October 3, 2008
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Because of the rapidly changing conditions in the financial markets, we have established this special series of Client
Alerts to advise you of the newest economic and legal developments and their wide-ranging business implications.
HOW COMMERCIAL MORTGAGE LOANS ARE AFFECTED BY THE
EMERGENCY ECONOMIC STABILIZATION ACT OF 2008
An Overview of EESA
The Emergency Economic Stabilization Act of 2008 (“EESA”) provides up to $700 billion to the Secretary of the
Treasury to buy mortgages and other assets from financial institutions.1 Some aspects of the bill apply more broadly to
financial institutions, but the core of the legislation is the Troubled Asset Relief Program (known as “TARP”).
The heart of the credit crisis has been the contagion in the credit markets initially caused by subprime loans and other
single-family residential loans which were either originated without adequate underwriting (e.g. so-called “liar” loans) or
in which the loan balance now substantially exceeds the collateral value due to the precipitous decline in home values
over the last year. The initial focus on the purchase of troubled assets by the Treasury under EESA is therefore likely be
on the purchase of residential mortgage loans and securities, including residential mortgage-backed securities (RMBS)
secured by residential mortgages.
However, there is also a growing crisis involving commercial real estate loans, particularly commercial real estate loans
used to finance land, acquisition and development loans to developers of single-family residential projects and financing
for residential condominium projects2.
The Act addresses the purchase of troubled assets in the form of both residential and commercial mortgages as well as
securities backed by those mortgages.
Purchase of “Troubled Assets”
Section 1.01 of the Act authorizes the Secretary of the Treasury to purchase troubled assets from any financial institution