House Bill 3890

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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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 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.

SEC Ruling a Victory for Transparency

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 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 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.

Reporting from the Dealmakers Summit

I just finished up two days attending the Dealmakers Summit sponsored by Institutional Real Estate. It was held in San Diego and featured senior players primarily from the equity side of the business — owners, pension fund advisors, brokers, and consultants.

The mood was generally pessimistic, especially after hearing from the economists (CRE fundamentals would continue to deteriorate) and the transaction brokers (sales volume down 95% from the peak). However, there were at least a few people who thought “the bottom” would hit in 2010 with transaction volumes picking up in the second half. But, most thought the real estate markets would be dead through next year, would have some activity in 2011 and a bottom being found in 2012.

Regardless of opinions on timing, everyone agreed that the recovery will not happen unless and until there is a functioning debt market. There was a lot of discussion regarding CMBS and what it would take to get the market open. A panel was dedicated to the government programs (mostly TARP, TALF and PPIP), but that panel concluded the programs have so far not been particularly beneficial to commercial real estate.

Of course, I proposed the “Transparency Solution.” I argued that if CMBS investors had access to the underlying real estate information (specifically the rent rolls), that would go a long way to reestablishing CMBS as an asset class worthy of the capital markets. At a minimum, we would attract value “real estate” investors into CMBS because they could do the real estate math themselves.

Since these were people who own or deal with hard real estate assets who would never buy an asset without analyzing a rent roll, they understood the importance of that piece of data. In fact, almost everyone I spoke with assumed that full data disclosure of rent rolls would be a reasonable condition of investors returning to CMBS.

When the conversation turned to “what does that mean,” things got more controversial. I brought up the fact that, if rent rolls were included in the IRP, then for any property that had CMBS debt, tenancy schedules would be “public” because Web sites like would have the data available for analysis.

Most reactions to that fact were negative. Some owners went as far to say that would keep them away from using CMBS debt. Others did not think it was a major issue because people in the market always end up knowing that information anyway.

We talked about using technology to try and keep a “lid” on the offensive data (hiding tenant name, for example), but everyone assumed, at least for the discussion, the data would be “wide open.”

Even with that, the consensus was 1) a functioning debt market is critical for everyone and 2) it is reasonable for CMBS investor to have access to rent roll data in a usable format. If owners were ultra sensitive and did not want to participate, they could always stay in the private debt markets.

My take away was, if the capital markets demand rent roll transparency, the equity market, for the most part, will adjust.

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Jim Flaherty is CEO of 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 Update

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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Standards (Draft)!

The MISMO rent roll and operating statement standards committee has finished the proposed schema for the two reports.

(Keep reading to download the Excel workbook.)

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IRP Article in Debtwire

A recent article published by Debtwire addresses the IRP 6 issue. It’s the first time I’ve seen anything about this in mainstream news; that’s a good sign that more people are starting to pay attention to this issue. Here is the article:

New CMSA IRP in flux; opposition from executives

by Sarika Gangar

A new version of the commercial real estate industry’s standardized reporting package has been delayed due to opposition from servicers and trustees, according to a servicer, a source familiar with the situation and a rating agency official.

The package, named the Investor Reporting Package, is produced by the Commercial Mortgage Securities Association and provides detail on bond, loan and property-level performance behind CMBS deals. Master servicers, special servicers and trustees use the IRP to report back to CMBS investors.

The CMSA is working with the Mortgage Bankers Association’s Mortgage Industry Standards Maintenance Organization on the current IRP, which is now hitting its sixth edition. The new version aims to move the reporting away from the current Excel-based model and into to an XML format, making it easier to view and transfer data files. The actual data housed in the IRP remains identical to the data within the current version.

Details behind IRP 6.0 were unveiled in January, with an ensuing comment period and a launch scheduled for June. That launch was delayed due to opposition from certain servicers and trustees, according to sources.

Master servicers and trustees are said to be wary of the conversion weighing down an already stressed system. “There is a lot of development costs and time that comes along with implementing this type of [rollout],” said one servicer. Special servicers are rumored to be against the conversion because it opens the door for additional data reporting, specifically in the form of full rent roll data. “Specials don’t want any information out there, because people could start second guessing them,” said a source familiar with situation.

Stacey Berger, executive VP of Midland Loan Services, stated that the firm is supportive of the conversion, adding that the firm has invested time, resources and intellectual property into the switch. “However, for this change to be beneficial, it must be universally implemented by both upstream deliverers and downstream recipients of the IRP,” he said, referring to servicers providing data and the group of trustees and data companies receiving the data. “Perpetuating two standards would not be prudent,” he added.

The CMSA has stated that the IRP conversion is on hold and a decision will be made by its 15-member executive committee, possibly as early as this month.

“We’re at a good point in the market to fix the [reporting] because issuers aren’t issuing much. It’s hard when new deals are coming to market, because nobody wants to change [the reporting] then,” said the rating agency executive.

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Jim Flaherty is CEO of 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.

Good progress on MISMO standards

We had a third committee call today on the MISMO Rent Roll and Operating Statement Standards Committee. We have had 15-20 people on all the calls. The first two focused on the rent roll; this one focused on operating statements. We are making good progress and have basically finished up the rent roll and operating statement header.

Operating statement detail (the NOI categories / chart of accounts) is still being debated. The issue is how much structure do we put in the XML re: assigning detailed NOI categories to roll up reporting categories and property type. We have two more calls scheduled (July 23 and August 6) to hash out the structure. We are still planning on getting the MISMO XML schema ready for approval by September.

The question is: Will anyone use it?

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Jim Flaherty is CEO of 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.

Geithner Proposal a Mixed Bag

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.”


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 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.