Federal Reserve Crammed On Red Roof Inn Debt

Remember that bit about how the Fed only holds the highest quality debt (we forget if it was Tweedledum or Tweedledee who said it)? It appears that's just the latest lie in the Fed's endless catalog of misrepresentations. According to TREPP, 11 properties held by Red Roof Inn hotels saw foreclosure actions initiated on them by CMBS special servicers, and are now being sent to the auction block. Guess who is most impacted by this action? Why, the Federal Reserve of course.

The properties are part of the 131 Red Roof hotels which special servicers Centerline and LNR Partners are "working out" in restructuring $368 million of debt. As Debtwire reports: "The securitized debt backing the properties held within four CMBS trusts, represents a portion of the total USD 775 million senior mortgage. A good portion of the remaining USD 407 million in debt, held on lenders' balance sheets and intended for later securitization, landed with the Federal Reserve via Bear Stearns. The Fed holds $444 million in Red Roof Inn debt, which appears to be a mix of mortgage and mezzanine debt, through its Maiden Lane I vehicle." And here is why you should not trust any updates of Maiden Lane I from the Fed: "This month, the appraisal reduction amount on the Bear Stearns loan was upped from $64.5 million to $102.3 million, according to Trepp, which amounts to a roughly 40% reduction in loan balance."

The problem, as Willem Buiter points out, is that for all these valuation shortfalls (not so much the Fed which can print to "grow" into its balance sheet, but all other banks) to be filled the US will need to institute unprecedented debt inflation. The race to the fiat paper bottom is unavoidable.