For the first time in years, CREFC has proposed an increase in data disclosure by proposing a new report, the Loan Modification Report, to be effective Dec. 1, 2010. It isn’t perfect, but it is progress.

This report is designed for Special Servicers to use when they modify a loan. CMBS Investors have demanded this information because loan modifications have a direct impact on the bond payments and, therefore, the value of the bond. Despite the fact that modifications are fairly common these days, Special Servicers have not been doing a good job reporting the new terms. The current deficiency in reporting these modifications has grown into a major problem.

The new report will hopefully help solve that problem because it will require Special Servicers to disclose the terms of the modifications.

Check out the exposure draft: CRE Finance Council INVESTOR REPORTING PACKAGE Version 5.1

The Loan Modification Template is on Page 102.

My only negative comment regards the format of the report. Instead of a data-driven report in XML or even Excel, they picked PDF. Pretty much the worst format they could have picked.

But, if the special servicers actually describe the modifications in enough detail, folks who are trying to recreate the bond models can update the amortization/bond models manually to reflect modified loan terms. That is progress.

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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

With great fanfare today, President Obama signed the financial reform bill into law. Many times over the past several months, I thought this legislation would die, but this is a big, important deal. And now the law is clear: Transparency is required for securitized products.

The big question is whether the SEC enacts rules and regulations to actually bring about transparency.

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I am just returning from New York City where I attended MBA’s Commercial/Multifamily Servicing and Technology Conference 2010. Most of the major master, special and primary servicers attended. The proposed SEC changes to Regulation AB were discussed at almost every panel.

XML acceptance

A well-attended special session focused on the proposed new regulations and the MBA response.

After a fair amount of discussion on what the changes entailed, the moderator took a survey of which firms were in favor, opposed or indifferent to reporting in XML. For the first time, not one servicer stated they were opposed to reporting in XML (a few were in favor and most voted indifferent).

It seemed that either the fear of a negative reaction from the SEC or just plain acceptance of the inevitability of the rule changes eliminated at least public disagreement with converting to XML. To be sure, there will be great debate on which data elements should be included in the XML, and if the IRP itself will change, or if there will be a new XML report solely for SEC compliance. But public resistance from the servicers, which has always killed the discussion in the past, was absent.

MISMO: What a difference a year makes

There were two dedicated MISMO panels and a MISMO meeting. I attended all three sessions and spoke on the last panel titled “Making MISMO Work for You.” Download the Powerpoint slide show. The Dilbert comic on slide 2 is classic.

While I would not say attendance was bursting at the seams, all three sessions generated fairly good crowds. People actually asked questions and showed interest in learning more about standards and XML.

Last year at this conference in New Orleans, there was virtually no discussion about MISMO and XML standards. Everyone was focused on servicing issues as opposed to reporting/transparency issues. This year, the focus and sense of urgency provided a much-needed boost of energy to all the folks who have been working on data standards.

Next steps

The MBA, CREFC and MISMO are all working on their responses to the SEC proposals. The comment period ends August 2, so all responses must be finished by mid July.

I am participating in all the conference calls and was elected to be co-head of the MISMO response committee. MISMO will make sure the XML schema for the final list of data elements is workable and consistent with the MISMO data model, and ideally with the CREFC IRP 6. The next several weeks will be very interesting as the responses get finalized.

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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

I attended the CREFC After-Work Seminar – SEC Disclosure Requirements this week on the new SEC rule (Rule 17g-5) that goes into effect June 2. The rule is designed to address the perceived conflict of interest that rating agencies have as a result of issuers paying for ratings.

The rule requires issuers and hired rating agencies to maintain password-protected websites to share rating information with non-hired rating agencies.

Here are the rule’s objectives:

– Increase the number of ratings for structured finance products,

– Promote issuance of unsolicited ratings and

– Reduce the ability of issuers to obtain better than warranted ratings by exerting influence over hired rating agencies.

The session explained the rule and attempted to answer questions about its implications. You can download the details (New SEC Rating Agency Reform Requirements and Impact on Structured Products Participants) and read the highlights here:

1) The rule regulates the NRSROs (nationally recognized statistical rating organizations, aka rating agencies), not the issuers. A rating agency must maintain a website that lists all the deals it is rating and provide links to the Arrangers’ websites to access the disclosed data. Non-compliance by the NRSRO could jeopardize the NRSRO designation granted by the SEC.

2) Arrangers (issuers, sponsors and underwriters) are responsible for A) posting and maintaining all data and communication they have with the hired agency and B) granting access to this data to the non-hired NRSROs.

3) The rule applies to most structured finance including CMBS, CDOs, CMOs, CLOs and even 144A private deals.

4) The non-hired NRSROs must treat the information as material non-public information. There are lots of unanswered questions about what this really means, especially in CMBS where the ratings are usually supported by loan-level reports.

5) If a non-hired NRSRO accesses more than 10 deals on an arranger’s website, it must provide ratings for at least 10 percent of the deals they access. This is meant to prevent “free” data searches.

Catalyst?

As the three lawyers from Cadwalader explained all this to the audience, the reaction was focused primarily on implementation headaches.

I spoke up and said what a great opportunity this presents for the industry to adopt standards for both the way we communicate with the rating agencies and what data we share. I plugged MISMO and IRP 6 and reminded the crowd that the work of creating the standards is already done; we just need a coordinated adoption effort.

While there was some push-back, the compliance issues are so overwhelming that adoption of standards now seems inevitable. More than any other group I’ve discussed these issues with, I sensed this group is finally realizing that, since transparency is being mandated, standards will have to be adopted.

There’s a meeting in mid May to discuss these changes in more detail, and I am sure these issues will be front and center at the June conference. Stay tuned.

Great view

The offices of Cadwalader are downtown at One World Financial Center. The space has a great view south over New York Harbor with the Statue of Liberty and Staten Island.

World Trade Center

Out of the north side of the office, you could look straight down at Ground Zero where the World Trade Center stood. I’d heard they were making some progress on getting the building going, but I hadn’t realized steel was going up.

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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

We had our monthly MISMO status call yesterday and started implementing our 2010 strategic plan. The group is focused on pushing the adoption of the rent roll and operating standards to help achieve transparency and mitigate risk. We all feel this is a “make or break” year for MISMO, so we want to give a focused effort to promote adoptions of standards. Toward that end, here is what MISMO will work on this year:

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