CMBS 2.0

Bad mood at 2012 CREFC conference

jimflaherty — Tue, 17 Jan 2012 04:56:59 +0000

The annual CREFC conference was last week in Miami and, while attendance was slightly up, the mood was way worse than last year. 2011 started great (with momentum from a strong second half of 2010), but the summer spread widening caused losses and basically shut down the second half of 2011.

Going into 2012, there is very little momentum. Originations are starting at a standstill as opposed to a running start. However, it was still a fun few days, and the return to Miami Beach from Washington, DC was a welcomed change.

Let’s take a moment to appreciate this view — and the weather. This year’s sun was way better than last year’s snow.

Headwinds

More than one panel talked about the headwinds facing the industry in 2012. In addition to things we cannot control (like the world markets and interest rates), one of the most interesting headwinds our industry is facing is a wave of loan maturities from 2007.

Without a doubt, 2007 was the peak of the market with lax underwriting and excessive leverage. There are about $20 billion worth of loans originated in 2007 that mature in 2012 and the losses on these loans might reach 50 percent. The headlines that these defaults make will not help investor sentiment.

No one at the conference thought the underlying economy will grow much in 2012, nor did they believe that the jobs picture will improve much. This will lead stable (or only slightly improved) fundamentals that will be insufficient to generate much positive momentum.

Recovery Year

While the market is greatly improved from 2008 and 2009, and lenders are willing to lend for the right deals, most people believe 2012 will be a lot like 2011 in terms of volume (about $32 billion) and mark — by historical levels another modest origination year.

Some folks were predicting volumes could reach $50 billion while others thought we could end up as low as $20 billion. Personally, I think we will end 2012 with $35 billion of U.S. CMBS originations.

Regulatory Update

There were no big updates on the regulatory front.

The CREFC folks said to expect a resolution on risk retention in the first quarter of 2012 and a resolution on Reg AB changes by the end of the second quarter.

But those dates could easily change — and I’ll believe it when I see it.

I’m attending the MBA CREF conference in Atlanta in early February. I’ll check in then with a MISMO / MBA update.

Check out my report on the 2011 CREFC conference: Upbeat mood at CREFC conference

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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.

Reg AB II Responses Submitted to SEC

jimflaherty — Fri, 07 Oct 2011 20:48:58 +0000

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

It’s the rent roll stupid

My two page response focused on CMBS data disclosure and the value of XML.

I repeated my refrain that the in place contractual rent information found on rent rolls is currently missing in CMBS reporting. I reminded the commission that the law per Dodd-Frank says in order to securitize an asset the issuer must disclose enough information for both the investors and rating agencies to value the underlying collateral.

In my opinion, current CMBS reporting and the Commission’s proposed schedule L and LD fall short of providing the data required to comply with this law. If rent rolls are added to both schedule L and LD (and a handful of other capital stack related fields), the required transparency will be achieved.

See my entire response.

CREFC and MBA stay put

Both the CREFC and the MBA submitted responses, but they did not change their positions since their original submissions in August 2010.

The most recent CREFC submission was most disappointing. It still opposes XML based reporting and any additional mandatory disclosures.

The MBA was a bit better, but it basically stated the CREFC IRP is and should be the standard for CMBS reporting. However, the MBA was more positive in its support for XML and did say that, if the regulators require XML reporting, they should use voluntary consensus XML standards (i.e. MISMO). The Board of Governors of C-MISMO were vocal during the drafting process, and it was good to see the MBA’s final letter was supportive of XML and was a break from the CREFC position.

What next

My prediction is the regulators will stand firm on requiring XML, but I have no idea on where they will come out on asset level disclosures. It does seem clear that without their mandate, the industry seems incapable of changing on its own. Stay tuned. …

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www.cmbs.com

MBA taking back MISMO management

jimflaherty — Wed, 28 Sep 2011 19:42:54 +0000

The Mortgage Bankers Association has announced it will take back management of MISMO from MERS Corp effective December 1, 2011.

MISMO has always been a wholly owned, not-for-profit subsidiary of the MBA but, back in February 2009 during the depths of the financial crisis, the MBA transferred management of MISMO to MERS as a cost-cutting effort (see MERS takes over management of MISMO from the MBA, Feb. 2009).

MERS has successfully managed MISMO, especially as it relates to adoption in the residential mortgage world. Now the MBA wants management back.

According to the MBA, the decision to take back MISMO management was driven largely by the success of MISMO in the residential business and the belief that MISMO standards will (or at least could) form the foundation of the anticipated new regulatory reporting requirements. Since the MBA has a strong government lobbying group, it felt it could do a better job convincing regulators to adopt MISMO standards, as opposed to having the government create new standards.

David Stevens, CEO of the MBA, stated in the press release (download press release here) that:

“Due to changes in the regulatory environment over the last two years, the benefit of implementing data standards across the real estate finance industry has never been greater. Significant new reporting requirements highlight the need for a common vocabulary and data exchange mechanism. The continued enhancement of data standards and transparency are critical to the return of investor confidence and liquidity in our marketplace. MBA will continue to encourage regulators to adopt MISMO standards for regulatory reporting.”

The move suggests the MBA is betting regulators will demand XML reporting — and they want to strongly influence how this is done. If the MBA really throws its full support behind MISMO adoption, and the regulators embrace those standards, the bet may pay off.

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www.cmbs.com

10 Years On and Rockin

jimflaherty — Sat, 17 Sep 2011 16:23:16 +0000

Every year on September 11, I join most people in the nation and reflect on the terror attacks of that day. I was in New York Tuesday, Sept. 11, 2011 — and I witnessed the destruction firsthand. I was blessed that the meeting I had scheduled for 8:30 a.m. in Tower One at the Windows on the World restaurant, where no one survived, was changed to a 10:30 a.m. meeting in Suite 2243. Of course, that meeting never happened.

Never forget.

This year, I spent 9/11 at home with my family, and we spent most of the day watching all the remembrance shows. The 10th anniversary coverage was nonstop. I let my two kids (12 and 10) watch as much as they wanted, and they took me up on it.

We shared the day asking some pretty deep questions and talking about the important things in life. The stories that I most related to were the ones where the person survived through random luck.

There was the Boston flight attendant who was left off one of the hijacked planes because of a last minute scheduling mix up. A group of fire fighters was in a tower when it collapsed but survived because the stairwell they were in somehow didn’t get crushed. And countless random people like me who contemplated meetings or trips that would have put them directly in harm’s way and for whatever reason the plans changed. Why?

One World Trade Center

The new New York skyline.

I traveled to New York on Monday the 12^th and had a chance to check on the construction progress of One World Trade Center. I couldn’t get close to the memorial because reservations are booked months ahead. But, the office building is huge and is already starting to dominate the skyline. It will be nice having the tallest building in the United States back in New York.

Rockin’

Wednesday night the 14^th, Metallica played at Yankee Stadium as part of a heavy metal show featuring the “Big 4” — An all day festival with sets by Slayer, Mega Death and Anthrax. with Metallica headlining the last set.

Sold out Yankee Stadium.

Lars Ulrich (the drummer who was great on Howard Stern this week if you heard it) is a friend from Marin, and he set me up with the whole VIP package (as usual – thanks Lars!).

We watched the show from all sorts of different angles: from Luxury Suite 1, from front row seats in section 29, and from the front of the floor next to the stage. They were all great, but my favorite place was the sound booth. It was set about 150 feet back from the center of the stage in an elevated, tented, fenced off area. They set up some seats behind the technicians where the friends of the band could hang and watch the show. The computers and screens looked like a space ship and it was cool to hear, feel and “see” the music.

As always, an epic show with an unbelievable set list and a crowd full of energy. One of the lessons of 9/11 was you only go around once, and the trip may be shorter than you like, so you better rock!

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www.cmbs.com

First Public Deal of CMBS 2.0 Highlights Disclosure Issues

jimflaherty — Wed, 31 Aug 2011 03:52:39 +0000

The CMBS deal recently priced by Deutsche Bank and UBS was the first deal since the market crash to include publicly registered bonds (all other post crash securitizations issued private bonds using the 144A Rule).

This is a big deal. Most people agree that for the CMBS market to truly recover, we have to issue public bonds — because so many potential investors are limited to only buying publically registered bonds.

The Deutsche-UBS deal issued public bonds for the top 70% of the deal and private 144A bonds for the bottom 30%. While the deal reportedly found good demand for both the public and private bonds, the structure of the deal highlighted the fact asset-level disclosures were different for the public bonds versus the private bonds.

Since the crash and because all deals were 144A, the investors have been allowed to see and review sufficient asset level data to re-underwrite the underlying loans. This data has included appraisals, rent rolls, historical financial information, and issuers’ underwriting models. However, since the investors were typically operating under a confidentiality provision that is typical in private deals, the issuers were not worried about disclosing the information and conducting specific Q&A sessions with potential investors to answer asset-specific questions.

Issuing public bonds carries a much higher liability standard for issuers when it comes to disclosures. Information must be disclosed uniformly to all investors at the same time, and there is no ability for one investor to learn more about the assets than other investors. Also, if any information the issuer supplies to investors in a public deal turns out to be wrong or misleading, even if the information came from sources other than the issuer, the issuer can be held liable.

Since the Deutsche–UBS deal had both public and private bonds, the question came up whether an investor could buy both the public and private bonds. The answer was no. The reason is the investor who bought the 144A private bonds would have had more access to deal information than the public bond buyers. The concern is they could “use” that private 144A information to make a better decision on the public bonds. Since other investors who were buying only public bonds could not see the 144A information, that information advantage is illegal and is effectively insider trading.

Presumably this did not occur on the subject deal, and it is up to the investors and the issuers to police themselves to make sure the rules are followed. However, with this potentially serious conflict relating to disclosures, it seems like the structure used in the Deutsche–UBS should be improved on. Since at least some investors are demanding full disclosure, and we need the investor depth that the public markets can provide, something has to give.

Hopefully, the new Reg AB II rules that the SEC is working on will require the right disclosures for investors of all bonds but also protect the issuers against lawsuits regarding unreasonable disclosure liability. Also, there should be a few more public deals this year, so it will be interesting to see how other issuers address this potential conflict.

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www.cmbs.com

Reg AB II Movement

jimflaherty — Tue, 30 Aug 2011 00:02:14 +0000

The SEC recently “re-proposed” for public comment proposed new rules for asset backed securitization eligibility that has come to be known as Reg AB II. These proposed rules suggest changes to the current securitization regulations and cover multiple reforms on everything from asset-level disclosures on both public and private deals, to the role of the rating agencies, to adding a risk retention requirement, and several other steps that would be required for issuers to sell asset backed securities (including CMBS).

The SEC initially proposed these changes back in April 2010. The two major trade groups (the MBA and CREFC) spent the summer of 2010 preparing a regulatory response that was submitted on August 2, 2010 (read CMBS.com’s response).

Since that time, the SEC has stayed basically silent on this issue. The only reports I heard were they wanted to wait until after the risk retention rules are finalized to implement the rest of the securitization changes. In the “re-proposal” the SEC made it clear it was sticking with asset-level disclosures, but they also stated no final decision has been made regarding the specific data elements that will be disclosed.

Responses to the “re-proposed” rules are due to the SEC by October 4, 2011. Both the MBA and CREFC plan to submit responses. However, since the “re-proposal” does not specifically ask many new questions regarding CMBS, both trade groups are basically just re-submitting what they stated last August.

It looks like the risk retention issues will be finalized this fall, and the SEC wants to be ready to release the remaining securitization changes shortly thereafter. The fact that they have “re-proposed” their rules suggests that we may finally get clarity on the SEC’s vision of CMBS 2.0.

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www.cmbs.com

C-MISMO survives coup attempt

jimflaherty — Thu, 28 Jul 2011 04:23:22 +0000

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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www.cmbs.com

www.backshop.com

CREFC Cautious

jimflaherty — Tue, 28 Jun 2011 06:25:23 +0000

I attended the CREFC Annual Conference last week in New York, which was also attended by about 1,000 people representing all the different segments of the CMBS industry (Issuers, Investors, Servicers, and Professionals).

I would describe the mood as cautious due to recent spread widening, a perception that CMBS underwriting standards have already deteriorated and a widespread belief that the “reforms” implemented for CMBS 2.0 don’t amount to much.

What struck me most during the conference was the growing number of people calling for transparency. While not a majority yet, I would characterize the movement as a vocal minority (as opposed to a few individuals just last year) evidenced by:

1) Investor Demands

All the securitizations that have been done since the crash have been fully transparent on the initial loan level disclosures to the investors (Annex A data). These disclosures have included rent rolls, issuer underwriting models and appraisals. The investors have gotten used to this level of disclosure. Now they demand it.

The problem is all the recent securitizations have been private deals done under SEC Rule 144a, not publicly registered bonds. Since the deals were private, the issuers have been willing to share the information through password-protected Web sites, but the issuers are not yet willing to disclose the same level of data for public deals.

Most folks believe we have to get back to public deals for CMBS to truly recover, but when we asked investors if they are willing to trade public registration for the increased data they would receive up front, they all said no. They would live with the restrictions of 144A Bonds before they would go back to the old, insufficient upfront data disclosures. The folks at CRE Direct wrote a great article on this topic if you are interested.

2) IRP Committee

Since the CREFC put a stop to any changes to the IRP in 2007, there has been a lot of talk about the industry increasing disclosures on its own, but there has been very limited action.

This year hopefully signaled the start of CREFC allowing additional fields to be disclosed in the IRP. The IRP committee stated they would be forming work groups to recommend additional disclosures. While I am pessimistic that true disclosure will actually happen through this effort (I believe regulatory action is the only thing that will work), at least there is a committee being formed to consider new additions.

The best line came when an IRP committee member (not me) said something like “the industry will lose the support of the regulators if we do not show progress in making the IRP dynamic. The fact that the IRP has not changed much in years does not support the statements that CMBS has a dynamic and complete set of disclosures already in place.” Well said.

3) Regulatory Reform

While most of the discussion on regulatory reform was based on risk retention and the roll of the operating advisor, I heard more than one person state risk retention was a side show compared to the upcoming Reg AB changes that will determine the level and format of the disclosures that will be required for public bonds (aka Annex A and IRP in CMBS and Schedule L and LD in Reg AB). If the regulators get it right, the required transparency will be more meaningful than risk retention.

4) New CREFC Leadership

Every year the trade group gets a new president. This year the job goes to Jack Cohen, a successful, long-time industry player from Chicago who made his money in the mortgage banking business. He has a different perspective than most, and his acceptance speech during the conference suggested he believes all industry participants must cooperate at an increased level for the good of the whole industry — not only for our individual firms’ short term interests.

Another potentially significant change is the hiring of Steve Renna as the new CEO of CREFC. He seems like a practical guy, and the fact that he has an office in DC suggests he may take a leadership role in the regulatory process.

I think the spread widening and the cautious attitude might be helpful to the recovery of CMBS. We are an industry that only has a six-month memory, so reminding everyone that spreads do not always tighten should be helpful in promoting the need for transparency and, most importantly, prudent and profitable deal making at appropriate risk adjusted spreads.

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www.cmbs.com

www.backshop.com

MISMO Summit and ICSC RECon convention

jimflaherty — Fri, 27 May 2011 00:24:56 +0000

I’m fresh back from a pair of industry get-togethers. C-MISMO is floundering; retail seems to be recovering.

MISMO Summit

Last week I was in Chicago at the MBA’s annual Commercial Servicing and Technology Conference, where we hosted a MISMO summit in an effort to promote the adoption of industry standards. The meeting was fairly well attended with about 40 people from several of the major servicers, lenders and service providers.

There were no “breakthroughs,” and the whole session seemed like more of an explanation why standards were not being adopted as opposed to a renewed commitment to make standard adoption a priority. More specifically:

1. Participants seemed to understand the value of standards in the abstract, but few had real-life experience with using standards to become more efficient.

2. There seemed to be more value given to the C-MISMO data dictionary than the XML schema itself, especially from the business people in the room.

3. Of the 40 or so attendees in the room, only four companies were current MISMO subscribers. No attendees that were not already MISMO subscribers offered to join MISMO or contribute additional time or funding to the standards effort.

4. The MBA and MERS signaled for the first time that if membership and funding do not improve, it will consider shutting down the C-MISMO effort.

Where do we go from here?

The summit ended with the moderators asking the question of where we go from here. After debate on whether we were really making progress, there seemed to be two choices:

1. Reorient/rebrand MISMO to focus on the common vocabulary (Logical Data Dictionary) and educate/support industry and regulators to help them implement or accept MISMO and de-emphasize XML and technology.

2. Consider putting Commercial MISMO in some type of hibernation status.

The Commercial Governance Committee has been tasked with making a recommendation on next steps. If the recommendation is to move forward, we will have to present a budget and obtain commitments from firms willing to pay subscription rates that equal the costs of running C-MISMO. While we on governance are eternally optimistic and are inclined to push ahead, it is becoming clear that, if we cannot find the financial support from the industry, the MBA is likely to pull the plug on the C-MISMO effort. Stay tuned. …

ICSC RECon convention

This week I was in Vegas for a trade show put on by the International Council of Shopping Centers (ICSC). RECon is the biggest annual conference in the real estate industry. ICSC is so big because it attracts retail property owners and all the different groups selling to these companies. Attendance was about 30,000 people with about 1,000 exhibitors including leasing brokers, tenants, lenders and service providers. Seeing the various wings of the Las Vegas Convention Center filled with 1,000 exhibitor booths was impressive.

The mood and general activity was more upbeat than the last few years, but still way off the peak. I had an interesting conversation with a person at the bar at my hotel (stayed at the Cosmopolitan which I recommend) who used to be a mortgage broker but switched to being a solar systems salesperson during the downturn. Instead of selling debt to property owners, he was now selling solar energy systems, and he was exhibiting at the show. An example of the lasting effects the financial crisis has had on individual careers and how the industry has changed. Nonetheless, the mood seemed to be more “normal” than “distressed” and the retail recovery seemed well on its way.

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www.cmbs.com

www.backshop.com

MISMO, Risk Retention and OBL

jimflaherty — Sat, 07 May 2011 05:19:41 +0000

Lots going on this week, including a MISMO Data Summit, federal risk retention proposals and the end of Osama Bin Laden.

MISMO Data Summit

Plans are full steam ahead for a C-MISMO data “Summit” May 16 at the MBA Servicing and Technology Conference in Chicago. About 75 individuals from 30 companies got personal invitations.

The Board of Governors and the MBA grouped the companies into six types: issuers, investors, rating agencies, servicers, GSEs and vendors. We split up the lists. My list consists of issuers and investors including Bank of America, Wells Fargo, JPMorgan, CWCapital, PNC, MetLife and New York Life.

The invite’s opening paragraph says:

“For the last several years, participation in, and funding for, Commercial MISMO (C-MISMO) has declined. Yet today our industry finds itself at a point where Commercial MISMO will be most needed, with the development of more standardized reporting systems and detailed regulatory oversight. Decisions need to be made regarding our industry’s belief in and support for C-MISMO. To strategically assess how C-MISMO should move forward, and to determine its direction, the Mortgage Bankers Association and MISMO’s Commercial Governance Committee would like to personally invite you to a MISMO Summit at this year’s Commercial/Multifamily Servicing and Technology Conference in Chicago.”

The Summit will either bring industry agreement on a common data standard with buy-in and commitment from the group, or it will be sparsely attended and/or bog down in debate with no clear agreement. I’ll report back after the conference on attendance and results.

The Freedom Tower!

Risk Retention

The federal regulators issued their joint proposals for risk retention a few weeks ago. They took a hard line with CMBS. While the rules do not go into effect until April 2013, and they might change after the comment period, they include three provisions that are unexpected and problematic:

Premium Capture Reserve Account – The regulators introduced the concept that issuers must not monetize and book the profits from a securitization until after all the bonds have been repaid instead of when they are issued upfront. This provision is a big change and a big deal.
Operating Advisor - The third party B Piece buyer will only satisfy the risk retention requirement if there is an “Operating Advisor” overseeing the asset management decisions of the special servicer / B Piece buyer.
Exempt Loan Test Too High – The regulators put such low LTV and high DSCR requirements that very few CMBS loans would qualify as being “exempt” from risk retention.

If the regulators take as hard a line on disclosure as they did on risk retention, adopting XML will be inevitable — after all, that’s what they intended from the beginning.

That being said, I think getting the disclosure requirements right is much more important than the risk retention rules. I would be happy if the regulators gave a bit on retention as long as they get the disclosure right. Hopefully the feds do as good a job on securitization reform as they did on taking out Osama.

OBL

I was as happy as anyone that we took out Osama Bin Laden. We were all touched by 9-11, and I chronicled my story in my first blog post.

The Navy Seal raid was amazing, and I am glad justice was delivered on the spot. I was in New York this week and went by ground zero to pay respects and see the progress of the Freedom Tower. Finally, the building is coming out of the ground.

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