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The government has introduced key initiatives over the past 14 days aimed at bolstering the capital markets – namely, the extension of TALF to include vintage CMBS as collateral and Freddie Mac’s K-Certificates. To be sure, the government has been throwing unprecedented sums at this crisis since last September; these last two developments are just variations of the same overall push towards economic health. Marcus & Millichap recently put out a report examining the government initiatives and whether they have been enough to jump start the commercial real estate markets. We spoke with Hessam Nadji, managing director of Research Services, to hear his thoughts on the matter.

GlobeSt.com: Out of everything the government has done, what has had the greatest impact?

Nadji: Actually, the big news is that there isn’t any one particular piece of big news. The positive out of all this is that the worse case scenario for financial institutions and the economy has not occurred. People predicting the worst case a few months ago are today breathing a sigh of relief. The situation is still bad but not as bad as the Armageddon scenario that had been feared.

GlobeSt.com: Do you think the economy and credit markets have improved – or will improve since the credit markets are only marginally healthier – as a result of the government’s measures?

Nadji: So far the government actions have shown little direct impact in improving credit flows. Their greatest impact is an indirect one: by shoring up banks and restoring confidence at a basic level. That, coupled with proposed specific action steps through the PPIP [Public Private Investment Partnership] will remove toxic assets – put it all together it spells moving in the right direction.GlobeSt.com: But to the average commercial real investor, these actions over the next 30 to 60 days mean what?

Nadji: Not much. But again, the overall direction is towards resolution and the beginnings of an improvement in credit flows. We will see more progress – significance progress — in the next six to nine months.

GlobeSt.com: Is there an area where you wished the government had pushed harder?

Nadji: Yes. The steps they are taking now with PPIP. It took too long for Treasury to specify what they planned to do with the toxic assets. Markets don’t like uncertainty – they dislike that more than outright bad news. Under Paulson [Henry Paulson, Treasury Secretary in the Bush Administration] if you recall, first they announced they would take toxic assets off of the balance sheets, then they said, ‘no we won’t’. That creates uncertainty. A big problem in 2008 occurred when inter-lending among banks froze. That set in motion the tremendous job losses we have seen. A lot of that had to do with the lack of systematic proposals and solutions coming from the government.

GlobeSt.com: What about right now?

Nadji: In terms of wishful thinking yes, I do have some ideas, but how practical they are is questionable. It would be wonderful to have more clarity on which assets will be treated as toxic and to expedite the repricing of assets so we can move through them more quickly – the quicker we can address that the quicker we can begin to lend again. In the early 1990s the government created the RTC for the zombie loans, mark the assets to market and move them all through the system. Then the loans were all in one place so it was relatively easy. Today the loans have been securitized and are all over the place, so it is not practical.

GlobeSt.com: What do you think about Freddie Mac’s plan to issue the K-Certificates?

Nadji: It’s another is a step in the right direction –any movement towards reestablishing the secondary markets is a positive for the overall health of capital markets.

GlobeSt.com: Do you think we will see the CMBS markets revive in a similar fashion?

Nadji: Yes, we believe the same thing will happen with CMBS. If you look at the essence at what the CMBS model provided – when it worked it was very efficient. What went wrong was the lack of retained risk – all of the risk was passed to the end investor. But if you modify [the model] so there is more skin in the game for originators – that will inherently increase the quality and underwriting of the risk. With some adjustment and tweaks the securitized model can be very efficient — we just don’t know when. It will probably take at least 12 to 18 months to be re-established with new ground rules. We don’t think securitization has gone away forever.

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