Rating agency reform

I attended the CREFC After-Work Seminar – SEC Disclosure Requirements this week on the new SEC rule (Rule 17g-5) that goes into effect June 2. The rule is designed to address the perceived conflict of interest that rating agencies have as a result of issuers paying for ratings.

The rule requires issuers and hired rating agencies to maintain password-protected websites to share rating information with non-hired rating agencies.

Here are the rule’s objectives:

– Increase the number of ratings for structured finance products,

– Promote issuance of unsolicited ratings and

– Reduce the ability of issuers to obtain better than warranted ratings by exerting influence over hired rating agencies.

The session explained the rule and attempted to answer questions about its implications. You can download the details (New SEC Rating Agency Reform Requirements and Impact on Structured Products Participants) and read the highlights here:

1) The rule regulates the NRSROs (nationally recognized statistical rating organizations, aka rating agencies), not the issuers. A rating agency must maintain a website that lists all the deals it is rating and provide links to the Arrangers’ websites to access the disclosed data. Non-compliance by the NRSRO could jeopardize the NRSRO designation granted by the SEC.

2) Arrangers (issuers, sponsors and underwriters) are responsible for A) posting and maintaining all data and communication they have with the hired agency and B) granting access to this data to the non-hired NRSROs.

3) The rule applies to most structured finance including CMBS, CDOs, CMOs, CLOs and even 144A private deals.

4) The non-hired NRSROs must treat the information as material non-public information. There are lots of unanswered questions about what this really means, especially in CMBS where the ratings are usually supported by loan-level reports.

5) If a non-hired NRSRO accesses more than 10 deals on an arranger’s website, it must provide ratings for at least 10 percent of the deals they access. This is meant to prevent “free” data searches.


As the three lawyers from Cadwalader explained all this to the audience, the reaction was focused primarily on implementation headaches.

I spoke up and said what a great opportunity this presents for the industry to adopt standards for both the way we communicate with the rating agencies and what data we share. I plugged MISMO and IRP 6 and reminded the crowd that the work of creating the standards is already done; we just need a coordinated adoption effort.

While there was some push-back, the compliance issues are so overwhelming that adoption of standards now seems inevitable. More than any other group I’ve discussed these issues with, I sensed this group is finally realizing that, since transparency is being mandated, standards will have to be adopted.

There’s a meeting in mid May to discuss these changes in more detail, and I am sure these issues will be front and center at the June conference. Stay tuned.

Great view

The offices of Cadwalader are downtown at One World Financial Center. The space has a great view south over New York Harbor with the Statue of Liberty and Staten Island.

World Trade Center

Out of the north side of the office, you could look straight down at Ground Zero where the World Trade Center stood. I’d heard they were making some progress on getting the building going, but I hadn’t realized steel was going up.

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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.



New clients, expanded features and other fun

We have been jammed getting two new clients live (one Backshop license and one CMBS data user) and delivering major loan servicing features for an existing client. As we finish up, we are turning our attention to doing a Backshop enterprise software delivery, launching our document service and closing more business.

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SEC acts on rating agency disclosure!

I assumed the SEC wouldn’t begin making new rules on disclosure until Congress/Obama passed the financial reform bill. Wrong. Last week, the SEC proposed a bunch of new securitization rules that represent real change and are already drawing controversy.

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Senate moves transparency front and center

This week the U.S. Senate released its version of financial reform with a bill titled “Restoring American Financial Stability Act of 2010.” Like the House bill passed last year, this bill, among other things, stresses the importance of transparency. In fact, the first line of the Senate Bill says it purpose is “To promote the financial stability of the United States by improving accountability and transparency in the financial system. …”

Download: Financial Stability Act of 2010 : Senate Reform Summary

Further than the House

The Senate bill, surprisingly, takes transparency requirements to a greater level than even the House bill. Specifically, the Senate Bill requires the SEC to form the “Investor Advisory Committee” that is responsible for protecting investors in general and the “Office of Credit Rating Agencies” that is charged with identifying and enforcing disclosure rules. The formation of these two groups clearly gives the SEC the mandate to increase disclosure and the enforcement authority to make it happen. While the House bill had a similar intent, the Senate bill provides much greater detail on what transparency means and how to enforce disclosure.

One of the biggest items in the new disclosure rules would be that rating agencies would disclose to their customers (the investors) the details of how the ratings were established. Rating agencies will need to include both the “qualitative methodology” and the “quantitative inputs” for all ratings determination. This is detailed on page 837 through 843 of the bill. The way I read it, this disclosure eliminates the “black box” ratings model and opens up the data to all investors.

For CMBS, I don’t see how inclusion of rent rolls in both new issuance and surveillance activities would not be required, as the “rent in place” is the number one “quantitative input” all CRE valuation models use.

Not all good news

While I applaud the new transparency requirements and believe those rules are critical, I am basically against almost all the rest of the reform proposals. Specifically, the Senate still has the concept of “skin in the game” where the issuer would have a retention requirement of 5 percent and the accounting concept that a securitization is not a true sale. Both these proposals, I believe, are unnecessary and could act as impediments to getting securitization going again.

Will the bill be law?

Despite that fact that the Bill is not perfect, the good outweighs the bad. The clear directive, roadmap and enforcement authority regarding transparency and disclosure is more important than the headache of retention and accounting concerns. We will have to wait and see if the Bill gets passed and how it gets reconciled with the House Bill. As the classic song goes,

I’m just a bill
Yes, I’m only a bill
And if they vote for me on Capitol Hill
Well, then I’m off to the White House
Where I’ll wait in a line
With a lot of other bills
For the president to sign
And if he signs me, then I’ll be a law.
How I hope and pray that he will,
But today I am still just a bill.

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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.



MISMO focus for 2010

We had our monthly MISMO status call yesterday and started implementing our 2010 strategic plan. The group is focused on pushing the adoption of the rent roll and operating standards to help achieve transparency and mitigate risk. We all feel this is a “make or break” year for MISMO, so we want to give a focused effort to promote adoptions of standards. Toward that end, here is what MISMO will work on this year:

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Transparency: On the agenda

The CMSA conference in Washington, DC just ended and the transparency issue was one of (if not the) dominant issues of the conference. Many attendees — as well as the guest speakers that included a senator, two congressmen, the head of the FDIC and a treasury spokesman — stressed transparency as critical to market recovery and the intent of the reform legislation.

Over 1,000 people showed up, and the parties were actually pretty good. Although we all missed South Beach, it was fun to be in DC on the one year anniversary of the inauguration and on the day that Teddy Kennedy’s seat went red.

The White House

IRP Committee
The day started with the IRP Committee meeting, where we learned about a new structure the CMSA put in place to facilitate the process of determining policy.

The idea is to create a series of forums that will give voices to the interests of the different types of CMSA members (Investors, Servicers, Portfolio Lenders, Multifamily/GSE). The CMSA stated that recommendations from the forums would influence CMSA policy.

So, if we could get a forum to conclude the IRP should change to XML, the committee could finally move ahead on the conversion. I gave the audience an update on the MISMO standards, and how they were improved from the original proposal, and then we headed off to the Investor and Servicer Forums.

Investor and Servicer Forums
The debate regarding rent roll disclosure really started in the Investor Forum and was brought to a head in the Servicers Forum.

A CMBS trader from a large money manager and I both asked about disclosing rent rolls as an essential element to our disclosure levels as an asset class. We both pointed out that without disclosing full rent rolls, CMBS was not a transparent asset class and would, therefore, suffer in the eyes of investors. The response from the panel was mostly dismissive.

But: The panel had to address the question twice, not all panel participants were 100% negative and I was not the only one asking.

There was enough coverage on this issue and enough recognition by the CMSA that this issue needs to be addressed that transparency is at least on the agenda for consideration again.

Now, let’s see if the forums work as intended and if we can get positive movement out of the CMSA.

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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.



Press coverage of MISMO rent roll and operating statements standards

The commercial real estate news service CRE News picked up the MISMO press release and wrote an article about the new rent roll and operating statement standard.

Hopefully, this will help broaden the debate and discussion about this issue at the CMSA conference in Washington DC next week.

Here is the article:

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Standards Released!

The rent roll and operating statements standards we’ve been working on for the past six months are finished. They are posted on MISMO’s Commercial Mortgage Specifications page. Now it’s time to promote the benefits of compliance to ensure widespread industry adoption.

I will be at the CMSA Conference next week in Washington, DC and the MBA CREF Conference in Las Vegas in early February drumming up support. If not now, when?

Keep reading for the MISMO press release.

Commercial MISMO Releases Standards For Rent Roll and Operating Statements

RESTON, VA, January 12, 2010 – The Mortgage Industry Standards and Maintenance Organization (MISMO) announces the release of two new commercial real estate XML standards for the exchange of financial data. The Rent Roll and Operating Statement Version 2.0.1 specifications began their 30 day IPR Disclosure period on January 6, 2010. These standards provide a normalized way for borrowers, servicers, lenders, investors, and regulators to share critical financial information on all types of commercial real estate collateral.

Currently, most participants in commercial real estate finance are unable to access critical financial data contained in rent rolls and operating statements in a timely and useable format to perform easy and accurate valuations of the underlying collateral. These new standards provide the road map to move and access this data in XML format from one system to another and from one company to another. MISMO believes adoption of these standards will serve at least two immediate needs:

Internal Risk Management: Within financial organizations, the need to report on asset valuation for all business lines has increased. For commercial real estate, the most important data elements needed to perform accurate asset valuations are found on rent rolls and operating statements. Normalizing the data structure for such critical information allows valuation models to work. These standards provide that road map.

External Reporting Transparency: Increased transparency in securitized finance is generally supported by both industry players and regulators alike. The concept that rating agencies and investors should have access to enough information to value the underlying assets in any securitization is common sense and a key component of regulatory reform that enjoys bipartisan congressional support. These standards provide a foundation for parties that are required to report to investors, rating agencies or regulators on their commercial real estate portfolios.

The Mortgage Industry Standards Maintenance Organization (MISMO), a not-for-profit subsidiary of the Mortgage Bankers Association (MBA) and managed by MERSCORP, Inc., is the leading technology standards development body for both the Residential and Commercial industry segments. MISMO promotes data consistency throughout the broader industry, reduces processing costs, increases transparency, and boosts investor confidence in mortgages as an asset class, while passing cost savings on to the consumer. More information on MISMO can be found at www.mismo.org.

Gloria Zimmer

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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.



Standards Update

The MISMO rent roll and operating statement committee which I co-chair finished its work on the XML schema today (thanks to all committee members!).

The schema we propose is capable of handling all common data templates for both Rent Rolls and Operating Statements. The schema will be made public around the first of the year for its 30 day Intellectual Property Review period and then, hopefully, be ready for finalization by the MBA CREF Conference in early February.

MISMO’s goals for 2010 include promoting the adoption of these standards as an essential part of improving risk management, investor reporting, and compliance with the new transparency requirements of the pending financial reform legislation.

Some color on the two schemas:

Rent Rolls
The biggest concept of the rent roll schema is Rent Roll Template Type. We came up with four templates that are commonly used to handle commercial properties, multi-unit properties (in both summary and detail mode), hotel properties and healthcare. The data schema will support all the essential data elements for the major property types. Specifically: retail, office, industrial, apartments, mobile homes, self storage, hotels, assisted living and skilled nursing properties are covered.

Operating Statements
The biggest concept in the Operating Statements schema is also the concept of template types. Unlike the four templates that were needed for rent rolls, we have already needed 10 templates for op statements. The goal is to have an all-encompassing list of NOI categories (the current list has 234 items) and then provide templates that can roll up by user group. Of the 10 we have already planned for, we have eight to support the CMSA’s IRP templates, and we plan to have one each for Freddie Mac and Fannie Mae. Unlike the data for rent rolls, the list of NOI categories is endless so we went with a roll up approach with easy template expansion capabilities.

I’ll post the final package on this site when it is ready.

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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.



Busy week: Checking in

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)


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.