Checking In on 9/11

Today marks the 12th year I’ve been writing this blog, which I started to provide an inside perspective on how financial reform would affect the CMBS finance markets and, more importantly, provide commentary on how it should. In my opinion, data transparency is the single most important factor in ensuring the markets stay fair, honest and healthy — and the most important tool to prevent a repeat of the 2008 financial crisis.

The reforms that were ultimately included in the 2014 Dodd-Frank Act did about everything but require full transparency. They put in things like risk retention, rating agency reform and better disclosures, but they came up short on requiring the single most important item: information on the lease payments (the rent roll).

The big-picture result of Dodd-Frank has been to effectively “deleverage” the CMBS structures. The percentage of the pool rated as junk bonds is now bigger, and the less risky AAA bonds form a smaller percentage, which creates bigger credit support levels. It also effectively pushed out the smaller, undercapitalized players because of the new capital and regulatory requirements. Most CMBS loans are now originated by the top 5 banks. All have seemingly gone well for the last several years with generally increasing originations, low loss levels, and the industry earning back its reputation.

Now we are being tested again because of the negative impact the pandemic is having on both CRE in general and CMBS specifically. In August an article in the Wall Street Journal called out that the lenders were inflating the revenue of properties to make the loans look less risky, according to an academic study and a whistleblower complaint to the SEC summarized as follows:

“A study of $650 billion of commercial mortgages originated from 2013 to 2019 found that even during normal economic times, the mortgaged properties’ net income often falls short of the amount underwritten by lenders. The underwritten amount should be a conservative estimate of how much a property earns. Instead, the actual net income trails underwritten net income by 5% or more in 28% of the loans, according to the study of nearly 40,000 loans by two finance academics at the University of Texas at Austin.”
– Wall Street Journal, August 11, 2020

Here is the full story.

The industry responded forcefully with a six-page defense of the current practices and basically said the study was flawed. They said current delinquencies are being caused by the pandemic, not bad underwriting. Download the industry response.

While I agree with the CREFC premise that underwritten income does not always match in-place income, CREFC fails to concede that, if there is a difference, investors and rating agencies deserve to know. Why is it different? Which loans? Then investors can make informed decisions.

Rent roll disclosure would accomplish this.

Today is also the 19th anniversary of 9/11, and as I finish up this post I am listening to Bruce Springsteen’s “The Rising,” top to bottom. The album always gets me and reminds me of how we only get one trip through, there are no guarantees, and you need to make the best of the ride by living an honorable life.

I remember post 9/11, the tragic events caused people to be more empathetic, respect our first responders, be unified, and were generally inspired to live honorably.

The financial crisis of 2008 did bring meaningful reform that successfully de-levered the system, making us better prepared for this Covid-induced down cycle. Professionally, my “honorable” cause is trying to make CRE finance markets better by enabling transparency at the system level and promoting the merits of opening the data to my industry peers. I’ll do my part to try and make one of the unexpected positives of Covid be triggering the final step in CMBS transparency.

I hope you all stay safe and healthy.

— — —

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 and investors.

Leaping Toward Asset Transparency

A new rent-roll reporting standard promises to improve underwriting and commercial real estate investment management

Reasonable people can disagree about whether specific provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act go too far in regulating financial institutions and instruments, but few would argue with the intent of the law as stated upfront in the 848-page document: “To promote the financial stability of the United States by improving accountability and transparency in the financial system.”

Indeed, transparency of property-level information is key to accurately value a commercial or multifamily investment throughout its lifecycle, including at the origination of a deal and during the ongoing asset management of a deal, and to gauge relative risk.

Read more

MISMO Releases Rent Roll Standards for Commercial Property

New language brings consistency, efficiency and accuracy to exchange of key property data

WASHINGTON, D.C. – December 12, 2016 – The Mortgage Industry Standards Maintenance Organization (MISMO®) has released a new proposed data standard for the exchange of rent roll information on commercial property. The proposed standard is open for public comment. The public comment period will remain open from Monday, December 12, 2016 through Friday, January 13, 2017. The proposed rent roll standard is expected to be elevated to Candidate Recommendation status shortly thereafter. The proposed standard is designed to provide a consistent set of data points and definitions to use in financing and managing commercial property assets.

Read more

New CRE standards are coming!

After blogging about MISMO and CRE data standards for years, I can finally say the new rent roll standard is ready for public comment. Thanks in large part to the efforts by Fannie Mae, we will release the MISMO XML rent roll standard at the MBA’s annual convention starting Oct. 23 in Boston.

If you’re an owner, broker, lender, appraiser, investor, agency or other CRE participant, you need to pay attention.

Read more

MISMO update May 2016

It’s been a while since I’ve posted on C-MISMO, but finally there is some real progress to report. We are releasing an updated rent roll standard for a 60-day public comment period, and Fannie Mae is going to announce its support for the standard this week in Dallas at the MBA Commercial Servicing and Technology Conference.

Read more

REG AB II Update : May 2015

It’s been about 7 months since the SEC came out with the final rules for REG AB II, and the industry response is becoming clear.

CREFC, the industry trade group that controls the IRP, has hosted several meetings with the IRP working group, and the emerging strategy for compliance with REG AB II XML reporting is disappointing.

Read more

More details on Reg AB II

It’s been about two weeks since the SEC released its final rules on disclosure requirements for CMBS, and I have some more details to report.

Read more

SEC Finalizes Reg AB Rules: open XML, no rent rolls

Today the SEC announced its final decision on Reg AB. They held firm by requiring XML data for CMBS to be posted on EDGAR. That is a big deal and a huge win for transparency: each CMBS loan will require wide open disclosure of about 160 data elements.

Read more

SEC takes a big step back on disclosure methods

“All data – especially sensitive data – wants to be free.”

On Feb. 25 the SEC reopened the comment period for REG AB II, with focus on the method used to disclose asset level data.

The 19-page memorandum (download the PDF here) opens with:

“This memorandum describes a potential approach for disclosure of asset-level information to investors and potential investors in asset-backed securities taking into account the potential sensitivity of certain asset-level information. In particular, instead of filing and making publicly available certain types of asset-level information on EDGAR as described in the proposal by the Securities and Exchange Commission for enhanced regulation of ABS offerings in 2010, this approach would require issuers to make asset-level information available to investors and potential investors through an issuer’s Web site which would enable issuers to address privacy concerns associated with such disclosures, including through restricting access to potentially sensitive information.”

Read more

Reg AB II is not almost here

The SEC pulled Reg AB II rule-making from the Feb. 5 agenda.

So nothing happened. There’s no word on why it was pulled or when we will hear back.