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.
— — —
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’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.
— — —
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.
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.
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.
The Freedom Tower!
— — —
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.
CREFC Cautious
/0 Comments/in Industry news, Industry standards /by jimflahertyI 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.
— — —
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
MISMO Summit and ICSC RECon convention
/0 Comments/in Uncategorized /by jimflahertyI’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.
— — —
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
MISMO, Risk Retention and OBL
/0 Comments/in Industry news /by jimflahertyLots 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.
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:
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.
The Freedom Tower!
— — —
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