The Journal on C1 says commercial real estate is seeing the return of the recourse loan, which requires building owners to give lenders their personal assets if the loan runs into trouble.

During the recent sales frenzy for commercial properties, nonrecourse loans were the norm. Typically, this meant that the developers put up as collateral only the buildings they were purchasing. If they couldn’t pay off the loans, they simply handed the building’s keys to the lender and walked away. The borrowers’ other holdings—including personal assets such as homes and boats—remained intact. The investment banks that originated many of these loans felt comfortable with the arrangement because they typically packaged those loans into commercial-mortgage-backed securities, or CMBS, and sold them as bonds, reducing their own risk if the borrowers couldn’t pay.

Now, with a 90% drop in CMBS sales, banks have all but stopped originating loans aimed at the bond markets. Instead, they are returning to the traditional model of holding on to—as opposed to selling—the loans. “We’re not closing loans for securitization. We’re closing loans for balance sheet,” said Brett Smith, managing director in Wachovia Corp.’s real-estate group. And with the return of balance-sheeting lending comes the return of recourse loans.

This is not going to end well for the landlords, though the Journal notes that it instills “discipline” into the market when borrowers have their own homes and yachts at stake.

A Catch-22 for insurance regulators

The NYT reports on C1 that bond insurer MBIA’s credit-default swaps (contracts that insure against a security’s default) have their regulator in a Catch-22.

The commissioner of the New York State insurance department wants MBIA to shore up its bond-insurance unit with $900 million it has raised and promised to use for that purpose. The Times says stipulations in the swaps contracts provide for their holders to get paid immediately if something happens to the bond-insurance unit. That gives it leverage over the insurance regulator, the paper says.

The NYT nicely catches MBIA lying about the swaps clause in a conference call.

The swaps’ acceleration clauses appear to be a factor in this bit of brinksmanship, although MBIA does not advertise their existence. In a presentation about its first-quarter results, for example, MBIA said its “insurance contracts are not subject to acceleration.”

Asked about this discrepancy, MBIA said the presentation language meant that holders of its swaps have no acceleration rights “as long as the company continues to operate in its current manner,” which it believes it will do.

“Fortunately, for us it’s not something that we have to be concerned about,” said Greg Diamond, director of investor relations for the company.


States not playing games with toys

The Journal reports on A3 that states are cracking down on the toy industry with safety regulations that are tougher than the federal government’s.

After delays in Congress and continued weak federal oversight, 16 states have devised laws that are in some cases stricter than what Congress envisions. A proposal in Washington state would curb allowable levels of lead in toys and other products to at most 90 parts per million compared with the 100 parts per million proposed by the House and Senate bills. Industry lobbyists said the competing rules will confuse consumers, make compliance difficult and encourage multiple actions against businesses.

The statehouse moves came after a rash of recalls of toys, especially those made in China, last year. The Journal writes that compliance will be tougher for smaller manufacturers.

Sticking it to the poor students

The NYT’s article on lenders cutting back student loans to two-year colleges and “less selective” four-year schools is having an impact already, the paper reports on C1.

Two Democratic senators introduced legislation that would ban the practice, but some say it will just push more lenders out of the business.

Here’s the You’re Telling Me! Quote of the Day:

“Banks are not philanthropic agencies,” said Pat Watkins, director of financial aid at Eckerd College in St. Petersburg, Fla. The institution was recently informed by Wells Fargo that the bank would not extend loans to its students anymore, Dr. Watkins said.
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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.