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).
Today marks my fourth year writing this blog.
I started CMBS 2.0 to provide an insider’s perspective on how financial reform plays out in the Commercial Mortgage Backed Securities (CMBS) industry. My first post was on September 11, 2008, right before Lehman crashed, and I closely followed the passage of Dodd Frank in 2010. I assumed by now I’d be writing about how the new rules are working, but they they still haven’t been finalized.
From what I’m hearing, the risk retention rules are to be finalized in first quarter 2013, and REG AB changes should be finalized by mid 2013.
So on we go.
The launch of CMBS.com Pro has been going well. Our new commercial real estate deal management tool, which includes CMBS data, was very well received at the ICSC conference in Las Vegas. We had several people sign up on the spot, and one property owner from the Midwest stated we were his favorite product at the show. The attendance was massive at the show but the Marketplace Mall (where we were) did not get the same traffic as the Leasing Mall. Maybe next year we will change locations. Nonetheless, it was a great venue to launch the new product.
The first CMBS deals of 2012 have priced well, and interest rates being quoted by the conduit shops are now sub 5 percent for high quality CMBS loans. Investor demand has been strong enough to allow the originators to offer rates that start with a 4.
That makes CMBS more attractive vs. other loan products and supports positive momentum for a successful year. The market is on pace to reach $35 billion — and there is more and more talk of doing substantially better than that.
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.
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.
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.
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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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 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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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 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.
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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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 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.
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.
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.
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