We had a third committee call today on the MISMO Rent Roll and Operating Statement Standards Committee. We have had 15-20 people on all the calls. The first two focused on the rent roll; this one focused on operating statements. We are making good progress and have basically finished up the rent roll and operating statement header.
Operating statement detail (the NOI categories / chart of accounts) is still being debated. The issue is how much structure do we put in the XML re: assigning detailed NOI categories to roll up reporting categories and property type. We have two more calls scheduled (July 23 and August 6) to hash out the structure. We are still planning on getting the MISMO XML schema ready for approval by September.
The question is: Will anyone use it?
— — —
Jim Flaherty is CEO of CMBS.com and the creator of the Backshop loan origination system. He is a trained credit professional with experience installing enterprise underwriting systems for commercial real estate lenders, rating agencies and investors.
https://www.cmbs.com/wp-content/uploads/2019/03/cmbslogo030619.png00jimflahertyhttps://www.cmbs.com/wp-content/uploads/2019/03/cmbslogo030619.pngjimflaherty2009-07-09 20:56:512020-09-16 20:57:48Good progress on MISMO standards
Treasury Secretary Timothy Geithner’s proposal to “fix” securitization was released last week, and it is a mixed bag for CMBS.
On the positive side, he stated the SEC should promote increased transparency for both the deals and the rating agency methodology used to rate the deals. The best line was “Investors and credit rating agencies should have access to the information necessary to assess the credit quality of the assets underlying a securitization transaction at inception and over the life of the transaction.”
Agreed!
The bad news for CMBS lies in two other proposals:
1. The issuer (or sponsor) of a securitization be forced to retain a 5 percent interest in a pool that cannot be hedged or sold.
2. Issuers cannot achieve a “gain on sale” accounting treatment until the underlying loans are paid off.
The whole point of securitization is to transfer risk. Taking both accounting and credit incentives away is troublesome and unproductive, making securitization harder, not easier. Instead, we should focus on freeing the data so investors and rating agencies know the value of the collateral. This way, we will re-establish the credibility of our asset class.
Investors are not dumb
Of course if you cannot transfer the risk because you cannot find a buyer, then you are stuck. And the only investors today are value investors who will only buy CMBS at reasonable spreads if we share our data and prove our value.
While aligning economic interest is absolutely a good idea, I would suggest this point is so fundamental it should be assumed as mandatory. If the issuer and the investor do not have aligned interests (i.e. we issue and securitize loans that aren’t actually going to pay back), we should not even consider bringing back CMBS.
W T F with 5%?
Why did Geithner come up with 5%? Why not 10%, 20%, 50%? How much equity is needed to keep all players’ interests aligned? The fact is the answer does not matter because the amount changes depending on the market. Today, you need 100% equity (or close to it). In 2007, you needed 0% (or close to it).
Standards and Transparency
While coming up with an equity/skin-in-the-game component is a fairly simple “tweak,” it does not represent the permanent reforms that are required. The keys are standards and transparency with all parties using common underwriting models.
I rant about this in one of my first blog postings which was a response to Ethan Penner’s article on this issue: Transparency vs. Skin.
The Proposal and the CMSA Response
Click here to download the Obama regulatory reform proposal.
Click here to download CMSA President Par Sargent’s response to the proposal.
— — —
Jim Flaherty is CEO of CMBS.com and the creator of the Backshop loan origination system. He is a trained credit professional with experience installing enterprise underwriting systems for commercial real estate lenders, rating agencies and investors.
https://www.cmbs.com/wp-content/uploads/2019/03/cmbslogo030619.png00jimflahertyhttps://www.cmbs.com/wp-content/uploads/2019/03/cmbslogo030619.pngjimflaherty2009-06-25 20:58:072020-09-16 21:00:02Geithner Proposal a Mixed Bag
Monday’s IRP Committee Meeting at the annual CMSA conference was more talk and no action. There were about 100 people in the room including many investors and servicers, which highlighted the importance of the topic. The committee heads gave a good summary of the IRP process and why it is no longer being pursued. Then they opened the meeting to questions.
The first question was “Are we transparent enough? If not, what are we missing?” The answer came from an investor: “No, we are not. We need rent rolls.” I literally applauded. And the debate began.
Those who are trying to kill any transparency improvements gave the typical responses:
1) Budgets are too tight right now for additional technology spending.
2) The PSA’s have this concept of “restricted data.” The servicers will bear liability if they share too much data.
3) Borrower’s don’t want rent rolls to be shared.
The responses from the folks who support better transparency where just as passionate:
1) When the market was working, the argument was we were all too busy to make the investment in XML. Now, we are not busy enough to make it? Plus, the actual cost to produce an XML report on existing data cannot be very high.
2) While some PSA’s do have the concept of restricted data, the vast majority of them state the reporting standards are dictated by the IRP, not the PSA. Sure, conservative lawyers may take a position to support their client’s goal of not sharing data, but most lawyers I spoke to agreed that “reporting could probably be significantly expanded without incurring liability.”
3) Borrowers generally are contractually obligated to supply the rent rolls. They have no ability to restrict their distribution. While some may not like this, my guess is they will all accept this openness if it helps open up the markets.
Compromise?
One of the major services floated an idea about keeping IRP 5 in place but amending the property file with XML-based rent rolls and operating statements. While I think we should move the entire thing to XML, I welcomed the comment because it at least represents movement. Then, quickly, another major servicer said “no” to even that step.
Stalemate
So, like the rest of the meetings on this topic, it simply ended with no resolution and no direction to go forward. Frustrating to say the least. I then pushed CMSA leadership to provide direction and rules on how to break the stalemate. How does a committee sponsored by a trade group get anything done if it needs unanimous consent? What are the rules? Are we like the U.N. Security Council where all members hold veto power?
Pat Sargent, the new president of the CMSA, reportedly stated at the Wednesday Board of Governors meeting that the CMSA would tackle the XML/Transparency issue “head on” and would push for resolution — one way or the other.
Hopefully Pat will provide the leadership to move this issue.
Conference Mood
The mood of the conference was a bit better than I was expecting. While there were still plenty of shellshocked people, the general mood was more of acceptance than denial. The Special Servicers are jammed and busy as can be. The investors were “playing nice” with the B Piece guys. Even some lenders where thinking about next steps. But, the main sentiment was acceptance that the next 18–36 months will include a massive deleveraging process with foreclosures, price declines and continued lack of liquidity.
And, if some have their way, no new data to help sort out the mess.
— — —
Jim Flaherty is CEO of CMBS.com and the creator of the Backshop loan origination system. He is a trained credit professional with experience installing enterprise underwriting systems for commercial real estate lenders, rating agencies and investors.
https://www.cmbs.com/wp-content/uploads/2019/03/cmbslogo030619.png00jimflahertyhttps://www.cmbs.com/wp-content/uploads/2019/03/cmbslogo030619.pngjimflaherty2009-06-12 21:00:312020-09-16 21:01:16More XML discussion with no movement
Good progress on MISMO standards
/0 Comments/in Industry standards /by jimflahertyWe had a third committee call today on the MISMO Rent Roll and Operating Statement Standards Committee. We have had 15-20 people on all the calls. The first two focused on the rent roll; this one focused on operating statements. We are making good progress and have basically finished up the rent roll and operating statement header.
Operating statement detail (the NOI categories / chart of accounts) is still being debated. The issue is how much structure do we put in the XML re: assigning detailed NOI categories to roll up reporting categories and property type. We have two more calls scheduled (July 23 and August 6) to hash out the structure. We are still planning on getting the MISMO XML schema ready for approval by September.
The question is: Will anyone use it?
— — —
Jim Flaherty is CEO of CMBS.com and the creator of the Backshop loan origination system. He is a trained credit professional with experience installing enterprise underwriting systems for commercial real estate lenders, rating agencies and investors.
www.cmbs.com
www.backshop.com
Geithner Proposal a Mixed Bag
/0 Comments/in Industry news, Industry standards /by jimflahertyTreasury Secretary Timothy Geithner’s proposal to “fix” securitization was released last week, and it is a mixed bag for CMBS.
On the positive side, he stated the SEC should promote increased transparency for both the deals and the rating agency methodology used to rate the deals. The best line was “Investors and credit rating agencies should have access to the information necessary to assess the credit quality of the assets underlying a securitization transaction at inception and over the life of the transaction.”
Agreed!
The bad news for CMBS lies in two other proposals:
1. The issuer (or sponsor) of a securitization be forced to retain a 5 percent interest in a pool that cannot be hedged or sold.
2. Issuers cannot achieve a “gain on sale” accounting treatment until the underlying loans are paid off.
The whole point of securitization is to transfer risk. Taking both accounting and credit incentives away is troublesome and unproductive, making securitization harder, not easier. Instead, we should focus on freeing the data so investors and rating agencies know the value of the collateral. This way, we will re-establish the credibility of our asset class.
Investors are not dumb
Of course if you cannot transfer the risk because you cannot find a buyer, then you are stuck. And the only investors today are value investors who will only buy CMBS at reasonable spreads if we share our data and prove our value.
While aligning economic interest is absolutely a good idea, I would suggest this point is so fundamental it should be assumed as mandatory. If the issuer and the investor do not have aligned interests (i.e. we issue and securitize loans that aren’t actually going to pay back), we should not even consider bringing back CMBS.
W T F with 5%?
Why did Geithner come up with 5%? Why not 10%, 20%, 50%? How much equity is needed to keep all players’ interests aligned? The fact is the answer does not matter because the amount changes depending on the market. Today, you need 100% equity (or close to it). In 2007, you needed 0% (or close to it).
Standards and Transparency
While coming up with an equity/skin-in-the-game component is a fairly simple “tweak,” it does not represent the permanent reforms that are required. The keys are standards and transparency with all parties using common underwriting models.
I rant about this in one of my first blog postings which was a response to Ethan Penner’s article on this issue: Transparency vs. Skin.
The Proposal and the CMSA Response
Click here to download the Obama regulatory reform proposal.
Click here to download CMSA President Par Sargent’s response to the proposal.
— — —
Jim Flaherty is CEO of CMBS.com and the creator of the Backshop loan origination system. He is a trained credit professional with experience installing enterprise underwriting systems for commercial real estate lenders, rating agencies and investors.
www.cmbs.com
www.backshop.com
More XML discussion with no movement
/0 Comments/in Company history, Industry standards /by jimflahertyMonday’s IRP Committee Meeting at the annual CMSA conference was more talk and no action. There were about 100 people in the room including many investors and servicers, which highlighted the importance of the topic. The committee heads gave a good summary of the IRP process and why it is no longer being pursued. Then they opened the meeting to questions.
The first question was “Are we transparent enough? If not, what are we missing?” The answer came from an investor: “No, we are not. We need rent rolls.” I literally applauded. And the debate began.
Those who are trying to kill any transparency improvements gave the typical responses:
1) Budgets are too tight right now for additional technology spending.
2) The PSA’s have this concept of “restricted data.” The servicers will bear liability if they share too much data.
3) Borrower’s don’t want rent rolls to be shared.
The responses from the folks who support better transparency where just as passionate:
1) When the market was working, the argument was we were all too busy to make the investment in XML. Now, we are not busy enough to make it? Plus, the actual cost to produce an XML report on existing data cannot be very high.
2) While some PSA’s do have the concept of restricted data, the vast majority of them state the reporting standards are dictated by the IRP, not the PSA. Sure, conservative lawyers may take a position to support their client’s goal of not sharing data, but most lawyers I spoke to agreed that “reporting could probably be significantly expanded without incurring liability.”
3) Borrowers generally are contractually obligated to supply the rent rolls. They have no ability to restrict their distribution. While some may not like this, my guess is they will all accept this openness if it helps open up the markets.
Compromise?
One of the major services floated an idea about keeping IRP 5 in place but amending the property file with XML-based rent rolls and operating statements. While I think we should move the entire thing to XML, I welcomed the comment because it at least represents movement. Then, quickly, another major servicer said “no” to even that step.
Stalemate
So, like the rest of the meetings on this topic, it simply ended with no resolution and no direction to go forward. Frustrating to say the least. I then pushed CMSA leadership to provide direction and rules on how to break the stalemate. How does a committee sponsored by a trade group get anything done if it needs unanimous consent? What are the rules? Are we like the U.N. Security Council where all members hold veto power?
Pat Sargent, the new president of the CMSA, reportedly stated at the Wednesday Board of Governors meeting that the CMSA would tackle the XML/Transparency issue “head on” and would push for resolution — one way or the other.
Hopefully Pat will provide the leadership to move this issue.
Conference Mood
The mood of the conference was a bit better than I was expecting. While there were still plenty of shellshocked people, the general mood was more of acceptance than denial. The Special Servicers are jammed and busy as can be. The investors were “playing nice” with the B Piece guys. Even some lenders where thinking about next steps. But, the main sentiment was acceptance that the next 18–36 months will include a massive deleveraging process with foreclosures, price declines and continued lack of liquidity.
And, if some have their way, no new data to help sort out the mess.
— — —
Jim Flaherty is CEO of CMBS.com and the creator of the Backshop loan origination system. He is a trained credit professional with experience installing enterprise underwriting systems for commercial real estate lenders, rating agencies and investors.
www.cmbs.com
www.backshop.com