CREFC Cautious
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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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.
