The Dogs Aren’t Barking

Like the title of the Sherlock Holmes story, when the expected is drastic, it’s sometimes hard to see the unexpected.

Late yesterday (Sunday) Capmark Realty threw in the towel.  It was the former commercial real estate lending division of the GMAC, which had been through name and ownership changes on the way to bankruptcy court.

I fully expected to get a chance to buy stock in a handful of other commercial mortgage lenders at levels in the neighborhood where they priced last March.  I could see a drastic one day plunge, followed by a partial recovery, even later in the trading day.

It didn’t happen.  Two of the four stocks I had on my shopping list are actually trading higher today than they were on Friday.  Unlike Sherlock Holmes, I can’t solve the mystery by noticing the dogs aren’t barking.

One interpretation is that all the bad news in the commercial real estate sector is already priced into the market.  I just don’t buy that one, because the commercial real estate cycle is tied to the 10-year balloon maturity of the mortgages, so the pain will be played out over a longer time frame than we see in residential loans or even corporate junk bonds.

Another interpretation is that the market is becoming complacent again.  Even though Capmark had a nationwide geographic exposure, the market somehow might believe that they are a special case that took on more risk than their competitors.  That’s hard to swallow, as well.

Since I can see both bullish and bearish interpretations of the lack of market direction for the sector, I’ll do the prudent thing – neither buy nor sell.

I can’t help thinking of my last visit to the GMAC Commercial Mortgage offices in the countryside outside Philadelphia.  I was there to see a group of their senior people who were announcing a new venture they called Realpoint.

Realpoint was set up as a subscription credit analysis service for commercial mortgage and CMBS investors that would track real estate loan performance, built on the enormous database they had built up over the years as a lender and securitizer of those mortgages.

Unlike GMAC’s lending business, that has been a smashing success.  Realpoint LLC was designated a “Nationally Recognized Statistical Rating Organization” (NRSRO) by the SEC earlier this year.  That’s a very exclusive club, with only a handful of members.

How strange is that?  At the same time GMAC’s former lending operation was foundering, presumably under the weight of bad credit decisions, GMAC’s former credit operation was being the recognized as a premier analyzer of credit risk.


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