Centralized Underwriting or Increased Transparency?

The CMBS Investor Group has a new proposal to improve the CMBS market. This is the same group that spoke at the January CMSA conference. I applaud the group for being proactive in trying to solve the crisis, and they have come up with many valid points. In their latest round of comments, they introduced the idea of a “centralized underwriter” to “assemble and present” underwriting and surveillance information for CMBS Investors. Basically the entity would be responsible for analyzing all financial reporting data and presenting it to investors in a concise, standardized way.

Centralized Underwriting
While the goal of giving investors easy access to reliable data is commendable, achieving that goal by paying a “Centralized Underwriter” to assemble and present the data seems redundant. This would add a human cost layer for the centralized underwriter to manually assemble and present data. And, by the group’s own admission, it’s unlikely that all (or even most) investors would outsource their credit decisions.

In the current system, we already have parties who are supposed to perform these two functions. The Master Servicers are the ones that are supposed to “assemble and present” the data via the IRP. That group has already figured out how to fix the “assemble and present” problem through IRP 6 in XML — it just needs to be implemented.

The rating agencies are supposed to interpret that data and express opinions on the underlying collateral. We should demand transparency into the rating agencies’ analysis and let them earn back investors’ trust by performing accurate, thoughtful analysis. If a particular rating agency has lost investor confidence beyond repair, they should be replaced by a rating agency that still has investor confidence. If we focus on adding another layer to this system (the “Centralized Underwriter” or a “Mirror Rating Agency”) instead of organizing and standardizing the data we produce (via IRP 6), it we’ll become less efficient, not more efficient.

Increased Transparency
The group’s spot on recommendation was the demand for increased transparency. The proposal stated: “As much information as legally possible should be provided publicly via electronic distribution.” Absolutely!

The costs of “fixing” the reporting problems so the Master Servicers “assemble and present” the right data (in IRP 6 of course) will be much cheaper and a better solution than adding another human cost layer. Instead of adding a new layer of people to the process, let’s produce clean, complete data in XML and demand transparent standardized underwriting analysis from the rating agencies.

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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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