of the troubled asset problem,” the report said.

To make matters worse, the value of Level 3 assets on the books of the 19 stress-tested financial institutions is increasing. Bank of America (BAC: 7.29 -0.14%), PNC Financial (PNC: 59.08 +0.31%), and Bank of New York Mellon (BK: 20.23 +1.15%) had twice as many assets in Q109 as they did in Q408. Morgan Stanley’s (MS: 18.56 +2.26%)Level 3 assets account for more than 10% of its total assets.

The Public-Private Investment Program (PPIP) was introduced to do what TARP was originally supposed to — provide funding to clear toxic assets off lenders’ balance sheets.  So far, $657.5bn is the combined estimated value of 'Level 3' assets, those most likely to be toxic, sitting on the books of the 19 of the countries largest financial institutions that underwent the Treasury Department’s so-called “stress tests” earlier this year. These types of assets are those with unobservable variables, which makes assigning a value difficult. Because of this, there are lax standards and inconsistency in how institutions report these assets.

One thing the panel is sure of is that PPIP isn’t maximizing its effectiveness. While PPIP addresses troubled mortgage securities, it does not address whole loans, which are held in greater proportion by small banks.

The report also notes that banks smaller than the 19 subjected to the stress tests also hold more concentrations of commercial real estate loans, which face the risk of a surge in defaults. On top of that, small banks have less access to capital markets than larger banks.

“Despite these difficulties, the adequacy of small banks’ capital buffers has not been evaluated under the stress tests,” the report said.

The report concludes there must be continued vigilance in monitoring how PPIP is implemented, and changes should be considered, when warranted.

“If PPIP participation proves insufficient, Treasury may want to consider adapting the program to make it more robust or shifting to a different strategy to remove troubled assets from the banks‘ book,” it said.

Write to Austin Kilgore.