I helped draft letters from CREFC, MBA and MISMO to the SEC commenting on the proposed Regulation AB changes. The letters were filed Aug. 2. While all of them supported the concept of transparency, none of them proposed a data list to actually achieve transparency.
So I also wrote my own letter.
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.
I attended the Commercial Real Estate Finance Council’s Future of Commercial Real Estate Finance conference in New York City June 14-16. This year’s conference, formerly held by CMSA, was different in that its forum structure provided sessions for six different groups: securities and loan investors, issuers, servicers, portfolio lenders, investment-grade bondholders and multifamily lenders.
The result was much greater discussion of the controversial issues.
The two most controversial issues, loan level disclosures and alignment of interest, were discussed in most sessions but really got active in the Investment Grade Bond Holders Forum.
The forum was chaired by Bill Moretti of Met Life and Tricia Hall of Paulson & Co., who both did a great job of pushing the discussion into controversial topics. When the topic of 5 percent risk retention for shelf eligibility came up, most participants at the conference were in favor of allowing third party B-piece investors to satisfy the requirement. When Bill Moretti stated that full disclosure of rent rolls is important for investors, there was push back from both the issuers and the servicers.
However, Bill made it clear he thought risk retention by the issuing shelf and by a third party B-piece buyer was the best idea. He also stated categorically that full rent rolls should be reported for all tenants on all properties. He reminded the audience that the expected loss of 25 percent on CMBS bonds issued in 2006 and 2007 is awful and represents proof that our methods must improve. The panel really made their point when they put up a slide of that crazy picture of Albert Einstein with his tongue sticking out with a quote under the picture saying: “Insanity is doing the same thing over and over again and expecting a different result.”
They also distributed a “Best Practices for CMBS Restart” document at the conference. This eight-page document is broken out into two general categories: transparency and alignment of interest. Download Best Practices for CMBS Restart.
The proposals sure makes sense to me, and they got good press coverage. Download this excellent article by CRE Direct.
Backshop/CMBS Cocktail Party
Our Tuesday night cocktail party was well attended and lots of fun. Thanks to everyone who came. We got a suite on top of the W New York hotel across the street from the Waldorf. The deck was awesome and the night was perfect. We enjoyed the New York skyline and watched Game 6 of Lakers/Celtics. We went into the wee hours and wound up at a diner for some late night grease.
View from the deck. |
That awesome deck. |
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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.
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.
In addition to the rating agency rules that go into effect on June 2, the SEC has asked for public comment on extensive changes to SEC securitization rules, known as Regulation AB.
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.
I assumed the SEC wouldn’t begin making new rules on disclosure until Congress/Obama passed the financial reform bill. Wrong. Last week, the SEC proposed a bunch of new securitization rules that represent real change and are already drawing controversy.
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:
I attended the Mortgage Bankers Association annual commercial real estate finance conference in Las Vegas last week. Attendance was about 2,000 people, which was better than last year’s 1,600 but well off the 5,000 who attended during the peak.
Money Available
The mood was better than last year but still pretty bleak.
I would describe the major difference as this: This year, if you own a class A property that is well leased and you only need moderate leverage (based on today’s value), there is plenty of debt available. Last year, even for that deal, there was no money.
The problem is, not many borrowers need that deal. If you assume values are off by 40% and lenders are only willing to make 60% LTV loans, the amount of leverage available compared to 2007 pricing is 36%, calculated as
(100 – 40) x .60 = 36
Most borrowers still have debt equal to 80 cents of 2007 values so 36 cent debt is not that helpful. Nonetheless, at least the low-leverage money has come back.
Several new lenders and distressed funds were offering money, but that money is all chasing 20% yields. The problem they have isn’t accessing money; it’s finding deals that make sense. Low-leverage money is facing the same problem.
Deal Flow
The problem really comes down to deal flow.
There’s no doubt that values are way off from 2007, but there hasn’t been significant deal volume for a host of reasons:
1) The extend and pretend mentality of lenders/special servicers,
2) The low interest rates on the distressed debt that is keeping them alive,
3) Regulatory relief in terms of suspension of mark-to-market accounting, and many others.
That being said, I sense the cracks are starting to grow and 2010 will be the start of the deleveraging process that needs to occur.
In CMBS, special servicers, I predict, will finally start moving bad loans in decent volumes. I also think the FDIC will continue to liquidate banks as quickly as they can.
Borrowers, on the other hand, will remain optimistic and only give up properties as a last resort, so the bid ask on non-forced sales will remain wide. Fundamentals will not improve (and may very well continue to deteriorate) so, despite my prediction for more deal flow, the market will be nowhere close to normal in 2010.
Rent Rolls
I spoke out on the need for disclosure of rent rolls for CMBS loans during the public policy meeting, the technology council and the servicers forum.
Not surprisingly, I was met with consistent and vocal opposition from the servicer community. I must say it is discouraging, but not surprising, that the servicers are still fighting this issue. The need for transparency is not their driving factor and, apparently, many are content to keep operating as they have in the past. In fact, I received complaints that MISMO was going too far in even creating rent roll standards. Ouch!
I will say that more and more folks are recognizing the common-sense need to disclose rent rolls to CMBS investors, but the old guard is fighting hard. I think the Senate passing the financial reform legislation and Obama signing it into law might be the only catalyst to force a change. Until then, we will keep up the pressure.
Off to Mexico with the family for winter break. I will report in after that.
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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.
The CMSA conference in Washington, DC just ended and the transparency issue was one of (if not the) dominant issues of the conference. Many attendees — as well as the guest speakers that included a senator, two congressmen, the head of the FDIC and a treasury spokesman — stressed transparency as critical to market recovery and the intent of the reform legislation.
Over 1,000 people showed up, and the parties were actually pretty good. Although we all missed South Beach, it was fun to be in DC on the one year anniversary of the inauguration and on the day that Teddy Kennedy’s seat went red.
The White House |
IRP Committee
The day started with the IRP Committee meeting, where we learned about a new structure the CMSA put in place to facilitate the process of determining policy.
The idea is to create a series of forums that will give voices to the interests of the different types of CMSA members (Investors, Servicers, Portfolio Lenders, Multifamily/GSE). The CMSA stated that recommendations from the forums would influence CMSA policy.
So, if we could get a forum to conclude the IRP should change to XML, the committee could finally move ahead on the conversion. I gave the audience an update on the MISMO standards, and how they were improved from the original proposal, and then we headed off to the Investor and Servicer Forums.
Investor and Servicer Forums
The debate regarding rent roll disclosure really started in the Investor Forum and was brought to a head in the Servicers Forum.
A CMBS trader from a large money manager and I both asked about disclosing rent rolls as an essential element to our disclosure levels as an asset class. We both pointed out that without disclosing full rent rolls, CMBS was not a transparent asset class and would, therefore, suffer in the eyes of investors. The response from the panel was mostly dismissive.
But: The panel had to address the question twice, not all panel participants were 100% negative and I was not the only one asking.
Agenda
There was enough coverage on this issue and enough recognition by the CMSA that this issue needs to be addressed that transparency is at least on the agenda for consideration again.
Now, let’s see if the forums work as intended and if we can get positive movement out of the CMSA.
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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.
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