Busy week: Checking in

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It has been a busy week around here: ULI Conference, Leads Release, MISMO Progress, preparing for the Backshop User conference and listening to Julian Marley.


As an aside: The asset highlighted in the Asset Summary Report – CVS Holliston Mass. (PDF) is a property my brother and Dad own that has CMBS debt on it. It’s interesting seeing your own loan in the database.

ULI Conference in San Francisco

Last week we had a booth at the Urban Land Institute Conference in San Francisco. The 5,500 registrants included a wide range of equity players including developers, REITS, funds, architects and city planners. There were not as many lenders as in the past, but attendance was strong and the exhibit hall sold out.

While the attendance numbers were good, the frozen debt markets, rising cap rates, and detiorating fundamentals were affecting most people. The bright spots were 1) the few REITs that have accessed the capital markets and 2) the funds with dry powder looking to buy into the downturn. I did some promoting for transparency but spent most of my time selling Backshop, Leads and our bond tools.

Leads Release

We upgraded the CMBS Leads product by adding a new PDF report at the asset level and adding expanded data to our download features.

Here are two sample reports:

CMBS Leads report – Alaska Hotels (Excel)

Asset Summary Report – CVS Holliston Mass. (PDF)

MISMO

The MISMO rent roll and operating statement committee, which I chair, had a call this week to go over the proposed XML schema we came up with at the end of August.

It took us a bit longer than we had hoped to get the structure integrated into the core data model, but we are moving again. We have another call set up for next week to finalize the schema, then it will be ready for its the 30-day public review period. Hopefully there will be a lot more on that in the coming weeks.

Backshop User Conference


Julian Marley rocks The Independent in San Francisco.

We are having our annual user conference in New York this Friday. The last two years, we have hosted two-day conferences in San Francisco. This year, given the markets and travel budgets, we decided to have the meeting in New York instead. Our good friends at Bank of America are contributing the meeting space, and we have more than 10 clients coming in for a day of updates and priority setting.

We have traditionally had a music theme at the conference. The first year we went to see Willie Nelson at the Fillmore. Last year we saw Dark Star Orchestra at the Great American Music Hall. This year, we are going to the Metallica concert Saturday night at Madison Square Garden. We have a crew of 16 going and, as always, I am looking forward to a rocking night!

Speaking of rocking, I saw Julian Marley play last night at The Independent in San Francisco. Julian, a son of Bob Marley, is touring with his brother Stephen in support of Julian’s new album, “A Time and Place.”

It is an awesome album and a great show. If you see this show pop up in your city, consider going for great taste of some current reggae.

I’ll report in after the user conference and Metallica show with some cool pics/video.

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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

House Bill 3890

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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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Movement

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The buzz is starting on the shape government reform will take. Looks like the brunt of the regulation/changes will take place at the rating agency level through increased disclosure legislation. The start of this move was the SEC announcement that all rating agencies will get all deal info.

Two more developments between the rating agencies and the Fed have created further movement:

1. Rating Agencies Want It

I watched the rating agency testimony last week on a web cam, and it was fascinating. The heads of Moodys, S&P, Fitch, RealPoint, Rapid Ratings, the SEC and a CFA were on the panel testifying about how to reform the market.

While they all said it one way or the other, Ray McDaniel, CEO of Moodys, testified that transparency of data for all parties is the single most important thing we could do to reform structured finance. Agreed!

Check out this clip:

2. New York Fed Wants It

On October 5, the New York Fed announced they are changing two rules on how TALF works. One change makes it easier for rating agencies to do business with the Fed, with the goals of promoting competition and increasing the number of rating agencies.

The second change was more significant. The Fed said they want the same data the rating agencies get so they can make their own, independent, analysis of the collateral. They want to decide for themselves whether the collateral is good enough and meets the credit quality standards of the TALF program.

Here is the press release on the Federal Reserve site.

Here is the language:

“Starting with the November subscription, in addition to continuing to require that collateral for TALF loans receive two triple-A ratings from TALF eligible NRSROs, the Federal Reserve Bank of New York will conduct a formal risk assessment of all proposed collateral — ABS in addition to CMBS, which are already subject to a formal risk assessment. The change to the collateral review process will enhance the Federal Reserve’s ability to ensure that TALF collateral complies with its existing high standards for credit quality, transparency, and simplicity of structure.”

So, if the Fed, as an investor, is not comfortable relying on the rating agency’s analysis for its investments, then it stands to reason they would not expect other private investors to rely solely on the rating agencies. Transparency seems to be coming. …

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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

SEC Ruling a Victory for Transparency

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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

MISMO Update

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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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Geithner Proposal a Mixed Bag

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Treasury Secretary Timothy Geithner’s proposal to “fix” securitization was released last week, and it is a mixed bag for CMBS.

On the positive side, he stated the SEC should promote increased transparency for both the deals and the rating agency methodology used to rate the deals. The best line was “Investors and credit rating agencies should have access to the information necessary to assess the credit quality of the assets underlying a securitization transaction at inception and over the life of the transaction.”

Agreed!

The bad news for CMBS lies in two other proposals:

1. The issuer (or sponsor) of a securitization be forced to retain a 5 percent interest in a pool that cannot be hedged or sold.

2. Issuers cannot achieve a “gain on sale” accounting treatment until the underlying loans are paid off.

The whole point of securitization is to transfer risk. Taking both accounting and credit incentives away is troublesome and unproductive, making securitization harder, not easier. Instead, we should focus on freeing the data so investors and rating agencies know the value of the collateral. This way, we will re-establish the credibility of our asset class.

Investors are not dumb

Of course if you cannot transfer the risk because you cannot find a buyer, then you are stuck. And the only investors today are value investors who will only buy CMBS at reasonable spreads if we share our data and prove our value.

While aligning economic interest is absolutely a good idea, I would suggest this point is so fundamental it should be assumed as mandatory. If the issuer and the investor do not have aligned interests (i.e. we issue and securitize loans that aren’t actually going to pay back), we should not even consider bringing back CMBS.

W T F with 5%?

Why did Geithner come up with 5%? Why not 10%, 20%, 50%? How much equity is needed to keep all players’ interests aligned? The fact is the answer does not matter because the amount changes depending on the market. Today, you need 100% equity (or close to it). In 2007, you needed 0% (or close to it).

Standards and Transparency

While coming up with an equity/skin-in-the-game component is a fairly simple “tweak,” it does not represent the permanent reforms that are required. The keys are standards and transparency with all parties using common underwriting models.

I rant about this in one of my first blog postings which was a response to Ethan Penner’s article on this issue: Transparency vs. Skin.

The Proposal and the CMSA Response

Click here to download the Obama regulatory reform proposal.

Click here to download CMSA President Par Sargent’s response to the proposal.

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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

17 Firms call in for XML kick off – CMSA next week

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We had the kick-off call for the rent roll and operating statement standards making committee yesterday, and 17 firms called in representing CMBS issuers, banks, insurance companies, rating agencies, servicers and data providers. I was encouraged by the attendance number and the productive conversation. We made good progress through rent rolls and got started on operating statements.

The rent roll schema discussion was pretty straightforward. We decided we needed to add a few elements (payment frequency and number/type units), but everyone generally agreed the current schema is workable.

The discussion around operating statements was a bit more difficult. It centered on two issues:

1. How to identify the op statement in the header. Op statements can cover many periods (annual, quarterly, monthly), and they have different types (actual, normalized, adjusted). After 30 minutes of discussion, we pretty much agreed we would identify operating statements with three data elements: Start Date, End Date and Type, but everyone wanted to think about it some more.

2. The number of operating income/expense categories we would support. Basically two lists of NOI categories have been compiled. The first is the summary reporting categories used by the CMSA IRP: about 30 core categories in three different templates — commercial, multi family and hotels. The second is a much more detailed group that represents just about every chart of account value there is. There was general agreement we would map the detailed list of NOI categories up to the “roll up” reporting categories that represent the 30 or so CMSA core reporting categories. The servicers seem to do that now, so no reason to change.

The next call is in a few weeks. We hope to finish the discussion and get a draft schema out ASAP. Thanks to all who called in. Please call in next time if you’re interested.

CMSA Conference kicks off Monday

I am headed to New York next week for the Annual CMSA Conference. We sponsor this conference every year, and we will be doing our normal booth and suite (including our annual cocktail reception). Three of us will be pushing our asset management, origination, bond and data tools.

The Big Session will be the IRP 6 committee meeting, 1:15 to 2:15 p.m. Monday. Jim Cooke, who sits on the C-MISMO Board of Governors with me, is participating on the panel, so we know the topic of XML will be discussed and supported. The CMSA did a great job promoting this meeting, and it will be interesting to see how it plays out. I’ll report in from New York.

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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

Register for the annual CMSA convention

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Pre-registration closes Monday, June 1. Rates increase on Tuesday, June 2. Keep reading for details.

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Big Easy showed early seeds of transparency

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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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