MERS takes over management of MISMO from the MBA

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Today John Courson of the MBA held a conference call with the residential and commercial leadership of MISMO to let us know that MERS, Mortgage Electronic Registry System, has taken over management of MISMO (See news release below).

MERS was created by the industry (the MBA has an ownership stake in MERS) to facilitate the electronic exchange of mortgage rights in support of securitization. It is a registration system (think universal loan ID) so loan servicers can do their job when it comes to releasing liens or foreclosing on loans that had been securitized. MERS has had great success in the Residential MBS market, and their services seem just as applicable to the commercial side. To be honest, I have heard about them forever but, I am not an expert in loan servicing, so I’m not sure how widely they are used in Commercial (I will find out).

Is this a Big Deal? Could be.

If every CMBS loan had a universal ID, that would be a big deal. The main headache with the existing IRP data is making the relationships between the various reporting files (loan, bond, property). If we standardized the way we relate these things together, that is half the battle. IRP in XML is nice to say, but I know firsthand that the data is not there in the raw form to facilitate it. It can be figured out to be sure: Lots of people are doing it (me, Trepp, Intext), but it is a painful, manual, value-added process. If all loans had a universal numbering system so the basic relationships were electronically available, that would be ideal.

What about deals that have multiple loans and multiple properties?

In MISMO, a commercial deal is defined as having many Loans (first mortgage loan, second mortgage loan, even partnership liens) and many properties. Usually, systems from the residential side are focused on the loan level, not the deal level, so tracking multiple loans — with various liens and many pieces of collateral — within one deal is challenging. If MERS registration solves both the loan and deal relationships, that will be a Really Big Deal.

Even if a MERS registration only solved the relationship between loan and bond and property, it would still be a big deal. The majority of the 850 billion dollars in CMBS are first liens, so knowing my position in the capital stack is less important than if I’m in a lower position. So, even if MERS is only at the note level, and since I am usually in first position, it would still deliver substantial benefits by clarifying the relationship from loan to the property and bond files.

Is this a Big Deal? Could be. …

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News Release

CONTACT: Cheryl Crispen
(202) 557-2726
ccrispen@mortgagebankers.org

WASHINGTON, D.C. (February 4, 2009) The Mortgage Bankers Association (MBA) and MERSCORP® today announced the two organizations have entered into a management agreement under which MERSCORP will be responsible for managing the day to day operations of the Mortgage Industry Standards Maintenance Organization, Inc.® (MISMO). Under the management agreement, MBA retains full control of MISMO and will maintain a permanent seat on the MISMO Board of Directors.

“MBA is pleased to enter into this agreement with MERS signaling the next generation of MISMO,” said John A. Courson, president and CEO of MBA. “It has always been the intent for MBA to develop and nurture MISMO and then align with another entity to conduct day-to-day management of the company in a way that best serves the real estate finance industry. MERS, as an industry utility owned in part by MBA, provides an ideal infrastructure for MISMO and will ensure the user experience of current MISMO participants remains constant at its current high level. We are confident this agreement will result in the continued enhancement of data standards and transparency which are critical to the return of investor confidence and liquidity in our marketplace.”

“As the mortgage industry’s utility, MERS has always been a strong supporter of MISMO in the advancement of industry standards,” said R.K. Arnold, President & CEO of MERS. “We are pleased with the confidence that the MBA has shown in us by entrusting management of MISMO’s day-to-day operations to us on behalf of the real estate finance industry.

The management agreement is effective immediately. MISMO subscribers should contact Dan McLaughlin (danm@mersinc.org <mailto:danm@mersinc.org>) or Gary Vandeventer (garyv@mersinc.org <mailto:garyv@mersinc.org>) at MERS, (800) 646-6377, for assistance with any MISMO matter.</mailto:garyv@mersinc.org></mailto:danm@mersinc.org>

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The Mortgage Bankers Association (MBA) is the national association representing the real estate finance industry, an industry that employs more than 370,000 people in virtually every community in the country. Headquartered in Washington, D.C., the association works to ensure the continued strength of the nation’s residential and commercial real estate markets; to expand homeownership and extend access to affordable housing to all Americans. MBA promotes fair and ethical lending practices and fosters professional excellence among real estate finance employees through a wide range of educational programs and a variety of publications. Its membership of over 2,400 companies includes all elements of real estate finance: mortgage companies, mortgage brokers, commercial banks, thrifts, Wall Street conduits, life insurance companies and others in the mortgage lending field. For additional information, visit MBA’s Web site: www.mortgagebankers.org .

MERS is a utility launched by the mortgage banking industry to eliminate paper from the mortgage life cycle. MERS facilitates the electronic exchange of mortgage rights and supports the transition to electronic mortgages. It currently has more than 3,800 members.

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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

Notes from the CMSA Investor Conference: IRP X

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The Exposure Draft of IRP 6 (called “IRP X”) has been released.

It contains essentially the same content as IRP 5, but in XML. I applaud both the CMSA and the MBA for getting that done. It is a critical step not only in organizing the basic data, but also in starting the comment period that leads to getting the standard approved.

We will now turn to the battle of getting the rent rolls added to IRP X, but at least the clock is ticking, and it will be in XML.

Master Servicer Issue

The master servicers are most affected by IRP X. To comply with XML should be only marginally painful because the servicing systems used (Strategy and Enterprise) are more than capable of producing XML. The bigger issue will be the rent rolls, because not all master servicers have the data readily available.

Some master servicers, typically banks, already enter rent rolls into their systems. Therefore, they can deliver the XML with rent rolls for about the same cost as just the XML (and at least one stated they would support the standard). Other master servicers enter only the top three tenants and the totals (the current standard) then simply log the document in the file cabinet. Finally, there are servicers who are reluctant to release any data without being paid.

To be fair, these companies bid their servicing contracts based on top three tenants. There is an argument to be made that, if we change the standard, master servicers should be compensated for the additional disclosure. I say fine, let’s find a way to get these companies compensated — it will not cost very much — and get on with it.

The view from the 17th floor of the Shore Club in Miami. Attending these conferences is a tough job, but somebody has to do it.

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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

Notes from the CMSA Investor Conference: Investor Forum

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The much anticipated investor forum was a bit disappointing.

I agreed with almost everything they said, and I liked the fact that it was delivered with a bit of an angry edge. The problem was that the laundry list lasted the entire session, and they left no time for questions, discussion and comments.

Read more

Rent roll data: You might not want to hear it, but we all need it

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When we talk about improving “Transparency” in CMBS, what are we talking about? To me, it is the rent roll.

Read more

Four Actions to Help Fix the CMBS Industry

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The best things about conferences are the unexpected and unplanned meetings.

Last night at the CMSA/MBA Capital Markets Conference in Washington, DC, I enjoyed an experience that restores a bit of hope: a illuminating dinner with three CMBS experts, each with his own insight into saving the market.

I had dinner with:

– Toby Cobb, head of Deutsche Bank’s real estate group, on special assignment to monitor developments in Washington, DC

– Pat Sargent, a seasoned real estate and securitization lawyer with Andrews Kurth, and the incoming president of the CMSA

– Jack Toliver, head of the CMBS ratings group at rating agency DBRS

All three share a desire and passion to get the CMBS market working again, and each brought a unique prospective. After a few rounds of cocktails and some really big steaks, each person proposed the one thing they thought was most critical to the market’s recovery:

1. No Government Bailout
Toby Cobb thinks the government is doing more harm than good when it comes to CMBS.

The change in direction on TARP from buying assets, including CMBS, to investing directly in bank stock, is an example. The announcement and switch caused disruption and uncertainty that contributed to the free fall in CMBS over the past 60 days.

He thought the government could play a leadership role in helping the private sector come up with a plan, but that the economics should be left in the private sector.

2. Rule of Law
The issue that most concerns Pat Sargent is the renegotiation of contracts.

The entire economy is based on the strength and enforceability of contracts. If these contracts are changed, especially if they are changed by servicers in a self-serving way, the entire structures lose credibility.

Without structural credibility, investors will be less likely to return to CMBS.

3. First Pay Rating
Jack Toliver, a vocal critic of the lending practices of 2006–2007, thinks the SEC can provide some help to investors in Structured Products by differentiating AAA securities that are “First Pay.”

In a standard CMBS deal, the AAA class gets 100% of the payments from 0% to say 70%. That means, even if real estate values go to 50 cents on the dollar, the AAA will get all of the cash, and, therefore, recover 50 cents and only lose the next 20 cents.

In other words, the bonds get the first money out of the assets even if they do not get paid back to par. But there are also AAA rated CDOs that were the “top” pieces of B notes, that were subject to senior A notes. They achieved AAA ratings because it was thought not all B notes would default, so at least some of them would pay off and, therefore, the first bonds to receive the payments were “safe.”

But that is not the case, and these are not “First Pay” securities. They rely on an underlying senior security to pay off before the junior security receives its first dollar. The value of that security can go to zero if all the B Notes fail, where the value of a “First Pay” CMBS bond would not go to zero. That should be differentiated.

4. Transparency
And, of course, I was promoting transparency to the rent roll and standardized underwriting models (the common calculator).

All good ideas if you ask me …

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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

Mike Matheson Nominates Jim Flaherty for C-MISMO Board of Governance

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I’ve known Mike Matheson professionally for years, but I finally got an opportunity to work with him earlier this year when a common client required we produce a nightly XML export out of Backshop in the C-MISMO data standard.

Mike, who sold a technology company to Midland and has a successful consulting company, Solve Development, has probably spent more time promoting C-MISMO than just about anyone.

After “brainstorming” on how to fix the industry, we both agreed that getting better information flows is a critical component and, along with the CMSA, C-MISMO and the MBA are leaders in trying to get traction.

I am willing and anxious to join the board of C-MISMO to help get some traction in acceptance of both data and underwriting standards.

Here is Mike’s letter of recommendation:

I got to know Jim while working with a common client going live on Backshop. The client was requiring Jim to create a nightly XML feed from Backshop out to a downstream data warehouse. The client directed Jim that the data structure of this nightly XML feed needed to be MISMO compliant.

I was brought in as an advisor to assist with the structure, and we successfully completed the project in June 2008. The experience not only left me impressed with Backshop, it also became clear that Jim has a unique position and knowledge as a bridge between the business needs and the technology required to make it so. Jim is a recognized innovator in the industry, helping bringing process improvements and standardization to all his clients.

In the past eight years, Jim and his companies have developed a web based loan origination system and earned clients and adoption by leading lenders such as Bank of America, RBS Greenwich Capital, CWCapital, NATIXIS, AIG, Genworth Financial, Hypo International and others. This speaks not only of Jim’s ability to understand the industry data problems and develop solutions, but also of his ability to get others on board with implementing change. In the process he has helped to prove that data structures and commercial real estate underwriting can be standardized.

Currently, Jim and company are working with the rating agencies to use Backshop as the “calculator” to re-underwrite the loans to apply the appropriate ratings for new CMBS issuance. The plan is to have Backshop issuers disclose their underwritings to the rating agencies via an XML transfer that includes cash flows tied out to rent rolls. This disclosure is significantly greater than the current standard of a flat “data tape” excel file with underwritings delivered in non-standardized Excel models.

Also, the firm is in the process of launching three new services. First, a “CMBS investor” site is launching in January 2009 that will bring standardized underwriting tools to investors. The product is essentially Backshop with the CMSA’s IRP data loaded and updated monthly with bond pricing and cash flow analysis from a product called Conquest, which CMBS.com acquired in 2005. In addition to allowing investors to perform “top down” analysis and loss projections, users will be able to perform “bottom up” analysis starting with the rent roll.

Second, a site for mortgage bankers is launching in February where brokers can create packages for financing requests that leverage the standardized underwriting tools used by the lenders. By brokers and lenders using the same calculator, greater efficiency and transparency is achieved.

Finally, CMBS.com is launching a site for primary servicers so they can perform their reporting functions to the master servicers in a more efficient way. The goal is to standardize the format of rent rolls and operating statements so the data can more easily flow through from the primary, to the master servicers, to the trustees, and ultimately to the investors.

As head of CMBS.com, Jim has the experience in standardizing underwriting and data for all participants in the CRE finance process. He has firsthand experience with existing MISMO data standards has already implemented substantial standardization and change to many of the market participants. His current plans are to expand this standardization with investors, brokers and servicers. His expertise and experiences would be greatly beneficial to the governance, adoption and success of C-MISMO. Jim is one of very few people who are truly equipped to help lead MISMO adoption and implementation, and therefore I am nominating him for CMISMO Governance.

For more information on Jim or CMBS.com visit www.cmbs.com or his blog located at www.cmbs2point0.com

Thanks Mike. Transparent standards today!

For more information: www.mismo.org

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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

CMSA Europe Conference, Day 2: Not all negative

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On Wednesday morning, my “happy” post-election emotion was replaced with a toxic combination of hangover and jet lag. I hit snooze a bunch of times and finally made it over to the conference for the afternoon sessions.

The takeaway was not all negative. A few buyers felt pretty good about recent trades buying AAA European CMBS for 60 cents on the dollar, driving yields up to 12% or so. But there have been only a few forced sales to date, and volume is very low.

That led to an interesting panel among special / master servicers, senior bond investors, junior bond investors and lawyers about the timing of enforcing non monetary loan defaults, the fiduciary responsibilities of the servicers to maintain a “servicing standard” and the potential liability created when folks in different parts of the cap stack want different strategies.

An example:

If a borrower breached a Loan-to-Value covenant but was still paying on the debt, should the loan be called for default and the special servicer take an enforcement action and foreclose / sell the asset?

Or, since the borrower is still paying, should the servicer waive the LTV default, maybe put in a cash sweep or some other modification, but hold off on foreclosure on the hope things get better in the next year or two.

Well, if you are the senior note holder and you think things are going to get worse over the next few years, you would rather the servicer foreclose on the property immediately and get you paid back. Your thinking is, since you own the top of the capital stack (say 0 – 70% of the debt stack), even at today’s depressed process, you should get most of your money back, and you do not want to risk further deterioration in values.

The problem is the junior bond holder (who owns say 70% – 90% of the capital stack) does not want the servicer to sell now. If the asset was foreclosed and sold today, his position would definitely be wiped out. So he would rather sit tight, keep collecting payments as long as possible, and keep his fingers crossed that values recover and things turn out OK.

Who does the servicer listen to? What happens if the servicer also owns either the senior or junior piece? How is this conflict of interest addressed? They were referencing a “Servicing Standard” to dictate the decisions, but it sounds to me that the only people that win in this scenario are the lawyers. …

While the debate among the servicers and investors was definitely interesting, other main themes included:

 

  • The mood was mostly (but not entirely) negative.
  • The primary CMBS market in Europe is shut down with virtually no new issuance.
  • The secondary market was also shut down with the exceptions of a few forced sales at around 60 cents on the dollar.
  • Sellers are only selling if they have to, because they believe government asset purchase programs might pay above market for assets in the not too distant future.
  • Cap Rates are believed to be rising and commercial real estate values falling, with some predicting stabilization as early as 2009, while others are predicting 2011/2012 and beyond.
  • Standards and Transparency will be harder to achieve in Europe because of privacy concerns.

 

I did have meetings with a major bank and rating agency to push the adoption of Backshop as an underwriting standard. I also spoke to the leadership of the CMSA about the importance of standardized underwriting and trying to make that part of any TARP / Bailout program for CMBS.

So, definitely worth the trip. Being oversees for the election was way cool.

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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

MBA — Serious about reform — Not that depressed, but certainly humble

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My takeaway from this week’s conference was the Mortgage Bankers Association is absolutely serious about enacting reform at every level. The words transparency, standards and credibility were used over and over. Because of the massive losses and the government’s long-term commitment to providing financing for homes, the pressure to standardize is greater than ever.

However, the words are not new — people have been saying them for years. The question is: Can they and will they do it?

Believe it or not, the mood at the convention was not all that bad. Remember, the home loan market is still going along at about $40 billion per month. While that number is way down, it still represents a significant volume of loans. Lenders, brokers, little companies and lawyers are all still in business, just not as busy.

The $40 billion number is almost 100% government backed (Fannie, Freddie, FHA, etc). The private market has basically shut down because of a lack of trust in the loans, the rating agencies, the economy, etc. If not for the government intervention, this would have been a different conference, and the liquidity crunch would be affecting a lot more people.

The commercial MBA conference is San Diego in February, and I expect it will be much more depressing. The CMBS market is not supported by the government. So, with the exception of apartment building loans that Fannie and Freddie are doing, volume in commercial is basically $0.

I would call the mood humble but professional. The leadership knows we have issues as an industry, and that we should have done a better job over the past few years. But the attitude was, “We can — and will — do better.”

The folks who attend the industry’s annual trade show are generally professional, honest, hard-working mortgage bankers. The “slime” brokers don’t pay to attend these types of things. There was a kind of “pick yourself up and dust yourself off” attitude, but with an openness to learn some lessons.

The factors for positive change are all there:

1) A humbled market.

2) Government intervention with strings attached.

3) Honest people who want to make things better.

But change is hard, and the forces that stand to lose are powerful.

The mortgage industry need standards more than ever.

Can they do it? Will they do it?

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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

MBA Conference Draws Protesters

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I headed into San Francisco this morning for the opening session of the 95th Annual Mortgage Bankers Association Conference and was subjected to a group of protesters objecting to the bailout, foreclosures and mortgage bankers in general. Read more

The Mother of All RFPs

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Politics and the CMBS industry have become sudden (and strange) bedfellows, but recent developments may help bring open transparency to both parties.

The Department of the Treasury recently issued an RFP titled “Notice to Financial Institutions Interested in Providing Whole Loan Asset Management Services for a Portfolio of Troubles Mortgage-Related Assets.”

This is a huge opportunity.

From the RFP:

“In furtherance of its mission to ensure the safety and soundness of the U.S. financial system, and to implement the Emergency Economic Stabilization Act of 2008 (Act), the Treasury is establishing a program to purchase a variety of troubled assets. Accordingly, the Treasury seeks one or more Financial Institutions to provide asset management services for a portfolio of dollar-denominated mortgage whole loans that the Treasury will acquire from Financial Institutions.”

The submission deadline was 5 p.m. ET today, and we proposed that the government name Backshop as the CMBS reporting standard.

From our cover letter:

“While the CMBS market represents only 15% to 20% of the securitized “problem,” Backshop and CMBS.com are uniquely positioned to help solve this part of the problem. We provide the software and the data required to power a common underwriting platform that provides needed transparency into the value of the underlying assets. …”

After all, we believe the appointed asset managers should report to the DOT — and the taxpayers — in an open and transparent way.

Download our entire proposal.

Transparent CMBS Standards Today!

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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