I hope this post finds you healthy, prosperous and vaccinated. Gratefully, we are all three here. There’s been a lot going on, and I’ve not posted in a while, so here is the update.

We launched our dedicated tool for CMBS borrowers to support their quarterly servicer reporting requirements. If you have a CMBS loan, you can easily find your loan in our CMBS database, then we pre-load all the loan, servicer and property information — including all the operating statements that you have submitted to your servicer.

So, if you have had your CMBS loan for 5 years and you sign up for CMBS.com, once you find and load your deal, you will see 20 operating statements (4 per year for 5 years). For your 21st submission, modify the last one you sent and send in the new one through our system. Going forward, the process will be automated.

For rent rolls, since they are not part of the IRP, you will have to upload the first one and then let our tool automate it from there.

For more details about automated quarterly CMBS servicer reporting, check out our help pages for CMBS Borrower Reporting.

Speaking of rent rolls, if you are a reader of this blog you know I believe they need to be disclosed as part of CMBS transactions, and it turns out I am not the only one. In my last post, I talked about the whistle blower complaint and the University of Texas study about lenders inflating the income on properties. I recently came across this interview. Starting at about 3:30 is a pretty good description of how CMBS “liar loans” are made.

To be clear, using our new CMBS borrower reporting tool does not mean your rent rolls will be disclosed to the investors or the public. It just automates the submission to your servicer, who will only disclose what is in the IRP. But the issue of rent roll disclosure is a story that is not going away.

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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 and investors.

The SEC pulled Reg AB II rule-making from the Feb. 5 agenda.

So nothing happened. There’s no word on why it was pulled or when we will hear back.

It’s been a housekeeping month with MISMO as we get ready to re-introduce and formally approve the rent roll and operating statement standards.

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The public comments on the SEC re-proposed rules for issuing asset backed securities including CMBS, known as Reg AB II, were due this week. The SEC received comments from 23 different companies and trade groups, including one from me.

See all responses : See my response

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I attended a dinner last week with the joint leadership of the Mortgage Industry Standards Maintenance Organization (MISMO). Attendees came from the residential mortgage business, the commercial mortgage business and the Mortgage Bankers Association (MBA, which owns and manages MISMO). I was invited because I serve as co-chair of the board for the Commercial Mortgage Industry Standards Maintenance Organization (known as cMISMO).

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The leadership at C-MISMO (which I am a part of) has been trying to decide the next steps to promote standards adoption. Toward that end, we hosted a “MISMO Summit” in May to seek support. At the meeting, it was clear a group of people wanted to put the entire effort into a hibernation mode.

These people argue C-MISMO should be shut down because there is no interest in implementing common, industry-wide standards. Most of the existing industry players (especially mortgage bankers) are satisfied with the status quo. I’ve known they don’t want standardization, but I was surprised when they actually tried to kill it.

Coup Attempt

In late June there were both formal and informal efforts by certain members of the MBA to kill C-MISMO by shutting it down. A proposal letter was drafted and circulated through the MBA that stated “it is not a good use of resources at this time to continue to create new standards.” The letter recommended “the development of new standards by Commercial MISMO be halted.” The effort to kill C-MISMO was pursued all the way to the Board of Directors of the MBA, where it was formally discussed.

Fortunately, the recommendation to hibernate C-MISMO was rejected by MBA leadership. We have been given the green light to keep going and, from what I understand, the firms pushing for the C-MISMO shut-down have backed down.

Origination Standard

When the governance of C-MISMO found out about the proposal to kill our efforts, we initially laughed because we felt like we were being fired from volunteer jobs. But then we started to get annoyed. It is offensive that people would actively oppose open standards. So instead of shutting down shop, we are going on the offensive.

Yesterday, C-MISMO leadership voted to create a new standard we are calling the Origination Standard. This data standard will contain all the information needed to re-underwrite and make a commercial real estate loan. We are purposefully focused on the front end data package needed to make a loan versus the back end investor reporting package. While the goal is big, the existing C-MISMO data schema is complete enough that this should be a manageable effort. We are going to get started in September.

We also agreed to create a GSE MISMO Adoption Task Force, and we are going to pursue a Rating Agency Data Standard.

So much for going into hibernation.

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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

The industry trade group that controls the reporting standards for CMBS reporting, the CRE Finance Council, released the consensus version of the new reporting requirements for CMBS 2.0. The trade group spent over a year with investors, issuers and servicers trying to reach consensus on best practices and disclosure levels.

Standardized Annex A

The biggest part of the release is standardization of investor disclosures when initially selling CMBS bonds. In the past, each issuer would define what they would disclose in the initial prospectus, with the actual data fields being defined in Annex A to the prospectus. While there were plenty of similarities in the Annex A disclosures from one issuer to the next, they were not standardized. The new disclosures (see attached) made good progress on standardizing and requiring data disclosure related to:

1) The data needed to model the debt both within and outside the trust (the entire capital stack)

2) More details on historical operating statements (income and expenses)

3) Better data on escrows and reserves

Download pdf: CREFC Standardized Annex A – December 2010

CREFC also addressed standardization of the “typical” Reps and Warranties issuers make to bond investors, as well as the repurchase language/process the parties go through if there is a breach claim. Definitely an important step.

Effort Falls Short

In my view, despite the progress, the consensus disclosure standard falls short, specifically as it relates to disclosing the in place rent on the collateral (full rent rolls). Instead of agreeing to disclose this critical data, the “consensus” was to add information on two additional tenants so investors will now get information on the top 5 tenants in each property instead of just the top 3.

Instead of complying with Dodd-Frank and disclosing enough information to allow the investors/rating agencies to recreate their own underwriting models by disclosing the full rent roll, CREFC issued a 33-page “Principals Based Underwriting Template” in an effort to describe a “good” underwriting.

With all due respect, people in the business know how to underwrite, and a 33 page manual is a complete waste. Instead, the counterparties to the securitizations need the data to recreate an underwriting and make their own conclusions. Having an issuer state they “followed the manual” is nowhere near the same as disclosing the data to allow all parties to reach their own conclusions. The investors agreed and initially asked for full rent rolls but were not able to reach “consensus” on this issue so, instead, we are left with limited information on the “top 5.”

Active Few Weeks

I think the timing of these market standards indicates the “rules” from the SEC/regulators will soon be released. Later this week the regulators will release their conclusions on risk retention, and there is a rumor the SEC will be issuing its rules on Reg AB reform in the next few weeks/months. We will see if the regulators step up and require additional rent data or if CMBS 2.0 is really a lot more like CMBS 1.5.

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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

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

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.

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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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The commercial real estate news service CRE News picked up the MISMO press release and wrote an article about the new rent roll and operating statement standard.

Hopefully, this will help broaden the debate and discussion about this issue at the CMSA conference in Washington DC next week.

Here is the article:

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Washington, DC – This morning I attended the House Financial Service Committee markup/debate meeting for the Accountability and Transparency in Rating Agency Act — House Bill 3890.

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The SEC announced new rules a few weeks ago regarding structured finance and securitization. One rule was covered extensively in the press and has been criticized as more “extend and pretend.” The other, which was not as well covered, is a huge victory for those of us seeking more CMBS transparency.

The well-covered rule granted CMBS loan servicers more leeway in restructuring loans before they go into default. This issue was pushed by trade groups representing property owners under the hope that loans could be extended within the CMBS structure before going into payment default, which would help liquidity issues. Critics say that ruling just promotes the “extend and pretend” mentality.

A second ruling was not covered as extensively in the press, but it represents a huge victory for those of us seeking more transparency in CMBS.

The SEC ruled that issuers of structured products have to share the underlying data (rent rolls, underwriting assumptions, financial models) with all rating agencies, regardless of whether they were hired to rate the deal or not. The intent of the SEC was to discourage the issuers from “shopping for ratings” and to allow all rating agencies to provide analysis/ratings on deals, even if they were not hired by the issuer.

In CMBS, this issue was pushed successfully by Rob Dobilas, CEO of Realpoint (congrats Rob!). Realpoint is a rating agency with a different business model than the others. They rate all CMBS deals and sell their opinions to investors on a subscription model. In contrast, the traditional agencies only rate deals for which they were hired and paid by the issuers. Until now, Realpoint has had to rely on available IRP data and their own additional work to provide the ratings. With the new rules, they will be able to get the full issuer package — which includes data that is critically missing from the current IRP.

DBRS is another rating agency poised to gain from this ruling. They were left off most deals in 2006 and 2007 because they refused to rate deals as aggressively as the big three. In the future, they also will have rights to all the data and will be free to express opinions on all deals, not just the ones they were paid to rate.

Now, the question is, what about the data providers? We at CMBS.com provide IRP data feeds to DBRS to support their ratings and surveillance activities, and I know Trepp provides its data to Fitch. So, do the data providers also get the “full package?” If so, can we share that data directly with our CMBS investor clients?

These and other questions will be answered over the next several months, but the momentum is clearly moving toward more transparency. If all the rating agencies get all the data, how far behind will the investors themselves be from getting all the data? And if they get all the data (delivered in IRP 6 XML of course), then CMBS will truly become transparent.

The SEC ruling was a big first step in that direction.

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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 a very active MISMO Council of Chairs call on Tuesday. IRP 6, rent rolls in XML and transparency where all being discussed. We had a “special guest” — a master servicer who gave us perspective on the challenges of getting the standards adopted.

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The MBA Commercial/Multifamily Servicing and Technology Conference I just attended was much more about business issues that servicers face (covenant violations, defaults, foreclosures and a general lack of liquidity) than how technology can help solve those issues. While words like transparency and efficiency were sometimes used, the belief that technology is need to achieve these goals seemed lacking.

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I’ve been writing about this for a while; here is the official announcement, plus a way for you to join the MISMO Commercial Operating Statements and Rent Rolls listserv. Do it now!

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The much anticipated investor forum was a bit disappointing.

I agreed with almost everything they said, and I liked the fact that it was delivered with a bit of an angry edge. The problem was that the laundry list lasted the entire session, and they left no time for questions, discussion and comments.

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On Wednesday morning, my “happy” post-election emotion was replaced with a toxic combination of hangover and jet lag. I hit snooze a bunch of times and finally made it over to the conference for the afternoon sessions.

The takeaway was not all negative. A few buyers felt pretty good about recent trades buying AAA European CMBS for 60 cents on the dollar, driving yields up to 12% or so. But there have been only a few forced sales to date, and volume is very low.

That led to an interesting panel among special / master servicers, senior bond investors, junior bond investors and lawyers about the timing of enforcing non monetary loan defaults, the fiduciary responsibilities of the servicers to maintain a “servicing standard” and the potential liability created when folks in different parts of the cap stack want different strategies.

While the debate among the servicers and investors was definitely interesting, other main themes included:

• The mood was mostly (but not entirely) negative.
• The primary CMBS market in Europe is shut down with virtually no new issuance.
• The secondary market was also shut down with the exceptions of a few forced sales at around 60 cents on the dollar.
• Sellers are only selling if they have to, because they believe government asset purchase programs might pay above market for assets in the not too distant future.
• Cap Rates are believed to be rising and commercial real estate values falling, with some predicting stabilization as early as 2009, while others are predicting 2011/2012 and beyond.
• Standards and Transparency will be harder to achieve in Europe because of privacy concerns.

I did have meetings with a major bank and rating agency to push the adoption of Backshop as an underwriting standard. I also spoke to the leadership of the CMSA about the importance of standardized underwriting and trying to make that part of any TARP / Bailout program for CMBS.

So, definitely worth the trip. Being oversees for the election was way cool.

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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

My takeaway from this week’s conference was the Mortgage Bankers Association is absolutely serious about enacting reform at every level. The words transparency, standards and credibility were used over and over. Because of the massive losses and the government’s long-term commitment to providing financing for homes, the pressure to standardize is greater than ever.

However, the words are not new — people have been saying them for years. The question is: Can they and will they do it?

Believe it or not, the mood at the convention was not all that bad. Remember, the home loan market is still going along at about $40 billion per month. While that number is way down, it still represents a significant volume of loans. Lenders, brokers, little companies and lawyers are all still in business, just not as busy.

The $40 billion number is almost 100% government backed (Fannie, Freddie, FHA, etc). The private market has basically shut down because of a lack of trust in the loans, the rating agencies, the economy, etc. If not for the government intervention, this would have been a different conference, and the liquidity crunch would be affecting a lot more people.

The commercial MBA conference is San Diego in February, and I expect it will be much more depressing. The CMBS market is not supported by the government. So, with the exception of apartment building loans that Fannie and Freddie are doing, volume in commercial is basically $0.

I would call the mood humble but professional. The leadership knows we have issues as an industry, and that we should have done a better job over the past few years. But the attitude was, “We can — and will — do better.”

The folks who attend the industry’s annual trade show are generally professional, honest, hard-working mortgage bankers. The “slime” brokers don’t pay to attend these types of things. There was a kind of “pick yourself up and dust yourself off” attitude, but with an openness to learn some lessons.

The factors for positive change are all there:

1) A humbled market.

2) Government intervention with strings attached.

3) Honest people who want to make things better.

But change is hard, and the forces that stand to lose are powerful.

The mortgage industry need standards more than ever.

Can they do it? Will they do it?

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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