D.C. Based Investment Manager Urges Covered Bonds for Commercial Real Estate Financing

We’ve just come across this opinion piece by Paul C. Dougherty, President of Perseus Realty Partners LLC, a Washington D.C.-based real-estate investment management company.   In an online posting for Pensions & Investments, he makes a case for introducing “a variant of the covered bond model” to finance commercial mortgages.

Dougherty’s premise is that unless something drastic is done, commercial mortgage loans maturing between now and 2012 “will overwhelm the system and produce a meltdown in commercial real estate similar to what we are seeing in residential today.”    He says a new system is needed that fuses retention of risk by the lender with the “efficiency” of securitization.

His proposed “variant” of covered bonds involves “the issuing banks retaining the below-investment grade tranches of [cover] pools while holding risk-based equity capital against these loans (hence covering them), selling to bond buyers the lowest risk and most highly rated securities.”   The end result would be “less profitable,” but also less risky than the old CMBS system.

Even while making this proposal, Daugherty writes that “Bush administration officials have said they are not interested in using covered bonds for CMBS.”  Nonetheless, he believes it essential to arrive at a new securitization model by the end of this year.

We don't know how appealing Daugherty's proposed variant of the covered bond system would be to investors in comparison to the classic model, but it is interesting to see someone with his background trying to push commercial mortgage financing in this direction.   

Read Daugherty’s opinion piece on the Pensions & Investments website: “Commercial refinancings could engulf market”

Read a related CMI posting: “Commercial R.E. Liquidity Shock Threatens ‘Massive Proportions’”