A Coming Wave Of Repo Litigation? Four Key Takeaways

A Coming Wave Of Repo Litigation? Four Key Takeaways

March 30, 2020, Covington Alert

Since the last financial crisis, the commercial real estate industry has accumulated vast amounts of debt. By one account, there is currently more than $3.6 trillion in mortgage debt secured by commercial and multi-family residential properties. Much of this debt is held by real estate investment trusts (“REITs”), in the form of commercial mortgage-backed securities (“CMBS”). REITs, in turn, often finance their investments through repurchase (“repo”) agreements, under which they obtain short term loans by selling CMBS to financial institutions and agreeing to repurchase the securities at a higher price on a specified date. The CMBS sold under the repo agreements effectively serves as collateral for the loans. Repo agreements give the lender (the “Buyer”) the right to make margin calls if the value of that collateral drops below a specified level; if the borrower (the “Seller”) fails to meet a margin call, the lender may declare an event of default and sell the collateral.