What took them so long? After months of being unable to service its debt, and numerous SEC filings describing the Company’s inability to cure its defaults, secured lenders finally closed in on Anthracite Capital, a struggling Mortgage REIT with a “legacy” portfolio full of almost worthless CMBS equity.

While events began to spin out of Anthracite’s control a long time ago, the official death bell began tolling on February 1st, when Deutsche Bank finally declared its loans immediately due and payable. Bank of America followed shortly afterward, and this left Anthracite with no assets of any real value and no choice but to liquidate. Today, Anthracite made it official: they are throwing in the towel, and shareholders (to the extent there were any left) will mostly get nothing.

The company was highly levered, which is not unusual in the Mortgage REIT world. However, Anthracite invested in the very bottom end of the CMBS credit stack – the equity, or “B” piece. Anthracite liked to refer to this as “controlling class” CMBS in its earnings reports, and in normal markets, the ability to control the underlying asset would normally provide more junior CMBS investors with some measure of comfort. Unfortunately, this is no normal market, and Anthracite’s “controlling class” CMBS was so junior that there’s not much left to control.

Had Anthracite invested a little higher up the food chain, or stepped back from the market as it began to overheat, it’s possible in theory at least, that Anthracite could have avoided today’s liquidation announcement. Unfortunately, Anthracite did exactly the opposite. As the market began to overheat, Anthracite also stepped up its purchases of CMBS equity:

As I wrote in this earlier post on Anthracite, The “B” piece buyers had always been a limiting factor in overall CMBS issuance. Not only were there not that many of them, but they also had veto power over any individual loan that could decrease their chances of getting fully paid out. As more yield-hungy investors clamored for more “B” notes, they began to exercise their veto rights less often. Underwiters and issuers, who were only in it for the fees and cared not about repayment, were then able to stuff more and more junk into the pipeline, and CMBS issuance ballooned.

As more and more of this junk was being stuffed into the pipeline, Anthracite was gobbling up just as much as it could. In hindsight, this was obviously a mistake, but less obviously it should also lead investors to another conclusion: externally managed REITs deserve a little more scrutiny than internally managed REITs. Blackrock, Anthracite’s external manager, was paid primarily based on assets under management, not to maximize the value of those assets. This model almost guaranteed a buying binge, since the more Anthracite owned, the more Blackrock got paid. Given its more risky business model, internal management alone would not have saved Anthracite, but it’s definitely a factor worth considering before left clicking on the “buy” button.

According to Instutional Investor, Freddie Mac is bringing its high leverage crack pipes back to the multi-family market. But the move is less a return to the go-go days than a sign of just how weak the market is, and it appears to be driven more by the fact that Freddie is running out of underwriting capacity rather than any real confidence in the apartment market.

Under the plan, Freddie intends to bribe join forces with a handful of mezzanine lenders to “expand its multifamily mortgage origination program”. However, the new program is definitely more about saving Freddie’s existing program than expanding it. Freddie Mac has already been offering relatively high LTV loans for some time, but the agency lender relies on liquidity in the CMBS market to refresh its underwriting capacity. With the CMBS market only now starting to show signs of life, Freddie is holding on to much more of this paper than it originally intended.

And this is where Freddie Mac wants its mezzanine lender “partners” to do some heavy lifting. In return for buying the lowest tranche of equity in Freddie Mac CMBS securitizations – the hardest bit to sell – Freddie will reward them with a well-priced senior loan at no more than 85% loan to value. Publicly, the program is geared toward helping over leveraged borrowers deal with looming mortgage maturities. “There is a market need for this,” said Patricia Boerger, a spokeswoman for the agency. “It is part of our mission to keep the market liquid and capital flowing.”

Privately however, Freddie now seems unable to fulfill that mission without the aid of private sector lenders, which ironically include still crippled Mortgage REITs like Winthrop Realty Trust. Even with the “new”, safer underwriting standards of today’s market, Freddie Mac intends to hold only the most senior paper, up to approximately 65% loan to value.

The more junior tranches, including the “B Piece” kryptonite, will sluffed off to the more servile Mortgage REITs, up to a combined 85% loan to value. I’m not a borrower in trouble, but if I were a borrower in trouble, I’m pretty certain that 85% of today’s value isn’t going to solve my 2006 problems. This “expansion” program is definitely more focused on saving Freddie Mac’s balance sheet, not those of its customers, and it’s another indication of what will most likely be a very prolonged recovery. Chris Germain San Francisco