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
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.
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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 and investors.
In the 20 years since we founded Backshop, we have created an all-in-one CRE software tool that services all aspects of the debt business.
Our capabilities now include:
- Deal Origination, Asset Management, Master Servicing, Special Servicing
- Mezzanine Lending with Fund and CLO Reporting
- CMBS Origination, Bond Analytics and IRP data via API
- Workflows, Approvals, Dashboards, and Document eSigning/Storage
- Direct Cap, DCF, and Sources & Uses models
- Deal sharing privately online and publicly via our open API
“We are proud of the constant improvements we’ve been making to our software,” says Backshop founder and CEO Jim Flaherty. “Our system makes every aspect of CRE deal origination, management and servicing simpler, easier and more profitable. Try our demo — it’s very convincing.”
To learn more, please check out www.backshop.com, email me at email@example.com or call me at 415.576.8008.
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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 and investors.
CMBS.com celebrates great achievement in the Real Estate Tech Awards (#RETAS)
New York, NY (September 5, 2019) — CMBS.com, CRE Software and CMBS Data for Property Owners and Professionals, is pleased to announce that they are a Sixth Annual Real Estate Tech Awards (#RETAS) winner in the Information & Intelligence category presented by CREtech, the largest event, data and content platform in the commercial real estate tech industry.
Sponsored by JLL Spark, the Real Estate Tech Awards (#RETAS) are the leading international award honoring excellence in commercial real estate tech. The awards recognize the most cutting-edge companies who have played an integral role in advancing tech in the industry throughout the year. Backed by the leading VCs, angel investors, corporate investors and thought leaders in the commercial real estate tech industry, the awards were open to startups or technology companies servicing the industry.
CMBS.com was carefully selected as a winner by the #RETAS elite panel of judges, including the leading VC’s, Angel Investors, and Corporate Investors and Thought Leaders in the commercial real estate tech industry.
CMBS.com provides full-stack deal modeling and CRM for property owners and professionals. Driven by the same engine as Backshop enterprise software, CMBS.com is available on a monthly or yearly subscription.
“We appreciate CREtech’s recognition of our platform by selecting us a RETAS winner,” said CMBS.com founder and CEO Jim Flaherty. “After spending 15 years developing our platform with leading CRE enterprises, we look forward to bringing the same efficiencies to CRE professionals and property owners, especially owners who have a CMBS loan.”
For more information about the Real Estate Tech Awards, click here.
Backshop and CMBS.com have been in business since 2000 and have become a premier commercial real estate software and data company.
Backshop enterprise software facilitates online life of the deal management and is used by all types of originators and asset managers including private equity funds, banks, insurance companies, REITS and CMBS players.
CMBS.com retail software is used by brokers, owners and other commercial real estate professionals to find, value and transact CRE deals resulting in smarter and smoother online deal making.
Our major “break-through” is providing web-based analytical tools that underwriters use to run property, debt and equity cash flows for all different types of commercial real estate properties.
CMBS.com and Backshop are based in beautiful Sausalito, CA.
CREtech is the leading media and events company servicing the greater real estate and technology community. Our mission at CREtech is to connect the real estate and tech sector by hosting engaging conferences, publishing research, and content.
CREtech is owned and operated by The News Funnel, the leading content, connectivity and event platform devoted to the commercial real estate industry.
To learn more about becoming a sponsor, a list of upcoming events and other exciting news, please click here or email firstname.lastname@example.org.
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.
With the launch of our new Professional software, we’re making the power of our Backshop enterprise CRE platform available to individuals and small groups.
I’m leaving Miami after attending the annual CREFC Investor Conference. The conference, now in its 25th year, is usually the best place to find out what people are thinking and get a prediction for the year. We had great weather, and a friend of mine hosted me on a nice-sized boat to cruise around Miami Bay — making the trip that much nicer.
In 2018 we significantly improved our Backshop commercial real estate software. Here are some highlights:
Last week we spread the word and met some new people at #CREtech in Los Angeles. While we are well known in CRE debt circles, we are not yet well known on the equity side of the business — and these events are attended by equity players.
We’re proud to announce three new enhancements to your CMBS.com account.
I always pause to remember and honor the victims of 9/11, and I try to reflect and celebrate the spirit of camaraderie and selflessness that grew in the country after the attacks.
I’ll be posting later in the week from Los Angeles, where we’ll be exhibiting at the CREtech conference. But for now, in the spirit of post 9/11 unity, check out what Bob Weir said on Mount Tamalpais this weekend about not letting your love fade away.
We’re excited to announce our first college securitization analysis contest. Model your chosen securitization using our data and tools — and win $2,500.
I usually talk about CRE issues here, but I have a 4th of July story that’s too good not to share.
The release of our Marketplace is a huge step in completing our vision to bring commercial real estate online. Model and market your deals using the same data backbone the big enterprises use — with the convenience of the Web and the confidence of standardized data.
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.
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.
(This was originally posted Sept. 11, 2008)
It is September 11, 2008 and I have started preparing content for my soon-to-be released-blog, CMBS 2.0. The history of the company is deeply connected to September 11, 2001 and what better day than the 7-year anniversary of the attacks to chronicle that history.
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.
For years I have been talking and blogging about the importance of transparency, standardization and XML in the CRE market. Well, I decided it was time to be more proactive in making these concepts a reality by creating inexpensive tools for small CRE operations and providing free tools for everyone who wants to experience the benefits of transparency.
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.
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.
Today is the 6th anniversary of this blog, which I write to follow the regulatory response to the financial crisis and how the implementation of the Dodd Frank law affects the CMBS market.
If you are a follower, you know I believe the regulators’ primary role should be to require transparency, and I advocate that position. This blog and my advocacy for transparency in the CMBS market is in part inspired by the events of 9/11/01.
Check out my very first post that gives that story:
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.
“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.”
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.
The SEC announced that on Feb. 5 they will propose final changes to loan level data disclosures for all asset backed securities including CMBS. This rule, known as Reg AB II, is an update to the original Reg AB that governed securitization rules during the financial crisis.
The America’s Cup recently finished here in San Francisco, and the event really delivered.
It’s been a housekeeping month with MISMO as we get ready to re-introduce and formally approve the rent roll and operating statement standards.
After more than two years of silence, federal regulators have begun issuing the final rules for securitization reform called for under Dodd Frank. This week, they issued the rules on risk retention.
More than 1,000 people attended the Commercial Real Estate Finance Council’s annual conference two weeks ago. While the mood was mostly upbeat, signs indicate not all is perfect in the market.
I attended two MISMO meetings in the last few weeks, and we are making progress.
I just got back from San Diego where I attended the MBA CREF/Multifamily Housing Convention & Expo along with about 2,600 other people. The mood was as optimistic as I have seen since the crash. Brokers have deals that need financing, and lenders have money to lend at historically low rates. With these perfect conditions, if you have a good deal, it is a great time to be a borrower.
CREFC is cautious but upbeat, the IRP Committee wants to skip IRP 6, and the Regulatory Committee is moving toward smart compromise.
The good times are back in the CMBS market with the fall deals pricing well and being over-subscribed. Spreads are so tight that top quality assets are getting rates of less than 4% and almost everyone is predicting growth going forward. The 2012 year-end volume is predicted to be about $40-45 billion and some people have predicted $60 billion next year. Of course everyone knows that macro events can change the market dynamic very quickly, but at least for now the industry is feeling very positive.
By Matt Robinson
MISMO revitalized its Government Forum to better share and exchange information between regulators, other government agencies and the mortgage industry about the benefits of broader adoption of MISMO data standards.
Check out the full story at www.mortgagebankers.org
I attended a dinner last week with the joint leadership of the Mortgage Industry Standards Maintenance Organization (MISMO). Attendees came from the residential mortgage business, the commercial mortgage business and the Mortgage Bankers Association (MBA, which owns and manages MISMO). I was invited because I serve as co-chair of the board for the Commercial Mortgage Industry Standards Maintenance Organization (known as cMISMO).
Today marks my fourth year writing this blog.
I started CMBS 2.0 to provide an insider’s perspective on how financial reform plays out in the Commercial Mortgage Backed Securities (CMBS) industry. My first post was on September 11, 2008, right before Lehman crashed, and I closely followed the passage of Dodd Frank in 2010. I assumed by now I’d be writing about how the new rules are working, but they they still haven’t been finalized.
From what I’m hearing, the risk retention rules are to be finalized in first quarter 2013, and REG AB changes should be finalized by mid 2013.
So on we go.
The big annual CMBS conference was held last week in Washington, DC — and the mood was cautious.
The launch of CMBS.com Pro has been going well. Our new commercial real estate deal management tool, which includes CMBS data, was very well received at the ICSC conference in Las Vegas. We had several people sign up on the spot, and one property owner from the Midwest stated we were his favorite product at the show. The attendance was massive at the show but the Marketplace Mall (where we were) did not get the same traffic as the Leasing Mall. Maybe next year we will change locations. Nonetheless, it was a great venue to launch the new product.
Sausalito, CA (May 17, 2012) – A CMBS.com Pro account brings the power of Web-based enterprise software and data to all commercial real estate professionals — at prices as low as $20 per month, without the hassles of spreadsheets, desktop software or expensive data services.
CMBS.com Pro comes from the same team that revolutionized the commercial real estate lending industry with Backshop enterprise software. Backshop enables major players to run their entire CRE businesses in a holistic, flexible and secure Web-based environment by integrating direct cap and DCF lease-by-lease underwriting tools into a pipeline management and report writing application.
CMBS.com Pro is powered by Backshop and offers three packages to serve all commercial real estate players. Services range from $20 per month to $80 per month and deliver powerful capabilities including:
- Never again rely on spreadsheets and other desktop software.
- Access CMBS data at never-before-seen prices.
- Manage your deal pipeline and maximize productivity.
- Value collateral using direct capitalization and discounted cash flow methods.
- Model debt and equity returns.
- Compare your deal to properties that have CMBS debt.
- Quickly write and publish reports.
- Store and manage documents and contacts easily and securely.
- Standardize your deals in the industry-accepted format.
- Serve up to 10 users at any of your locations.
Bringing power to everyone
“We are excited to bring CMBS.com Pro to the commercial real estate community at large,” said CMBS.com and Backshop CEO Jim Flaherty. “The existing deal modeling tools and data services available to the small companies and individual users are based on old technology and priced to support old business models. Having solved these same problems for enterprise clients for years, we are proud to offer commercial real estate players of all types and sizes the same power used by the big guys at never-before-seen pricing.”
Flaherty says a CMBS.com Pro account is perfect for a wide range of CRE players:
- CRE professionals who need a pipeline/document system or work with any types of deals, debt or equity
- Owners, brokers and appraisers who need to model and present valuation scenarios or want info on CMBS comps
- Existing CMBS borrowers who need to manage reporting or want loan comps for their CMBS debt
- Anyone who currently uses Excel or Argus™ to model deals. CMBS.com delivers more power, costs less and eliminates the hassles of spreadsheets and desktop software.
To learn more about a CMBS.com Pro account, visit http://www.CMBS.com
The first CMBS deals of 2012 have priced well, and interest rates being quoted by the conduit shops are now sub 5 percent for high quality CMBS loans. Investor demand has been strong enough to allow the originators to offer rates that start with a 4.
That makes CMBS more attractive vs. other loan products and supports positive momentum for a successful year. The market is on pace to reach $35 billion — and there is more and more talk of doing substantially better than that.
The annual CREFC conference was last week in Miami and, while attendance was slightly up, the mood was way worse than last year. 2011 started great (with momentum from a strong second half of 2010), but the summer spread widening caused losses and basically shut down the second half of 2011.
Going into 2012, there is very little momentum. Originations are starting at a standstill as opposed to a running start. However, it was still a fun few days, and the return to Miami Beach from Washington, DC was a welcomed change.
The Mortgage Bankers Association has announced it will take back management of MISMO from MERS Corp effective December 1, 2011.
MISMO has always been a wholly owned, not-for-profit subsidiary of the MBA but, back in February 2009 during the depths of the financial crisis, the MBA transferred management of MISMO to MERS as a cost-cutting effort.
MERS has successfully managed MISMO, especially as it relates to adoption in the residential mortgage world. Now the MBA wants management back.
According to the MBA, the decision to take back MISMO management was driven largely by the success of MISMO in the residential business and the belief that MISMO standards will (or at least could) form the foundation of the anticipated new regulatory reporting requirements. Since the MBA has a strong government lobbying group, it felt it could do a better job convincing regulators to adopt MISMO standards, as opposed to having the government create new standards.
David Stevens, CEO of the MBA, stated in the press release (download press release here) that:
“Due to changes in the regulatory environment over the last two years, the benefit of implementing data standards across the real estate finance industry has never been greater. Significant new reporting requirements highlight the need for a common vocabulary and data exchange mechanism. The continued enhancement of data standards and transparency are critical to the return of investor confidence and liquidity in our marketplace. MBA will continue to encourage regulators to adopt MISMO standards for regulatory reporting.”
The move suggests the MBA is betting regulators will demand XML reporting — and they want to strongly influence how this is done. If the MBA really throws its full support behind MISMO adoption, and the regulators embrace those standards, the bet may pay off.
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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.
Every year on September 11, I join most people in the nation and reflect on the terror attacks of that day. I was in New York Tuesday, Sept. 11, 2011 — and I witnessed the destruction firsthand. I was blessed that the meeting I had scheduled for 8:30 a.m. in Tower One at the Windows on the World restaurant, where no one survived, was changed to a 10:30 a.m. meeting in Suite 2243. Of course, that meeting never happened.
This year, I spent 9/11 at home with my family, and we spent most of the day watching all the remembrance shows. The 10th anniversary coverage was nonstop. I let my two kids (12 and 10) watch as much as they wanted, and they took me up on it.
We shared the day asking some pretty deep questions and talking about the important things in life. The stories that I most related to were the ones where the person survived through random luck.
There was the Boston flight attendant who was left off one of the hijacked planes because of a last minute scheduling mix up. A group of fire fighters was in a tower when it collapsed but survived because the stairwell they were in somehow didn’t get crushed. And countless random people like me who contemplated meetings or trips that would have put them directly in harm’s way and for whatever reason the plans changed. Why?
One World Trade Center
The new New York skyline.
I traveled to New York on Monday the 12th and had a chance to check on the construction progress of One World Trade Center. I couldn’t get close to the memorial because reservations are booked months ahead. But, the office building is huge and is already starting to dominate the skyline. It will be nice having the tallest building in the United States back in New York.
Wednesday night the 14th, Metallica played at Yankee Stadium as part of a heavy metal show featuring the “Big 4” — An all day festival with sets by Slayer, Mega Death and Anthrax. with Metallica headlining the last set.
Sold out Yankee Stadium.
Lars Ulrich (the drummer who was great on Howard Stern this week if you heard it) is a friend from Marin, and he set me up with the whole VIP package (as usual – thanks Lars!).
We watched the show from all sorts of different angles: from Luxury Suite 1, from front row seats in section 29, and from the front of the floor next to the stage. They were all great, but my favorite place was the sound booth. It was set about 150 feet back from the center of the stage in an elevated, tented, fenced off area. They set up some seats behind the technicians where the friends of the band could hang and watch the show. The computers and screens looked like a space ship and it was cool to hear, feel and “see” the music.
As always, an epic show with an unbelievable set list and a crowd full of energy. One of the lessons of 9/11 was you only go around once, and the trip may be shorter than you like, so you better rock!
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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.
The CMBS deal recently priced by Deutsche Bank and UBS was the first deal since the market crash to include publicly registered bonds (all other post crash securitizations issued private bonds using the 144A Rule).
This is a big deal. Most people agree that for the CMBS market to truly recover, we have to issue public bonds — because so many potential investors are limited to only buying publically registered bonds.
The Deutsche-UBS deal issued public bonds for the top 70% of the deal and private 144A bonds for the bottom 30%. While the deal reportedly found good demand for both the public and private bonds, the structure of the deal highlighted the fact asset-level disclosures were different for the public bonds versus the private bonds.
Since the crash and because all deals were 144A, the investors have been allowed to see and review sufficient asset level data to re-underwrite the underlying loans. This data has included appraisals, rent rolls, historical financial information, and issuers’ underwriting models. However, since the investors were typically operating under a confidentiality provision that is typical in private deals, the issuers were not worried about disclosing the information and conducting specific Q&A sessions with potential investors to answer asset-specific questions.
Issuing public bonds carries a much higher liability standard for issuers when it comes to disclosures. Information must be disclosed uniformly to all investors at the same time, and there is no ability for one investor to learn more about the assets than other investors. Also, if any information the issuer supplies to investors in a public deal turns out to be wrong or misleading, even if the information came from sources other than the issuer, the issuer can be held liable.
Since the Deutsche–UBS deal had both public and private bonds, the question came up whether an investor could buy both the public and private bonds. The answer was no. The reason is the investor who bought the 144A private bonds would have had more access to deal information than the public bond buyers. The concern is they could “use” that private 144A information to make a better decision on the public bonds. Since other investors who were buying only public bonds could not see the 144A information, that information advantage is illegal and is effectively insider trading.
Presumably this did not occur on the subject deal, and it is up to the investors and the issuers to police themselves to make sure the rules are followed. However, with this potentially serious conflict relating to disclosures, it seems like the structure used in the Deutsche–UBS should be improved on. Since at least some investors are demanding full disclosure, and we need the investor depth that the public markets can provide, something has to give.
Hopefully, the new Reg AB II rules that the SEC is working on will require the right disclosures for investors of all bonds but also protect the issuers against lawsuits regarding unreasonable disclosure liability. Also, there should be a few more public deals this year, so it will be interesting to see how other issuers address this potential conflict.
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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.
The SEC recently “re-proposed” for public comment proposed new rules for asset backed securitization eligibility that has come to be known as Reg AB II. These proposed rules suggest changes to the current securitization regulations and cover multiple reforms on everything from asset-level disclosures on both public and private deals, to the role of the rating agencies, to adding a risk retention requirement, and several other steps that would be required for issuers to sell asset backed securities (including CMBS).
The SEC initially proposed these changes back in April 2010. The two major trade groups (the MBA and CREFC) spent the summer of 2010 preparing a regulatory response that was submitted on August 2, 2010.
Since that time, the SEC has stayed basically silent on this issue. The only reports I heard were they wanted to wait until after the risk retention rules are finalized to implement the rest of the securitization changes. In the “re-proposal” the SEC made it clear it was sticking with asset-level disclosures, but they also stated no final decision has been made regarding the specific data elements that will be disclosed.
Responses to the “re-proposed” rules are due to the SEC by October 4, 2011. Both the MBA and CREFC plan to submit responses. However, since the “re-proposal” does not specifically ask many new questions regarding CMBS, both trade groups are basically just re-submitting what they stated last August.
It looks like the risk retention issues will be finalized this fall, and the SEC wants to be ready to release the remaining securitization changes shortly thereafter. The fact that they have “re-proposed” their rules suggests that we may finally get clarity on the SEC’s vision of CMBS 2.0.
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The leadership at C-MISMO (which I am a part of) has been trying to decide the next steps to promote standards adoption. Toward that end, we hosted a “MISMO Summit” in May to seek support. At the meeting, it was clear a group of people wanted to put the entire effort into a hibernation mode.
These people argue C-MISMO should be shut down because there is no interest in implementing common, industry-wide standards. Most of the existing industry players (especially mortgage bankers) are satisfied with the status quo. I’ve known they don’t want standardization, but I was surprised when they actually tried to kill it.
In late June there were both formal and informal efforts by certain members of the MBA to kill C-MISMO by shutting it down. A proposal letter was drafted and circulated through the MBA that stated “it is not a good use of resources at this time to continue to create new standards.” The letter recommended “the development of new standards by Commercial MISMO be halted.” The effort to kill C-MISMO was pursued all the way to the Board of Directors of the MBA, where it was formally discussed.
Fortunately, the recommendation to hibernate C-MISMO was rejected by MBA leadership. We have been given the green light to keep going and, from what I understand, the firms pushing for the C-MISMO shut-down have backed down.
When the governance of C-MISMO found out about the proposal to kill our efforts, we initially laughed because we felt like we were being fired from volunteer jobs. But then we started to get annoyed. It is offensive that people would actively oppose open standards. So instead of shutting down shop, we are going on the offensive.
Yesterday, C-MISMO leadership voted to create a new standard we are calling the Origination Standard. This data standard will contain all the information needed to re-underwrite and make a commercial real estate loan. We are purposefully focused on the front end data package needed to make a loan versus the back end investor reporting package. While the goal is big, the existing C-MISMO data schema is complete enough that this should be a manageable effort. We are going to get started in September.
We also agreed to create a GSE MISMO Adoption Task Force, and we are going to pursue a Rating Agency Data Standard.
So much for going into hibernation.
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I attended the CREFC Annual Conference last week in New York, which was also attended by about 1,000 people representing all the different segments of the CMBS industry (Issuers, Investors, Servicers, and Professionals).
I would describe the mood as cautious due to recent spread widening, a perception that CMBS underwriting standards have already deteriorated and a widespread belief that the “reforms” implemented for CMBS 2.0 don’t amount to much.
What struck me most during the conference was the growing number of people calling for transparency. While not a majority yet, I would characterize the movement as a vocal minority (as opposed to a few individuals just last year) evidenced by:
1) Investor Demands
All the securitizations that have been done since the crash have been fully transparent on the initial loan level disclosures to the investors (Annex A data). These disclosures have included rent rolls, issuer underwriting models and appraisals. The investors have gotten used to this level of disclosure. Now they demand it.
The problem is all the recent securitizations have been private deals done under SEC Rule 144a, not publicly registered bonds. Since the deals were private, the issuers have been willing to share the information through password-protected Web sites, but the issuers are not yet willing to disclose the same level of data for public deals.
Most folks believe we have to get back to public deals for CMBS to truly recover, but when we asked investors if they are willing to trade public registration for the increased data they would receive up front, they all said no. They would live with the restrictions of 144A Bonds before they would go back to the old, insufficient upfront data disclosures. The folks at CRE Direct wrote a great article on this topic if you are interested.
2) IRP Committee
Since the CREFC put a stop to any changes to the IRP in 2007, there has been a lot of talk about the industry increasing disclosures on its own, but there has been very limited action.
This year hopefully signaled the start of CREFC allowing additional fields to be disclosed in the IRP. The IRP committee stated they would be forming work groups to recommend additional disclosures. While I am pessimistic that true disclosure will actually happen through this effort (I believe regulatory action is the only thing that will work), at least there is a committee being formed to consider new additions.
The best line came when an IRP committee member (not me) said something like “the industry will lose the support of the regulators if we do not show progress in making the IRP dynamic. The fact that the IRP has not changed much in years does not support the statements that CMBS has a dynamic and complete set of disclosures already in place.” Well said.
3) Regulatory Reform
While most of the discussion on regulatory reform was based on risk retention and the roll of the operating advisor, I heard more than one person state risk retention was a side show compared to the upcoming Reg AB changes that will determine the level and format of the disclosures that will be required for public bonds (aka Annex A and IRP in CMBS and Schedule L and LD in Reg AB). If the regulators get it right, the required transparency will be more meaningful than risk retention.
4) New CREFC Leadership
Every year the trade group gets a new president. This year the job goes to Jack Cohen, a successful, long-time industry player from Chicago who made his money in the mortgage banking business. He has a different perspective than most, and his acceptance speech during the conference suggested he believes all industry participants must cooperate at an increased level for the good of the whole industry — not only for our individual firms’ short term interests.
Another potentially significant change is the hiring of Steve Renna as the new CEO of CREFC. He seems like a practical guy, and the fact that he has an office in DC suggests he may take a leadership role in the regulatory process.
I think the spread widening and the cautious attitude might be helpful to the recovery of CMBS. We are an industry that only has a six-month memory, so reminding everyone that spreads do not always tighten should be helpful in promoting the need for transparency and, most importantly, prudent and profitable deal making at appropriate risk adjusted spreads.
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I’m fresh back from a pair of industry get-togethers. C-MISMO is floundering; retail seems to be recovering.
Last week I was in Chicago at the MBA’s annual Commercial Servicing and Technology Conference, where we hosted a MISMO summit in an effort to promote the adoption of industry standards. The meeting was fairly well attended with about 40 people from several of the major servicers, lenders and service providers.
There were no “breakthroughs,” and the whole session seemed like more of an explanation why standards were not being adopted as opposed to a renewed commitment to make standard adoption a priority. More specifically:
1. Participants seemed to understand the value of standards in the abstract, but few had real-life experience with using standards to become more efficient.
2. There seemed to be more value given to the C-MISMO data dictionary than the XML schema itself, especially from the business people in the room.
3. Of the 40 or so attendees in the room, only four companies were current MISMO subscribers. No attendees that were not already MISMO subscribers offered to join MISMO or contribute additional time or funding to the standards effort.
4. The MBA and MERS signaled for the first time that if membership and funding do not improve, it will consider shutting down the C-MISMO effort.
Where do we go from here?
The summit ended with the moderators asking the question of where we go from here. After debate on whether we were really making progress, there seemed to be two choices:
1. Reorient/rebrand MISMO to focus on the common vocabulary (Logical Data Dictionary) and educate/support industry and regulators to help them implement or accept MISMO and de-emphasize XML and technology.
2. Consider putting Commercial MISMO in some type of hibernation status.
The Commercial Governance Committee has been tasked with making a recommendation on next steps. If the recommendation is to move forward, we will have to present a budget and obtain commitments from firms willing to pay subscription rates that equal the costs of running C-MISMO. While we on governance are eternally optimistic and are inclined to push ahead, it is becoming clear that, if we cannot find the financial support from the industry, the MBA is likely to pull the plug on the C-MISMO effort. Stay tuned. …
ICSC RECon convention
This week I was in Vegas for a trade show put on by the International Council of Shopping Centers (ICSC). RECon is the biggest annual conference in the real estate industry. ICSC is so big because it attracts retail property owners and all the different groups selling to these companies. Attendance was about 30,000 people with about 1,000 exhibitors including leasing brokers, tenants, lenders and service providers. Seeing the various wings of the Las Vegas Convention Center filled with 1,000 exhibitor booths was impressive.
The mood and general activity was more upbeat than the last few years, but still way off the peak. I had an interesting conversation with a person at the bar at my hotel (stayed at the Cosmopolitan which I recommend) who used to be a mortgage broker but switched to being a solar systems salesperson during the downturn. Instead of selling debt to property owners, he was now selling solar energy systems, and he was exhibiting at the show. An example of the lasting effects the financial crisis has had on individual careers and how the industry has changed. Nonetheless, the mood seemed to be more “normal” than “distressed” and the retail recovery seemed well on its way.
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Lots going on this week, including a MISMO Data Summit, federal risk retention proposals and the end of Osama Bin Laden.
MISMO Data Summit
Plans are full steam ahead for a C-MISMO data “Summit” May 16 at the MBA Servicing and Technology Conference in Chicago. About 75 individuals from 30 companies got personal invitations.
The Board of Governors and the MBA grouped the companies into six types: issuers, investors, rating agencies, servicers, GSEs and vendors. We split up the lists. My list consists of issuers and investors including Bank of America, Wells Fargo, JPMorgan, CWCapital, PNC, MetLife and New York Life.
The invite’s opening paragraph says:
“For the last several years, participation in, and funding for, Commercial MISMO (C-MISMO) has declined. Yet today our industry finds itself at a point where Commercial MISMO will be most needed, with the development of more standardized reporting systems and detailed regulatory oversight. Decisions need to be made regarding our industry’s belief in and support for C-MISMO. To strategically assess how C-MISMO should move forward, and to determine its direction, the Mortgage Bankers Association and MISMO’s Commercial Governance Committee would like to personally invite you to a MISMO Summit at this year’s Commercial/Multifamily Servicing and Technology Conference in Chicago.”
The Summit will either bring industry agreement on a common data standard with buy-in and commitment from the group, or it will be sparsely attended and/or bog down in debate with no clear agreement. I’ll report back after the conference on attendance and results.
The federal regulators issued their joint proposals for risk retention a few weeks ago. They took a hard line with CMBS. While the rules do not go into effect until April 2013, and they might change after the comment period, they include three provisions that are unexpected and problematic:
- Premium Capture Reserve Account – The regulators introduced the concept that issuers must not monetize and book the profits from a securitization until after all the bonds have been repaid instead of when they are issued upfront. This provision is a big change and a big deal.
- Operating Advisor – The third party B Piece buyer will only satisfy the risk retention requirement if there is an “Operating Advisor” overseeing the asset management decisions of the special servicer / B Piece buyer.
- Exempt Loan Test Too High – The regulators put such low LTV and high DSCR requirements that very few CMBS loans would qualify as being “exempt” from risk retention.
If the regulators take as hard a line on disclosure as they did on risk retention, adopting XML will be inevitable — after all, that’s what they intended from the beginning.
That being said, I think getting the disclosure requirements right is much more important than the risk retention rules. I would be happy if the regulators gave a bit on retention as long as they get the disclosure right. Hopefully the feds do as good a job on securitization reform as they did on taking out Osama.
I was as happy as anyone that we took out Osama Bin Laden. We were all touched by 9-11, and I chronicled my story in my first blog post.
The Navy Seal raid was amazing, and I am glad justice was delivered on the spot. I was in New York this week and went by ground zero to pay respects and see the progress of the Freedom Tower. Finally, the building is coming out of the ground.
The Freedom Tower!
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The industry trade group that controls the reporting standards for CMBS reporting, the CRE Finance Council, released the consensus version of the new reporting requirements for CMBS 2.0. The trade group spent over a year with investors, issuers and servicers trying to reach consensus on best practices and disclosure levels.
Standardized Annex A
The biggest part of the release is standardization of investor disclosures when initially selling CMBS bonds. In the past, each issuer would define what they would disclose in the initial prospectus, with the actual data fields being defined in Annex A to the prospectus. While there were plenty of similarities in the Annex A disclosures from one issuer to the next, they were not standardized. The new disclosures (see attached) made good progress on standardizing and requiring data disclosure related to:
1) The data needed to model the debt both within and outside the trust (the entire capital stack)
2) More details on historical operating statements (income and expenses)
3) Better data on escrows and reserves
Download pdf: CREFC Standardized Annex A – December 2010
CREFC also addressed standardization of the “typical” Reps and Warranties issuers make to bond investors, as well as the repurchase language/process the parties go through if there is a breach claim. Definitely an important step.
Effort Falls Short
In my view, despite the progress, the consensus disclosure standard falls short, specifically as it relates to disclosing the in place rent on the collateral (full rent rolls). Instead of agreeing to disclose this critical data, the “consensus” was to add information on two additional tenants so investors will now get information on the top 5 tenants in each property instead of just the top 3.
Instead of complying with Dodd-Frank and disclosing enough information to allow the investors/rating agencies to recreate their own underwriting models by disclosing the full rent roll, CREFC issued a 33-page “Principals Based Underwriting Template” in an effort to describe a “good” underwriting.
With all due respect, people in the business know how to underwrite, and a 33 page manual is a complete waste. Instead, the counterparties to the securitizations need the data to recreate an underwriting and make their own conclusions. Having an issuer state they “followed the manual” is nowhere near the same as disclosing the data to allow all parties to reach their own conclusions. The investors agreed and initially asked for full rent rolls but were not able to reach “consensus” on this issue so, instead, we are left with limited information on the “top 5.”
Active Few Weeks
I think the timing of these market standards indicates the “rules” from the SEC/regulators will soon be released. Later this week the regulators will release their conclusions on risk retention, and there is a rumor the SEC will be issuing its rules on Reg AB reform in the next few weeks/months. We will see if the regulators step up and require additional rent data or if CMBS 2.0 is really a lot more like CMBS 1.5.
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We in the Commercial Mortgaging Industry Standards Maintenance Organization (C-MISMO) have been trying to come up with our strategic goals for 2011. As a starting point to determine these goals, we are using the results of a 2010 survey the MBA commissioned by the Vertical Industry Standards and Technology Adoption (VISTA) project. The survey basically asked industry participants if Commercial MISMO standards were being adopted and, if not, why not.
The survey concluded that MISMO standards were NOT being adopted because of several factors including:
• down market
• lack of investor demand
• no software vendor support
• existing standards too complicated
With so little MISMO XML use by the industry, we decided we need a “go for broke” strategy to sell the benefits of XML. We are going to host a “Data Summit” at the MBA Servicing and Technology Conference in Chicago in May. The idea is to invite key industry players to a forum where we discuss the benefits of XML standards and try and get buy-in for XML adoption.
The key players consist of lenders, servicers, investors, service providers and software providers. We’ve been making a list of who should be there, and we are splitting up the calls based on previous relationships. I have been given several names to arm twist — I mean invite — to this data summit so, if you get a call from me, be nice.
The reason I call this a “go for broke” move: What happens if we invite these key players and no one says yes (or even shows up)? If MISMO can’t convince the key players that XML standards make sense, then what is the purpose of C-MISMO, and should we keep up the effort? In case no one uses the standards, and if we can’t build momentum at the Data Summit, we discussed putting C-MISMO on ice until either the market’s perceived value of XML increases or regulatory compliance demands XML adoption.
It will be interesting to watch this play out. Updates to follow.
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Last week’s MBA CREF conference was more subdued than January’s CMBS-centric CREFC conference. While the mood was cautiously optimistic — and definitely better than last year — the MBA CREF conference lacked the jubilation expressed at CREFC.
That’s because CMBS was absolutely dead last year. Opening the coffin on the asset class has put most players in a celebratory mood, and that showed at the CREFC conference.
The people that go to the MBA CREF conference represent companies from a broader part of the real estate lending business, not just CMBS. To put it into perspective: Attendance was about 2,500 — about twice that of the CREFC conference.
These companies have been hurting for sure, but they were not put into the grave like CMBS was. The agency business (Fannie/Freddie/HUD) has actually been thriving, the life companies beat the CMBS market back in, and the FDIC is liquidating banks providing at least some deal flow.
Despite complaints about lack of funding for smaller deals, I would describe the MBA CREF mood as being cautiously optimistic but not yet jubilant.
2012 CREF in Atlanta
The biggest buzz at the conference was the MBA’s announcement that the 2012 MBA CREF conference will be in Atlanta.
There has been a history of the conference switching every year between a west coast city (San Diego) and a east coast city (Orlando).
Last year they tried Las Vegas, which was fun but a disaster for networking: Vegas swallows up a conference of only 2,500 people; you never saw anyone. But at least it was Vegas.
Needless to say, no one I spoke with was happy about going to Atlanta next February.
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I attended the annual CREFC CMBS Investor conference in Washington DC last week, where the mood was definitely upbeat. So positive, in fact, that some people were already warning about slipping underwriting standards!
Headed back to South Beach
Perhaps the biggest sign that the market is back was the announcement that the 2012 conference will move back to South Beach from Washington DC. The conference had been in Miami for years. but moved to DC after the crash for two reasons:
1) to be closer to the policy makers and
2) to avoid the appearance that bailed out banks were sending their people to a party in Miami Beach. Now that everything is back, South Beach is back on the agenda.
The White House
Dinner with the CREFC president
My personal highlight of the trip was a dinner where I sat next to John D’Amico, the acting CEO of CREFC and the president elect for 2011–2012.
My friend Jim Cooke, who is a lawyer at Ballard Spahr and chair of Commercial MISMO, invited me to his firm’s dinner where he had John sitting between the two of us. We spent the dinner talking about the disclosure of rent rolls to all investors and the value of XML.
John was a B Piece buyer pre 2009 and certainly has a good understanding of credit. When he was buying below investment grade bonds, they always had access to the rent rolls, so he was sympathetic to sharing the same data with the investment grade bond buyers.
By comparing XML to a “tab” in a Word document, he was able to understand the essence of XML versus Excel and understood how XML would be needed to move rent rolls.
We also talked about the value MISMO standards could bring in that process. While I think we, at some level, converted John to XML based disclosure, the fact is he does not have that much control over CREFC final policy. Nonetheless, he is a key person to get on board, and the dinner was fun.
Snow at Reagan Airport.
Other highlights from the conference
The “pros” were projecting CMBS originations to triple or quadruple from $10 billion in 2010 to $30 or $40 billion in 2011. While the overall mood was positive, some worry there are too many lenders back in the market, and that competition for good loans is creating a “race to the bottom” in underwriting standards.
Privately, there was talk that 2011 might not be as robust as everyone thought (maybe $20 to $30 billion) but, overall, folks were upbeat and positive on 2011 prospects.
With no word from the SEC on the securitization reform known as Reg AB (rules expected soon), the focus was on GSE reform and what the future of Fannie, Freddie and HUD might be.
Most agreed there would not be meaningful GSE reform until after the next presidential election. That being said, two distinct views of the future were offered by two guest speakers (Senator Charles Schumer, a NY Democrat and a Rep Scott Garrett, a NJ Republican).
Senator Schumer spoke about the importance of the GSEs. He believes they serve a critical function for both residential and apartments, and they should remain in place with the full backing of the U.S. government.
Representative Scott Garrett (R-NJ) went the other way with it and stated the Republicans favor privatizing the GSE and getting the government out of the housing business altogether. Not a lot of common ground there.
The parties were back! Lots of different lenders/servicers had parties and dinners, the bars were open and the buffets were full of shrimp and other good food. Last year, there were far fewer parties — another sign of the good mood this year.
Conference attendance was up with over 1,200 people attending compared to a low of 700 people in 2009 and a high of the 1,600 people at the height of the market in January 2007.
The keynote speaker was Tucker Carlson from Fox News. Being from San Francisco, I do not usually watch Fox News but he gave a great talk. Funny and poking fun of everyone from the left and the right. He talked mostly about politics and predicted that Chris Christie, the governor of New Jersey, would be the Republican nominee for president.
Another good reason to move the conference back to South Beach is the weather. I tried to leave DC on Wednesday but got caught up in one of the many East Coast snow storms. After hours at the airport, a missed meeting in Minneapolis, and a full day of traveling the next day, I got back to sunny California.
I am off to the MBA conference in San Diego next week and will report back after that conference.
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I was re-elected to the Commercial Board of Governors of MISMO for another two-year term, so I will remain active in MISMO at least through 2013. MISMO, which stands for the Mortgage Industry Standards Maintenance Organizations (www.mismo.org), is a standard-making body run by MERS and owned by the MBA.
I expected the SEC to release the final Reg AB language before the end of the year, but that did not happen. So, for a final post of the year, I thought I’d highlight steps the industry has taken on its own to improve transparency and investor protections, as well as define CMBS 2.0.
Upon reflection, there has been pretty good progress. 2010 CMBS deals saw four positive trends:
A major theme was reducing the conflict between the special servicer and the B Piece bond investor. Most of the 2010 deals had provisions limiting the B Piece owner’s ability to pick the Special Servicer by the introduction of the Senior Trust Advisor. These are third party consulting firms that oversee the Special Servicer and provide information to the investors. The Senior Trust Advisors have the authority to remove the special servicer and really do give the senior investors an oversight position on resolution strategies.
Projected vs. actual loss to pick special servicer
In CMBS 1.0, the controlling class that would pick the special servicer was determined by actual loss, not projected loss. Since the controlling class (the B Piece buyer) was also the special servicer in most cases, the potential for conflict in resolution strategies was apparent.
The 2010 CMBS deals all had the provision that losses and therefore control be determined by projected loss (appraised value) instead of actual loss. Specifically, the special servicer can be replaced by majority vote of remaining bond holders if appraised losses — as opposed to actual losses — exceed 75 percent of the most junior bond balance.
The 2010 CMBS deals record on increased transparency is mixed put there were definite positive trends.
On the negative side, none of the deals increase any additional “public” disclosure (all based on IRP 5 without rent rolls and underwritings) and, in fact, actually limited disclosure because they were all 144 A Private deals.
On the positive side, the issuers reportedly did share underwriting models and full assumptions with known investors as part of the investor “road shows.” So, if you were actually buying these bonds, the word is the issuers shared all. Other positive events include the CREFC increasing modification reporting with the release of IRP 5.1. Also CREFC are making proposals to standardize Annex A disclosures, Reps and Warranties and underwriting. While still missing some critical data, there was no doubt progress.
New B Piece Buyers
Attracting capital to buy below-investment-grade CMBS is key to CMBS 2.0. 2010 saw new entrants (most run by old players) to the B Piece market. Of the six deals done in 2010, the B Pieces were bought by four different firms:
Black Rock: three deals
H/2 Capital: one deal
Rialto Capital: one deal
Elliott Capital: one deal
So, with those positive thoughts, Happy New Year and I hope 2011 gives you more than 2010.
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I attended a CREFC mini-conference in New York this week titled “2010 Market Initiatives: Overview and Updates.”
The half-day session provided an update on financial regulatory reform and CREFC’s efforts to improve transparency outside SEC directives by creating industry consensus.
Some of the results are good, some are not good.
I never realized winning a World Series was so exciting and exhausting. I came close to living in cities where the home team won the Fall Classic (San Francisco 2002, Boston 1986) but this was the first time my home team actually got it done.
Every series (Atlanta, Philadelphia, and Texas) was a thrill and the entire city was watching. The cast of characters that make up the team really connected with the cast of characters that make up the Bay Area. I have been a Giants fan since moving to San Francisco in 1992 and loved every minute of the victory.
I was lucky enough to go to:
• Game 1 of the Atlanta series where Tim Lincecum threw the complete game: a one-hit shutout. We had great seats for that game!
• Game 4 of the Phillies series where Juan Uribe hit a walk-off fly ball to secure a 6 to 5 win and take a 3 games to 1 lead in the series. Here is the National Anthem sung by Huey Lewis and the News with a jet fly over.
• Game 2 of the World Series where the Rangers completely melted down and the Giants scored seven runs in the eighth to crush Texas 9-0. Here are two more runs in the bottom of the eighth.
• The victory parade in San Francisco that drew 1 million and shut down the city for a day. Mayhem!
Good luck next year Giants!
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For the first time in years, CREFC has proposed an increase in data disclosure by proposing a new report, the Loan Modification Report, to be effective Dec. 1, 2010. It isn’t perfect, but it is progress.
This report is designed for Special Servicers to use when they modify a loan. CMBS Investors have demanded this information because loan modifications have a direct impact on the bond payments and, therefore, the value of the bond. Despite the fact that modifications are fairly common these days, Special Servicers have not been doing a good job reporting the new terms. The current deficiency in reporting these modifications has grown into a major problem.
The new report will hopefully help solve that problem because it will require Special Servicers to disclose the terms of the modifications.
Check out the exposure draft: CRE Finance Council INVESTOR REPORTING PACKAGE Version 5.1
The Loan Modification Template is on Page 102.
My only negative comment regards the format of the report. Instead of a data-driven report in XML or even Excel, they picked PDF. Pretty much the worst format they could have picked.
But, if the special servicers actually describe the modifications in enough detail, folks who are trying to recreate the bond models can update the amortization/bond models manually to reflect modified loan terms. That is progress.
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Fighter jets and race cars — what could be better?
I’m talking about the Backshop .NET 3.5 release, Regulation AB, two years of blogging, The A Yacht and summer family trips.
I helped draft letters from CREFC, MBA and MISMO to the SEC commenting on the proposed Regulation AB changes. The letters were filed Aug. 2. While all of them supported the concept of transparency, none of them proposed a data list to actually achieve transparency.
So I also wrote my own letter.
With great fanfare today, President Obama signed the financial reform bill into law. Many times over the past several months, I thought this legislation would die, but this is a big, important deal. And now the law is clear: Transparency is required for securitized products.
The big question is whether the SEC enacts rules and regulations to actually bring about transparency.
I attended the Commercial Real Estate Finance Council’s Future of Commercial Real Estate Finance conference in New York City June 14-16. This year’s conference, formerly held by CMSA, was different in that its forum structure provided sessions for six different groups: securities and loan investors, issuers, servicers, portfolio lenders, investment-grade bondholders and multifamily lenders.
The result was much greater discussion of the controversial issues.
The two most controversial issues, loan level disclosures and alignment of interest, were discussed in most sessions but really got active in the Investment Grade Bond Holders Forum.
The forum was chaired by Bill Moretti of Met Life and Tricia Hall of Paulson & Co., who both did a great job of pushing the discussion into controversial topics. When the topic of 5 percent risk retention for shelf eligibility came up, most participants at the conference were in favor of allowing third party B-piece investors to satisfy the requirement. When Bill Moretti stated that full disclosure of rent rolls is important for investors, there was push back from both the issuers and the servicers.
However, Bill made it clear he thought risk retention by the issuing shelf and by a third party B-piece buyer was the best idea. He also stated categorically that full rent rolls should be reported for all tenants on all properties. He reminded the audience that the expected loss of 25 percent on CMBS bonds issued in 2006 and 2007 is awful and represents proof that our methods must improve. The panel really made their point when they put up a slide of that crazy picture of Albert Einstein with his tongue sticking out with a quote under the picture saying: “Insanity is doing the same thing over and over again and expecting a different result.”
They also distributed a “Best Practices for CMBS Restart” document at the conference. This eight-page document is broken out into two general categories: transparency and alignment of interest. Download Best Practices for CMBS Restart.
The proposals sure makes sense to me, and they got good press coverage. Download this excellent article by CRE Direct.
Backshop/CMBS Cocktail Party
Our Tuesday night cocktail party was well attended and lots of fun. Thanks to everyone who came. We got a suite on top of the W New York hotel across the street from the Waldorf. The deck was awesome and the night was perfect. We enjoyed the New York skyline and watched Game 6 of Lakers/Celtics. We went into the wee hours and wound up at a diner for some late night grease.
View from the deck.
That awesome deck.
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I am just returning from New York City where I attended MBA’s Commercial/Multifamily Servicing and Technology Conference 2010. Most of the major master, special and primary servicers attended. The proposed SEC changes to Regulation AB were discussed at almost every panel.
A well-attended special session focused on the proposed new regulations and the MBA response.
After a fair amount of discussion on what the changes entailed, the moderator took a survey of which firms were in favor, opposed or indifferent to reporting in XML. For the first time, not one servicer stated they were opposed to reporting in XML (a few were in favor and most voted indifferent).
It seemed that either the fear of a negative reaction from the SEC or just plain acceptance of the inevitability of the rule changes eliminated at least public disagreement with converting to XML. To be sure, there will be great debate on which data elements should be included in the XML, and if the IRP itself will change, or if there will be a new XML report solely for SEC compliance. But public resistance from the servicers, which has always killed the discussion in the past, was absent.
MISMO: What a difference a year makes
There were two dedicated MISMO panels and a MISMO meeting. I attended all three sessions and spoke on the last panel titled “Making MISMO Work for You.” Download the Powerpoint slide show. The Dilbert comic on slide 2 is classic.
While I would not say attendance was bursting at the seams, all three sessions generated fairly good crowds. People actually asked questions and showed interest in learning more about standards and XML.
Last year at this conference in New Orleans, there was virtually no discussion about MISMO and XML standards. Everyone was focused on servicing issues as opposed to reporting/transparency issues. This year, the focus and sense of urgency provided a much-needed boost of energy to all the folks who have been working on data standards.
The MBA, CREFC and MISMO are all working on their responses to the SEC proposals. The comment period ends August 2, so all responses must be finished by mid July.
I am participating in all the conference calls and was elected to be co-head of the MISMO response committee. MISMO will make sure the XML schema for the final list of data elements is workable and consistent with the MISMO data model, and ideally with the CREFC IRP 6. The next several weeks will be very interesting as the responses get finalized.
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In addition to the rating agency rules that go into effect on June 2, the SEC has asked for public comment on extensive changes to SEC securitization rules, known as Regulation AB.
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.
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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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.
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.
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. …”
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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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:
I spent the weekend skiing with a group of industry guys. Our annual trip is usually in Aspen, but this year we ventured to Whistler. It’s a boys trip with a rocking crew that works in lending, advisory, servicing and legal. Not much discussion about standards, rent rolls and MISMO, but I got a few props in.
Anyway, the town was still all decked out from the Olympics, and the bars were jammed. Here are a few pics and a video from the top of the mountain after eight inches of fresh snow. Enjoy.
The Olympic symbol at Whistler Peak.
Now that’s a peak: Black Tusk Peak
Snowy mountains as far as you can see.
Across the valley looking west.
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I attended the Mortgage Bankers Association annual commercial real estate finance conference in Las Vegas last week. Attendance was about 2,000 people, which was better than last year’s 1,600 but well off the 5,000 who attended during the peak.
The mood was better than last year but still pretty bleak.
I would describe the major difference as this: This year, if you own a class A property that is well leased and you only need moderate leverage (based on today’s value), there is plenty of debt available. Last year, even for that deal, there was no money.
The problem is, not many borrowers need that deal. If you assume values are off by 40% and lenders are only willing to make 60% LTV loans, the amount of leverage available compared to 2007 pricing is 36%, calculated as
(100 – 40) x .60 = 36
Most borrowers still have debt equal to 80 cents of 2007 values so 36 cent debt is not that helpful. Nonetheless, at least the low-leverage money has come back.
Several new lenders and distressed funds were offering money, but that money is all chasing 20% yields. The problem they have isn’t accessing money; it’s finding deals that make sense. Low-leverage money is facing the same problem.
The problem really comes down to deal flow.
There’s no doubt that values are way off from 2007, but there hasn’t been significant deal volume for a host of reasons:
1) The extend and pretend mentality of lenders/special servicers,
2) The low interest rates on the distressed debt that is keeping them alive,
3) Regulatory relief in terms of suspension of mark-to-market accounting, and many others.
That being said, I sense the cracks are starting to grow and 2010 will be the start of the deleveraging process that needs to occur.
In CMBS, special servicers, I predict, will finally start moving bad loans in decent volumes. I also think the FDIC will continue to liquidate banks as quickly as they can.
Borrowers, on the other hand, will remain optimistic and only give up properties as a last resort, so the bid ask on non-forced sales will remain wide. Fundamentals will not improve (and may very well continue to deteriorate) so, despite my prediction for more deal flow, the market will be nowhere close to normal in 2010.
I spoke out on the need for disclosure of rent rolls for CMBS loans during the public policy meeting, the technology council and the servicers forum.
Not surprisingly, I was met with consistent and vocal opposition from the servicer community. I must say it is discouraging, but not surprising, that the servicers are still fighting this issue. The need for transparency is not their driving factor and, apparently, many are content to keep operating as they have in the past. In fact, I received complaints that MISMO was going too far in even creating rent roll standards. Ouch!
I will say that more and more folks are recognizing the common-sense need to disclose rent rolls to CMBS investors, but the old guard is fighting hard. I think the Senate passing the financial reform legislation and Obama signing it into law might be the only catalyst to force a change. Until then, we will keep up the pressure.
Off to Mexico with the family for winter break. I will report in after that.
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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
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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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:
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.
FOR QUESTIONS, PLEASE CONTACT
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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:
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.
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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I spent Thanksgiving in New York City this year with my family.
My kids had never been to NYC so we sampled some of the great things The City has to offer including the Empire State Building, the Statue of Liberty, the museums and the Macy’s Thanksgiving Day Parade.
A week like that certainly makes you thankful.
View from the top of the Empire State Building.
Macy’s Thanksgiving Day Parade > Snoopy
Macy’s Thanksgiving Day Parade > Sponge Bob
Statue of Liberty
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I am just back from our 2009 Backshop user conference in New York. Bank of America hosted it in a beautiful board room overlooking Bryant Park. About 10 clients invested the day with us to go over our accomplishments from last year and help set priorities for next year.
Backshop User Conference
We unveiled our new look for Backshop that we undertook as part of converting Backshop from a ASP/ASP.NET hybrid application to a 100% .NET application.
The new look and feel was really well received, and we got some good feedback on some additional design tweaks. Check out the Backshop web site in the near future as we will be adding a Software Tour section featuring the new design.
We also had time for informal discussions on customers’ outlooks for 2010 and beyond. I would say no one expects 2010 to be a good year as far as originations go. The belief is a few low leverage deals will get done, but traditional conduit origination will be small.
Asset management and deleveraging were much more the talk than originations. However, for the first time in a while people were talking about some allocation of capital for 2010 new loans, so we will see.
Into the belly of the beast.
The real fun started on Saturday night when a group of 16 of us met at Stout Bar (on west 33rd street) for a pre show dinner.
We got to the Metallica show right when the house lights dimmed and watched them kick off the show. As usual (this was my 7th time seeing this show), they were awesome. Sellout crowd, downtown New York City, flames, lasers and 20,000 outlets of energy.
While I was cruising around back stage, I ran into John McEnroe getting a drink in the green room. Last time I had seen him was at a Metallica show a few years ago out in the Meadowlands. He is a big fan.
The after party was at Del Posto, a great restaurant owned by Joe Bastianich and Mario Batali on 10th Avenue at 16th street.
We arrived with about half the crew still standing and all got in and had a great time. I went to Boston College with Joe and we played rugby together (I was the hooker, he was a prop) so it was good to see him also.
I got to spend a few minutes with Lars and could not thank him enough for the hook up. Food, drink and famous people. Not a bad way to spend an evening.
Robert and Lars rock the bass and beat.
Metallica plays “Turn the Page” at Madison Square Garden:
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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.
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:
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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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.
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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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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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 CMBS.com 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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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.
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.)
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
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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TALF, LoopNet vs. CoStar, CoStar and PPR, MISMO and a vacation in Yosemite … a ton has happened in the past few weeks.
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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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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Monday’s IRP Committee Meeting at the annual CMSA conference was more talk and no action. There were about 100 people in the room including many investors and servicers, which highlighted the importance of the topic. The committee heads gave a good summary of the IRP process and why it is no longer being pursued. Then they opened the meeting to questions.
The first question was “Are we transparent enough? If not, what are we missing?” The answer came from an investor: “No, we are not. We need rent rolls.” I literally applauded. And the debate began.
Those who are trying to kill any transparency improvements gave the typical responses:
1) Budgets are too tight right now for additional technology spending.
2) The PSA’s have this concept of “restricted data.” The servicers will bear liability if they share too much data.
3) Borrower’s don’t want rent rolls to be shared.
The responses from the folks who support better transparency where just as passionate:
1) When the market was working, the argument was we were all too busy to make the investment in XML. Now, we are not busy enough to make it? Plus, the actual cost to produce an XML report on existing data cannot be very high.
2) While some PSA’s do have the concept of restricted data, the vast majority of them state the reporting standards are dictated by the IRP, not the PSA. Sure, conservative lawyers may take a position to support their client’s goal of not sharing data, but most lawyers I spoke to agreed that “reporting could probably be significantly expanded without incurring liability.”
3) Borrowers generally are contractually obligated to supply the rent rolls. They have no ability to restrict their distribution. While some may not like this, my guess is they will all accept this openness if it helps open up the markets.
One of the major services floated an idea about keeping IRP 5 in place but amending the property file with XML-based rent rolls and operating statements. While I think we should move the entire thing to XML, I welcomed the comment because it at least represents movement. Then, quickly, another major servicer said “no” to even that step.
So, like the rest of the meetings on this topic, it simply ended with no resolution and no direction to go forward. Frustrating to say the least. I then pushed CMSA leadership to provide direction and rules on how to break the stalemate. How does a committee sponsored by a trade group get anything done if it needs unanimous consent? What are the rules? Are we like the U.N. Security Council where all members hold veto power?
Pat Sargent, the new president of the CMSA, reportedly stated at the Wednesday Board of Governors meeting that the CMSA would tackle the XML/Transparency issue “head on” and would push for resolution — one way or the other.
Hopefully Pat will provide the leadership to move this issue.
The mood of the conference was a bit better than I was expecting. While there were still plenty of shellshocked people, the general mood was more of acceptance than denial. The Special Servicers are jammed and busy as can be. The investors were “playing nice” with the B Piece guys. Even some lenders where thinking about next steps. But, the main sentiment was acceptance that the next 18–36 months will include a massive deleveraging process with foreclosures, price declines and continued lack of liquidity.
And, if some have their way, no new data to help sort out the mess.
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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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Pre-registration closes Monday, June 1. Rates increase on Tuesday, June 2. Keep reading for details.
I celebrated my 42nd birthday with my family over the long weekend by renting a house in Discovery Bay, a community located on the Sacramento River Delta 70 miles from San Francisco. While the girls drove, my son and I went up by boat.
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.
We announced at the MBA Commercial/Multifamily Servicing and Technology Conference in New Orleans that C-MISMO has authorized the creation of new standards for rent rolls and operating statements.
To better aid all CRE investors/lenders, we have reduced our focus on the CMSA’s CMBS-centered IRP 6 (which we support) to instead concentrate on establishing broader commercial real estate standards.
I was named Chairperson of the effort. We plan to have these standards finalized by the end of summer.
Setting a CRE standard while supporting IRP 6
If it includes full rent rolls and is adopted by the CMSA, IRP 6 will solve the transparency issues for CMBS deals.
However, getting IRP 6 approved and adopted is a big challenge, especially because the critical players (the servicers and the trustees) are resistant to making the required investment. Also, while IRP 6 has the potential to fix reporting for CMBS, it does not automatically fix the problem for commercial real estate lenders in general; the IRP has data and structures (bond level data, for example) that are not needed by portfolio lenders.
Therefore, MISMO is moving ahead with adopting standards for the two most critical missing pieces: rent rolls and operating statements. These standards will be identical to the “rent roll” and “operating statements” containers found in IRP 6, as both are based on the already-approved MISMO XML schema.
We think pushing ahead with independent C-MISMO rent roll and operating statement standards will not only solve a critical need for portfolio lenders, but will also help the CMSA with its adoption challenges, as the benefits of the transparency improvements will become evident and the servicers can start implementing the change.
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CMBS Leads launched on Friday! It feels great to have the launch push behind us. Now we can focus on selling!
This week I’m headed to New Orleans for the MBA Commercial/Multifamily Servicing and Technology Conference. I am speaking on three panels:
1. MISMO® – Data Standards for the Brave New World of Transparency & Efficiency
2. Where can Investors get their data
3. The Future of Reporting
At the MISMO panel, we will announce our support of IRP 6 plus our own initiative to promote data standards. The other two panels should provide opportunity to debate how we use data to help solve the credit crisis. In last week’s pre-calls preparing for the panels, it was clear not everybody was on board with my views so, hopefully, the sessions will be entertaining.
We will also have a booth at the conference where we will be demoing Backshop, CMBS Leads, CMBS Investor, and our next tool: a MISMO-compliant XML reporting tool that takes feeds from servicing systems and allows primary servicers to report upstream in XML compliant format.
Stay tuned for the latest developments from the Big Easy.
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We plan to launch our CMBS Leads product at the end of the week. We are currently putting the finishing touches on the tool, and we are really proud of it.
I sit on the Commercial Mortgage Industry Standards and Maintenance Organization’s Commercial Board of Governors (C-MISMO BOG) and we have been active this month working on two things:
- Creating a MISMO action plan to make MISMO relevant and to help the CMSA get IRP 6 approved.
- Preparing for our panel session at the MBA Commercial/Multifamily Servicing and Technology Conference in New Orleans May 12–15.
On the MISMO front, it has been a very interesting month. Since the CMSA officially asked for industry comment on IRP 6, the MISMO BOG has been trying to finalize our strategy to best help promote the adoption of open and transparent commercial real estate standards. Also, most members of the BOG are participating in a MISMO panel on May 13th at the MBA’s Tech Conference in New Orleans. These two events have helped us focus our message and strategy.
The process of agreeing on our strategy, as a group, has required a bit of consensus building. Frankly, the process has been refreshing because I think the position we seem to be reaching is the right one, and I am feeling good about it. When we release the statement at C-MISMO (probably around the conference), I will post it here. Stay tuned.
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The CMBS Investor Group has a new proposal to improve the CMBS market. This is the same group that spoke at the January CMSA conference. I applaud the group for being proactive in trying to solve the crisis, and they have come up with many valid points. In their latest round of comments, they introduced the idea of a “centralized underwriter” to “assemble and present” underwriting and surveillance information for CMBS Investors. Basically the entity would be responsible for analyzing all financial reporting data and presenting it to investors in a concise, standardized way.
While the goal of giving investors easy access to reliable data is commendable, achieving that goal by paying a “Centralized Underwriter” to assemble and present the data seems redundant. This would add a human cost layer for the centralized underwriter to manually assemble and present data. And, by the group’s own admission, it’s unlikely that all (or even most) investors would outsource their credit decisions.
In the current system, we already have parties who are supposed to perform these two functions. The Master Servicers are the ones that are supposed to “assemble and present” the data via the IRP. That group has already figured out how to fix the “assemble and present” problem through IRP 6 in XML — it just needs to be implemented.
The rating agencies are supposed to interpret that data and express opinions on the underlying collateral. We should demand transparency into the rating agencies’ analysis and let them earn back investors’ trust by performing accurate, thoughtful analysis. If a particular rating agency has lost investor confidence beyond repair, they should be replaced by a rating agency that still has investor confidence. If we focus on adding another layer to this system (the “Centralized Underwriter” or a “Mirror Rating Agency”) instead of organizing and standardizing the data we produce (via IRP 6), it we’ll become less efficient, not more efficient.
The group’s spot on recommendation was the demand for increased transparency. The proposal stated: “As much information as legally possible should be provided publicly via electronic distribution.” Absolutely!
The costs of “fixing” the reporting problems so the Master Servicers “assemble and present” the right data (in IRP 6 of course) will be much cheaper and a better solution than adding another human cost layer. Instead of adding a new layer of people to the process, let’s produce clean, complete data in XML and demand transparent standardized underwriting analysis from the rating agencies.
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Our family just enjoyed a great spring break. While my wife and daughter went to Disneyland, my 10-year-old son Andy and I went to Palm Springs and hung out in the desert. We started by renting a hot red Dodge Charger and going to the local Walmart for essential supplies:
1) An adapter so we could plug our iPod into the rental car (going to Joshua Tree without playing U2’s Joshua Tree just wouldn’t seem right).
2) A sling shot.
After Walmart, we drove to 29 Palms and had breakfast at a Denny’s, then headed into the park. Joshua Tree is known for rock climbing, with piles of boulders and granite slabs everywhere. There is great climbing and scrambling through narrow cracks and tunnels.
After several stops of climbing and shooting rocks from the sling shot, we headed out on a 15-mile trip down a single track dirt road. Andy sat on my lap for a good part of it and got his first taste of driving. Way fun. We went out the eastern end of the park where we saw lots of interesting things — including Skull Rock and blooming cactus. Magical.
|In God’s country.||Andy in action.||Skull Rock!||Blooming cactus.|
|Where the streets have no name.|
After Andy got the taste of driving, we needed to hit an ATV park. About 5 miles outside of Palm Springs we found a great place where they had good machines and a minimum age of only 6! So we ended up doing it two different times and had a ball cruising around the dunes. Check out Andy’s speed:
The family reunited in Malibu for the weekend, where we met up with great friends we haven’t seen in a while. They had a 50 cc dirt bike and 15 acres, so Andy kept his need for speed going through the weekend. What a great dose of Southern California!
Back to work
Here at CMBS.com, we are busy finishing up our new Leads product. And tomorrow I’m speaking at the 4th Annual America’s Growth Capital Emerging Growth Conference on a panel about mortgage technology. I’ll report in after that.
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I’ve been writing about this for a while; here is the official announcement, plus a way for you to join the MISMO Commercial Operating Statements and Rent Rolls listserv. Do it now!
As MISMO’s liaison to the CMSA, I have spent the past few weeks calling around to contacts at Lenders, Rating Agencies, Servicers and Investors, to see what each firm’s position is on IRP 6. Other than the servicers, most firms I spoke with did not know the specific issues with IRP 6 and had no official position. After explaining the benefits of IRP 6 several times, and getting several firms to send in emails of support, it occurred to me we have a marketing problem.
To address this problem, we are putting together a press piece explaining the benefits of IRP 6 and releasing it through MISMO. Plus, I will keep dedicating space on the blog to promoting IRP 6. Toward that end, i case you want to support IRP 6, I drafted a form email to save you some time.
The text of the message is on the remainder of this post.
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Dear CMSA IRP Committee:
Our firm, YOUR FIRM’S NAME HERE, is an investor in commercial real estate debt, equity and CMBS.
For our CMBS investments, we have found the existing available data insufficient to perform a “bottom-up” analysis of the bonds. Specifically, we need to perform an analysis of the underlying real estate that requires access to a current rent roll, operating statements and current debt amount/terms. We have access to the debt information and sporadic access to operating statements but have not found any source for current rent rolls.
Therefore, we strongly recommend that the CMBS industry improve its transparency to current and potential investors by adopting, without delay, the new proposed standards as described in IRP version 6.
The primary benefits we see are 1) operating statements, bond, property, and loan data better formatted in XML and 2) access to basic tenant information (tenant size, contract rent, reimbursement amount, start date, end date) on all tenants.
Thank you for your consideration.
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As released today by the CMSA:
As MISMO’s liaison to the CMSA to support the adoption of IRP 6 as the new reporting standard for CMBS, I have an inside perspective on the prospects of this standard being adopted. The official comment period for IRP 6 ended on February 20 and the CMSA only received a handful of comments (around 5) with most being against adoption.
From what I understand, I had the only supportive comments, and the other comments were from a handful of master servicers and trustees who were very negative on adoption of IRP 6, presumably for reasons discussed elsewhere on this blog. With the majority of comments being negative, the CMSA is trying to build a case for adoption. I worry that if the positive voices are not registered, the special interests may stifle the transparency promised by IRP 6.
We need Your Help!
If you are a member of the CMSA or have an interest in CMBS bonds (especially if you are a current or prospective investor), please send an email to email@example.com and put you and your firm on record as being supporters of IRP 6 for open and transparent CMBS standards. State in the email who you are, what role you play in CMBS, and that you support IRP 6.
After hearing the news that most comments were negative and being told that CMSA will be hard pressed to push the standard through without industry support, I sent the following email to the CMSA.
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Dear CMSA IRP Committee,
I am a member of the Board of Governors of MISMO, and one of our key agenda items for 2009 is to help the CMSA usher in IRP version 6 in XML. I have been appointed as the MISMO liaison to support the CMSA IRP committee and want to offer any help needed to bring about the acceptance of this important standard.
I know there is some resistance from a handful of master servicers and trustees in implementing IRP 6. However, the investor community and the rating agencies are demanding cleaner, more complete data to better evaluate the value of CMBS bonds. Unfortunately, most players in the investor community do not understand the importance of XML to meet their information demands (they just want the data available and useable and complain loudly when it is not there). I believe if the investor community knew the relationship between solving their issues and IRP 6, they would be loud and vocal supporters of IRP 6. Unfortunately, they do not really understand the mechanics of moving data and therefore were largely silent in making comments on the exposure draft. Instead, all you received were mostly negative comments from a few servicers and trustees.
We at MISMO, and I know the two of you, understand the conversion of the IRP to XML is required if we are going to meet the information demands of the investors. Without investors, we do not have a viable asset class. Therefore, the requirements of this critical constituency and the overall goal of transparency should trump all objections. Do not let a few negative, self serving comments from a handful of servicers / trustees alter your dedication to the noble goal of data transparency.
I will reach out to all of you over the next few days to figure out a strategy to keep momentum going on this critical improvement in transparency and reporting. First and foremost is educating the investors on why this is important to help the CMSA build a case to push ahead with IRP 6. In the meantime, check out this timely article about XML and financial reporting to help remind us of the importance and righteousness of our mission.
(415) 576 -8008
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Not much glamour around CMBS.com the last few weeks. We’ve been working hard “clearing” deals to add to our CMBS library. To clear a deal, we must tie out the loans from the setup file with the loans being reported on the Trustee IRPs. This is a slow, labor-intensive process.
Once we tie these loans out, we can successfully “roll” the loans from our source information (the setup files in the Conquest database we acquired from S&P) to the current balances.
We have now cleared about 400 securitizations — including all of 2008 and 2007 and most of 2006 and 2005. We are clearing close to 20 a day, so we should be finished up with all 600 in the next several weeks. We are updating the CMBS.com Free Securitization Search with the 400 this weekend, so enjoy the new goods.
Cover of U2’s “No Line on The Horizon,” to be released March 3.
No Line on the Horizon is the name of the new U2 Album. I am lucky enough to have an advance copy, and we’ve been listening to it as we’ve been grinding through the data. Tracks 3, 4 and 5 (Moment of Surrender, Unknown Caller, I’ll Go Crazy If I don’t Go Crazy Tonight) are as good as any three U2 songs. Can’t wait for that tour –– I have an in there, so we should be front row again — Rock!
Why don’t deals tie easily? For a whole host of reasons, including:
1) The loan was split between securitizations, so there is more than one “servicer loan number” for a single loan in the setup file.
2) The loan paid off. In the older files, these simply were dropped from the list. Now, they are supposed to be reported as “paid off.”
3) The loan defaulted and has been foreclosed on.
4) The numbering systems are off between the setup file, which used Prospectus ID, and the Loan Periodic (the update file), which uses Servicer Loan Number.
So, populating our CMBS library is a manual process where each and every deal has to be touched and “cleared.” But we are figuring out the issues and getting the deals loaded correctly.
At 20 a day, there is a Line on The Horizon — and it is getting closer. …
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I just returned from the MBA’s annual Commercial Real Estate Finance (CREF) conference in San Diego. While we were there, the government announced $100 billion from the new bailout plan would be used to provide leverage to investors in AAA CMBS. Most people at the conference were excited. Personally, while I welcome government leadership on a host of issues, I disagree with this strategy.
Do we need to use taxpayer money to provide debt to boost the bond yield for investors in AAA CMBS? The bonds are already trading at 15% pay rates — how much more juice do these guys need!?!
A better idea
So, we came up with a better idea: Let’s take $20 million instead of $100 billion.
In San Diego we talked about the real issues, and the solutions required to fix them. I believe, along with others, investors would come back to CMBS and spreads would tighten if the investors had the information and tools to model the underlying real estate risk.
For sure, no one knows what lease rates and cap rates to use in this economy. But, if IRP 6 went live and full operating statements and rent rolls were included in the XML file, the data would be available to run a bottoms-up underwriting, and the debate could move to lease and cap rates instead of the black hole we have now. That would eventually bring in spreads and spur new lending because the risks would be understood.
Debating the merits of, and even complying with, IRP 6 was a main topic at the conference — particularly among the master servicers. Their official position seemed to be that they would comment on IRP 6, but they wanted infinite time to comply with the XML schema and new content.
They argued the asset class is dead and budgets are tight, so there isn’t enough money to make the changes required to comply with IRP 6. When pressed to quantify the expense of compliance, they gave estimates from $0 to $2 million per servicer. When asked if they would implement IRP 6 without delay if they were paid for it, most said that would make a difference.
Some simple math:
1. 10 master servicers x $2 million each = $20 million
2. For that, we get transparency into an asset class worth almost $1 trillion.
3. We arm investors with the data and tools to do the math and figure out the investments.
4. Bonds start trading, and the log jam is broken.
Think of it as an infrastructure project instead of money to boost an already generous yield. Oh, and by the way, since we would be investing in building a “pipeline” into the data, we will leave behind true reform and the transparency that will surely be the foundation of CMBS 2.0.
Don’t bring a knife to a gun fight
The XML transition has real costs, and the servicers will bear most of them. Some will say we don’t need the $20 million either because the way the PSAs read, if the IRP changes, the masters can be forced to comply.
But, if the government really wants to help the CMBS industry, and they are committed to write a check anyway, I suggest a $20 million investment in infrastructure to speed up transparency would yield far better and faster results than their current plan.
Trying to manipulate a several trillion market with $100 billion is like bringing a knife to a gun fight. Let the government provide the leadership and capital needed to disclose and reform CMBS data, but leave the economics of the bet squarely in the private sector.
Other Observations from MBA’s CREF Conference
Happy Hour at the CMBS.com booth.
MISMO and MERS – I spent several hours with the MISMO governance and the representative from MERS. There was clearly a frustration level with MISMO volunteers with how the transfer to MERS was conducted. But, it was driven by budgets and it was done with, so most of the time was focused on what next.
Most people agreed that origination standards would not be critical in 2009 because there would be so little origination. Rather, to get a “win” and gain credibility for MISMO, pushing for the adoption of IRP 6 (which is based on MISMO XML schema) was deemed a priority. As for MERS, they seem like nice people, and I think they could prove to be effective agents for progress. They definitely have a presence in commercial and could provide the numbering system for a “Universal Prospectus ID.”
What’s the true impact of MERS? It’s too early to tell.
People – While attendance was down, lots of key people attended the conference. The panels were timely and attracted the true leaders from the institutions they represented. I learned a bunch and had good and lively debate on several occasions.
Booth Duty – This is one of two conferences a year we actually put up a booth in an exhibit hall (the CMSA’s June New York conference is the other). Attendance was down about 50% from last year with significantly fewer exhibitors also. But, at times the floor was jamming and our new investor product was being well received. Booth duty is not glamorous, but it is fun to throw yourself and your product out there and do some old-fashioned selling. I enjoy it when you get a good crowd interested — and especially if you make a sale.
Weather – It sucked (although we need the rain so bad in California it was actually great weather).
Parties – Not great (no Eagles, Grateful Dead, or Steve Miller this year) but not bad at all, surprisingly enough. We found multiple parties around town that offered plenty of free drinks and food. Hey, what good is CMBS reform if you’re hungry and thirsty?!?
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I became such a Metallica groupie last week that my friends are calling me Penny Lane, the “Band Aid” groupie character played by Kate Hudson in the movie Almost Famous. They accuse me of having a “man” crush on Lars — Ahh, jealousy does not wear well on them.
Where to find the best shows
After seeing several shows in all sorts of venues, I can say Metallica is consistent — they alway deliver a rockin’ set. It’s the crowd and the venues that really set the energy level.
The Oakland show was the most intense I saw, followed closely by the Nassau Coliseum show in Long Island. What makes one Metallica show more intense than the other? The size of the mosh pits and slam dancing groups. Try to see a show where there will be an aggressive, active crowd. The great shows with super high energy can happen anywhere (and always in Europe), but I found the older venues in the U.S. tend to promote more energy than the newer venues. But, all that is just on the margins — all the shows had tons of energy.
Check out the Nassau mosh pit love these two shirtless skinheads are showing — they are about to hug it out after slamming the crap out of each other.
Check out the New York Times Review of the Naussau show.
A tight band rockin’ in New Jersey.
After the Saturday night Newark show, the band hosted an after party at Craftsteak at 10th Ave. and West 15th St. The band was all there: Lars, Kirk, Robert and even James who usually passes on the late night scene.
Spoke with Kirk Hammett’s security guard/assistant. We were reliving a story about a plane trip from Belgium to London last summer. The band was playing at a music festival in Belgium, and Lars let me tag along with him.
Metallica had two planes working that trip because James and Lars were in London and Kirk and Robert were in Paris. They all met in Belgium and, after the show, one plane took James and Robert to Greece (for their next gig three days later) and one plane went back to London and Paris because Lars and Kirk were going to go down to Greece the day of the show.
Kirk got on our plane, and when we landed in London, Kirk realized he had forgotten his passport. Not wanting to mess with the paper work, he hid in the toilet and was completely freaked out trying to avoid detection by the custom agents. He ended up getting away with it — amazing enough — but it was fun to relive that story.
Lars, on top of the world. His night is just beginning.
Had a good talk with the bass player, Robert Trujillo, and his wife. They went out on my boat with their baby a few months back, so we were reliving that and talking about the Bay area.
Hung with Lars until the end. From a peak of maybe 100 people at 2 a.m., there were about 15 die-hards left around 4 a.m. when the bar officially closed. The rest of the band had left but Lars was not quite done yet — he has a bit of a reputation as a night owl — so they agreed to let us stay. It was me, Lars, Steve, the guys from the warm up band, the Sword, and about 5 other random folks. We sat around a table drinking wine and shooting the shit until we finally stumbled out around 5:30 a.m.
I went back to the Hotel Gansevoort, packed, got 45 minutes of sleep from 6 to 6:45, got in a car for JFK at 7, and caught the 9 o’clock American Flight back to San Francisco.
Thank God I got a business class upgrade ’cause I slept from wheels up to wheels down. I got home in time to join my family at a Super Bowl party that was being thrown by, of all people, Skylar Ulrich — Lars’ ex wife and mother of two of his kids. They threw a great party with about 10 couples and lots of kids. After an awesome game, I finally got to sleep. Exhausted.
So, maybe I do have a slight man crush. Better get back to work this week or people will start talking. I will check in next week from the MBA CREF Conference in San Diego.
I shot this Master of Puppets video. Rock!
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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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CONTACT: Cheryl Crispen
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 (firstname.lastname@example.org <mailto:email@example.com>) or Gary Vandeventer (firstname.lastname@example.org <mailto:email@example.com>) at MERS, (800) 646-6377, for assistance with any MISMO matter.</mailto:firstname.lastname@example.org></mailto:email@example.com>
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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I have been looking forward to this week for months. Metallica is finishing up their North American Tour in support of their Grammy nominated new album Death Magnetic with shows in Chicago and New York. I am friends with drummer Lars Ulrich, so I have the privilege of getting great seats and passes to their shows (thanks Steve!).
Now that I’m a groupie, I have learned that, while not everyone loves (or even likes) Metallica, those who do like them, really love them. Since I have clients/friends in both Chicago and New York — and I love Metallica — I figured why not do some entertaining Heavy Metal Style!
So, last night in Chicago, 15 of us met for dinner/drinks at the Ram Brewery, then we hit the show at Allstate Arena.
Our seats were in row AA — literally the first row off the floor — and Metallica put on an amazing show.
|Heavy Metal — up close and personal.|
Afterward, we had a few drinks at Club Magnetic, the backstage open bar, then I took the three woman in our group into the “inner sanctum” to meet Lars and get an autograph. We all figured Lars would rather meet 3 ladies than 12 men, so that is why we took the women! Thanks Lars!
|If you want to meet a rock star, 3 women are much more effective than 12 men.|
I arrived in New York today and will be going to the shows with more clients and friends. The trip is not all fun as I also have several meetings lined up. So, if my wife is reading this, it really is a work trip (at least partially), and thanks for holding down the fort while I am playing Heavy Metal groupie!
BTW, I also saw the Oakland show on December 20th with my wife and 10-year-old son, who is taking guitar lessons and already has an ear for metal. Who says Heavy Metal and the Holidays don’t go together?
|It’s a Family Affair: me, Andy and Larie.|
Last night I shot this video of the opening of “The Day That Never Comes.” Have a taste!
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Attending the inauguration of our 44th President made me feel inspired and hopeful. My wife and I went as guests of the MBA’s political action committee (MORPAC) — and we felt like we witnessed history. The group we were with consisted of both democrats and republicans (and at least one libertarian) but all were moved and awed by the magnitude of the event.
One of the best quotes summing up the event: “What was once the ultimate impossibility will become the reality against which future generations will measure the magnitude of their aspirations.”
Obama and Michelle dancing at the Southern Ball. We were only about 50 feet away.
Hectic but fun
We arrived on Sunday evening (unfortunately having missed the concert on the Mall) and went to McLean, VA where we stayed with my wife’s aunt and uncle. Monday morning, we went to the Air and Space Museum for a private tour, arranged by MORPAC, and then spent the rest of the day on the Mall soaking in the vibe.
Lots of people milled around, and vendors sold all things Obama. We had dinner at Bobby Van’s Steakhouse and late night drinks at the Sofitel Hotel. We were lucky (we thought) to score “Silver” tickets to the swearing-in ceremony, which was supposed to give us access to a reserved standing area relatively close to the capitol. So we headed back to McLean around 1 a.m. to prepare for the big day.
Tuesday we got up early but after suffering through a slow commute on the Metro and having to drop our formal ware off at the MBA’s office, we didn’t reach the Mall until about 10 a.m. We foolishly thought that since we had reserved tickets, we would be able to still get into our section.
As it turned out, if you weren’t in line by 7 a.m., you didn’t get access into any of the reserved areas. There were just way too many people, and the security gates did not seem staffed nearly well enough. After about 30 minutes trying to fight through the humanity, we decided on plan B and high tailed it back toward the White House to watch the swearing in at the Willard Hotel.
The Willard Hotel, one of the oldest in Washington, is located right across from the White House on Pennsylvania Ave., directly overlooking the parade route. MORPAC reserved a corner suite on the 10th floor where they had food and drinks set up in a very civilized environment.
We got there about 10 minutes before the swearing-in began and watched the ceremony from the suite. Not exactly what we had hoped for but certainly a lot more comfortable than standing in the 20-degree weather. We, like everybody there, were blown away by his speech and totally in awe at the size of the crowd that came to witness the event firsthand. We ventured out into the streets a few times but spent most of the afternoon at the hotel watching the parade, which passed literally right below us.
That evening, we put on our formalwear and to the Southern Ball, one of the 10 official inaugural balls. The event was held near RFK Stadium and had probably 5,000 attendees.
Susan Tedeschi performed, but everyone was there to see The President. Joe Biden arrived first around midnight, gave about a 5-minute speech and did a quick dance before leaving. Obama arrived at about 12:30 a.m., and the crowd went crazy. He basically thanked the crowd for their support and said “the work starts tomorrow!” He did a quick dance with Michelle and was gone probably 10 minutes after arriving.
I shot this video of his speech and dance:
While the ball itself was not that special, we were able to get about 50 feet away from the stage and got by far our closest view of the Man — a nice way to end the event. Got back to McLean about 2 a.m. and crashed for a few hours before our flight back to San Francisco.
View of the parade route from the MBA suite. That’s “The Beast,” Obama’s top-secret armored Cadillac limo. Said the General Motors spokesperson: “One of the specifications is that we don’t talk about the specifications.”
African American Community
The fact that Monday was Martin Luther King Day and Tuesday was the swearing in of our Nation’s first black president was not lost on us or the crowd. I would say at least half of the people attending the inauguration were African American, and the pride and inspiration that community demonstrated was beyond words.
If Obama’s presidency does nothing else except inspire people of all colors that anything is possible with personal responsibility and hard work, it will be a success.
The Security and Crowd Control
The event must be judged as a huge success because no one, especially the President, was hurt. That being said, 2 million visitors made the city crowded and hard to get around.
However, despite the frustrations many felt with regard to the swearing-in tickets, the crowd was friendly and inspired, with no trouble makers to be seen. An amazing fact was, despite the gathering of about 2 million people, there was not a single arrest made during the event. Well done crowd!
It was cold. Enough said.
Everyone was hopeful. The businesspeople who thought things could not get any worse, and that Obama might inspire confidence began to find a bottom (after all, oil is at $40, interest rates are at 4.5 percent, and housing is finally starting to get affordable again).
The politicians were hopeful they could ride the momentum to enact meaningful legislation. People of all colors were hopeful that they will now be judged by the content of their character, not the color of their skin. Hopeful that the world may look at America with a fresh perspective and put aside old ways of thinking. Hopeful that maybe, just maybe, a wave of openness and transparency was sweeping the nation and the world.
It was awesome.
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This year’s CMSA conference was a lot less depressing than I expected. Not because there’s any sense that the market is going to recover in 2009 — everyone is predicting next to zero lending — but because of these three facts:
1) The people who still attend these conferences are survivors at firms that are committed to the space, and few of them think 2009 could be any worse than 2008.
2) Several potential new investors attended. They were “kicking the tires” to find value in the bonds.
3) The parties — at venues like the Shore Club and the Delano — were surprisingly nice.
Not to say it was a big party. Two reminders of the carnage: the attendance numbers were way off, and people were walking around looking for work.
1. Simpler capital structures.
A real sense of urgency
The hot topic of conversation was the investor forum, which turned out to be a long scolding about the problems the industry has with getting data through the system. The leadership looked at the “the list” and contemplated a formal response. Conversations were started with the servicers, and I heard several creative ideas that could provide solutions for the investors.
But I also had more than one conversation with experienced and smart people who think “it (real reform) is never going to happen.” Maybe they are too jaded from trying for so many years with very little success. Or maybe they are right.
The Year of Change
While change is hard, and there’s no guarantee of success, I am optimistic. The challenges are not insurmountable and, for the first time, probably ever, there is a real impetus to make improvements.
After all, this is the Year of Change. Yes we can!
My wife and I are headed to Washington next week for the inauguration — to witness history and get inspired for the year ahead. I was invited by the MBA, so I hope to get good access. I will post updates from history next week.
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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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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.
Great news: I’ve been voted to serve on the MISMO Commercial Governance Committee for 2009 and 2010. Thanks to everyone who voted for me. I look forward to serving the industry.
More great news: This weekend we will roll out a new site and a new set of research and analytical tools for CMBS Investors. This is part of our mission to provide open and standardized data and underwriting tools for all participants in the commercial mortgage backed securities market.
When we talk about improving “Transparency” in CMBS, what are we talking about? To me, it is the rent roll.
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.
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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I am on a plane to New York for several meetings and to attend the CMSA/MBA Capital Markets Conference in Washington DC this Wednesday through Friday.
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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I spent the day Fishing and Crabbing off of the Marin coast in the “High Tide” -– my 28 foot long, twin engine MasterCraft X-80 that can usually be found pulling us around on a wakeboard. Not today: We took up the carpets, loaded my 4th and 2nd grade kids, and got my buddy who actually knows how to fish to be our guide.
We started the day by dropping a crab pot in 150 feet of water about 7 miles off Bolinas. The trap was loaded with an old fish head and, after the drop, we hit the Man Over Board button on the GPS to mark our spot and then headed in toward the coast.
Andy with his monster from the deep.
We went to a spot called Double Point about half way between Bolinas and Point Reyes and got the poles ready. We were fishing for rock fish with sardine bait. Basically, you put a heavy weight on the line and bounce the weight off of the rocky shore below trying to get a fish to hit.
The closer you are to the rocks, the better, so there is a fair amount of positioning the boat. Needless to say, we crushed it!
My son Andy got the first hit and it turned out to be the best fish of the day — a 27-inch Blue Lingcod. The fish was ugly with big teeth and a gnarly looking face with spikes coming out of it, but lingcod are prized for eating. We went on to get six more fish including a Cabezon and a few Red Rock Fish.
We headed back out to the crab pot to see if we caught any Dungeness Crabs. After pulling up of the crab pot, we were pleased to see a bunch of keepers. We ended up with eight to keep and threw back five or so for being too small.
We powered back enough fish and crab to feed us and my buddy and his family for at least three meals (plus my dogs loved the skin and scraps). Awesome!
It was a big difference for me and the kids fishing in the ocean as we usually only fish for Trout in the Sierra lakes (Lake Kirkwood is our favorite) where a 12 inch fish is the norm.
To pull up a “creature from the deep” that feeds the entire family for a few days was awesome. Plus, to transform the boat from a Wakeboarding machine to fishing platform adds a new way to use the boat, which is always a goal.
Me and the kids: There’s no better way to get crab.
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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.
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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I’m in London this week for the annual European conference of the Commercial Mortgage Securitization Association (CMSA).
The media have been focused on the presidential race, but, when it looked like Obama was going to win, and we left home in Notting Hill to go join “the masses,” we found the streets mostly empty. Granted it was already 2 a.m. Wednesday morning local time, but I thought we might see more activity.
We headed over to the U.S. embassy in Mayfair because we heard there was a party there. When we got there, it looked “too” official with everyone dressed up and fairly conservative. So we headed to Piccadilly Circus / Leicester Square where the rowdy people were hanging out (it is comparable to Times Square in New York).
Here’s where we found the party.
We went to a bar called Yates that was hosting an all-night election party. We paid the cover, and when we went inside, there were two definite groups in the bar. In the front were about McCain supporters. From the middle to the back of the bar, there were probably 500 people pulling for Obama.
We set up shop in the middle of Obama territory and waited for Pennsylvania and Ohio to come in. I got a call from my wife who was at an election party in San Francisco when they called Ohio. In London, they had not made the call yet so I announced it in the bar. People were skeptical but then as if on cue, the broke the news that Obama was going to carry Ohio and Pennsylvania.
McCain supporters in front, Obama supporters in back …
Case closed: Obama won.
The place erupted — shots, champagne, hugs, tears — the whole thing. Brits were congratulating Americans for our ability to reinvent ourselves. If felt cool to be an American again in Europe. The U.S. backpackers might not have to pretend to be from Canada anymore!
After it was clear Obama won, I limped back to my hotel and watched the acceptance speech from my room (about 5 a.m. now). Inspiring, emotional, historic. When I finally passed out, I was drained but happy.
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What a week to be in London!
I find myself in London on this historical election night. I am attending the annual European conference of the Commercial Mortgage Securtization Association (CMSA), and the excitement around the U.S. election is intense.
So far during this consolidation, our enterprise software business has been coping pretty well.
Bank of America buying Countrywide and RBS buying ABN AMRO were negative events in the fact that, since all four were users, four contracts became two. But, we were still left with fair multiyear maintenance contracts. Bank of America buying Merrill Lynch and Lehman failing were, in a way, good for Backshop because a two big securitized players that were not on Backshop are now gone.
In all those deals, we survived the consolidation and ended up as the system of record. In this deal, PNC is the acquiring bank. Within the different divisions of NatCity, the use of Backshop is limited to the Structured Product Groups in Stamford and not the balance sheet commercial real estate group run out of Cleveland.
While I have been in the Board Room in the NatCity tower in downtown Cleveland presenting to the chief credit officer and various division heads, and we have good support among many groups to convert the entire NatCity portfolio onto Backshop, as of now Backshop is only used by SPG.
So, the question is, after PNC closes the deal and completes the acquisition, will the system of record be Backshop or will it be the PNC system?
I do not know much about the PNC loan origination system. I never tried hard to sell them because they own Midland Loan Services who in around 2002 bought an origination software company run by Mike Matheson. We competed against them in RFPs from 2002 to 2005, but they eventually pulled out of the origination business and focused on Enterprise, their loan servicing system. Nonetheless, PNC was on Midland’s system, and they were not going to change to Backshop so why waste time trying to sell?
But now, PNC just bought an ASP License to use Backshop (my standard ASP license is assumable in the event of acquisition). Midland is not in the third party origination software business, so, as far as I can tell, PNC is on a custom origination system. I’m sure that system works perfectly well for their internal use, but that proprietary approach does not advance the cause of standardizing commercial real estate underwriting.
I’ve read the combined bank will be the fifth largest in the country. An important player for sure and one that, I hope, will get on board with Backshop. But, I’d be going into the weekend with a little less stress if PNC, the acquiring bank, was on Backshop and NatCity, the one being acquired, was on Midland’s system.
I’ll keep the blog posted as this plays out over the next several months. …
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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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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
Last night we were privileged to see Metallica play a final practice show before starting the Death Magnetic World Tour. I am friends with the band through our kids, so I was able to secure a group of passes to the show.
About 1,000 people got into the Cow Palace in South San Francisco to see the new set and hear the new songs. If you have not heard it, get a copy of the Death Magnetic album. Rick Rubin produced it, and it is awesome.
The house lights go up for “Seek and Destroy.”
Kirk Hammett belts out “The Day That Never Comes.”
That Was Just Your Life
The End Of The Line
Harvester Of Sorrow
Wherever I May Roam
Broken, Beat And Scarred
Until It Sleeps
The Four Horsemen
The Day That Never Comes
Master Of Puppets
Fight Fire With Fire
Nothing Else Matters
– – – – – – – –
Seek and Destroy
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Seeing the Blue Angels perform over San Francisco Bay makes me proud to be a taxpayer!
In the world of multi-billion dollar government bailouts and endless deficits, seeing the US Military burning some fuel and pulling Gs seems to make things feel better.
The market up 11 percent helps a bit too. Enjoy the pics.
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.
Transparent CMBS Standards Today!
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This week is one of my favorites. The Blue Angels are coming to town, and the weather is looking nice. The Blue Angels fly starting on Thursday through Sunday. We will be on the boat later this week and will post some cool pics as we get them.
Speaking of cool pics, the Maltese Falcon arrived in San Francisco last week. Owned by Tom Perkins, the Maltese Falcon is the largest private sailing vessel in the world, and it is impressive to say the least: www.symaltesefalcon.com. From what I understand, it can be yours for $190 million (anyone have that left?).
Back to business. We are spending a lot of time with clients integrating CMBS IRP data into Backshop so they can tie the property level underwritings out to the bonds. DBRS has been leading the charge — and it is very cool to see this coming together and others taking notice. The “Holy Grail” as it has been called.
We are also jamming with existing clients and working on launching the new “Public” site. I’ll make a prediction next week on at least the launch month. …
I had four days at the Tribeca Grand this week, and it has felt a little bit like September 11, 2001. Except this time the crisis is in the economy.
The TV set (at least mine) has been glued to CNN and WSJ Online to see the latest on the bailout. The UN is in town, and the police presence is huge with boats, helicopters and sirens blaring. That certainly contributes to the “siege” or “crisis” atmosphere.
President Bush gave the Nation a definition of mortgaged backed securities. In primetime. Wow.
But when I ventured out to spend time with my clients, there did not seem to be a sense of panic. While all lenders are sitting on the fence right now, the core teams to run the infrastructure are generally in place, albeit “Right Sized.” Good real estate people can make money in all markets, and I see firms keeping long term commitments to the space.
But make no mistake, lenders that survive need either Asset Management/Servicing revenue or a big balance sheet. The markets are broken and need fixing. If the US finance system breaks and we have a George Bailey run on the banks, this business plan might suffer the same fate as the original September 11 LoopLender fiasco (See The history of Backshop and CMBS.com).
So, I had a “recovery” day where I spent the afternoon at the 10th Street Baths (1st Avenue and 10th Street), a functional place to cure whatever ails you. As long as you are OK with 120 degree saunas, 50 degree cold plunges, and getting beaten with oak branches. Try it next time you’re in New York. www.russianturkishbaths.com
Speaking of George Bailey, here’s a timely scene from “It’s a Wonderful Life”
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When I graduated from Boston College in 1989, I had no idea I was beginning an adventure that would position me right where I am today: Developing technology and leading the charge to re-invent the CMBS market.
I started my career in 1989 working for Fleet Bank in Providence, RI. I completed the bank’s “loan officer development program” where I learned the 5 Cs of credit.
At the end of 1989, the markets froze and they put me and two other “graduates” in the commercial and industrial loan workout group. I spent the next two years “collecting” on C&I loans including foreclosing on mortgages (commercial and residential) and UCC foreclosures on assets such as inventory, receivables, etc.
The coolest seizure I was part of was a jewelry foreclosing on gold that had been lent to a jewelry shop on 46th street in Manhattan. We went in the Wednesday before Thanksgiving and packed up all the gold in an armored car at midnight, and the place announced the liquidation the Monday after. The worst was foreclosing on a borrower’s house who had put up his home as a guarantee for spec industrial buildings that went bust.
In those first few years out of college, I saw Fleet buy Bank of New England, which failed, and saw the “once in a lifetime” event of the RTC crisis that ended up costing something like $450 billion.
Life in Providence was fine and I was able to summer in Newport, which was a blast. But my college love was from San Francisco (still married to her with two kids), and my spirit was being pulled west. So, in 1992, I packed up my Ford T-Bird and moved to San Francisco. I ended up getting a job (out of an ad in the newspaper) with Hanford/Healy, the largest SAMDA contractor on the west coast. SAMDA stood for “Standard Asset Management and Disposition Agreement” and it was literally the name of the contract RTC service providers signed to liquidate assets of the seized S&Ls.
I was assigned a portfolio of commercial real estate loans to foreclose on, and I worked the portfolio for about a year. However, in 1993 and 1994, before we could conduct a full liquidation, the RTC shifted from a work-out-each-loan strategy to a sell-the-loans-in-bulk-to-the-private-sector (Wall Street) strategy, which basically put a sunset on the SAMDA contracts.
Working for Wall Street
Hanford/Healy transitioned to working for Wall Street, and so I became a senior member of the asset management team dealing with Wall Street bankers in bidding and collecting on real estate loans.
The best deal I ever saw was called Kearny Street and was pulled off by Morgan Stanley Real Estate Funds in 1993 (MSREF). MSREF bought a portfolio of mortgages secured by Class A real estate that were made by Security Pacific (which was being acquired by Bank of America — sound familiar?!). Anyway, the simple math was, they paid $400 million for loans that had a face value of $1.2 billion (less than $.40 on the dollar), they financed the entire purchase with privately placed CMBS debt, and ended up collecting $1 billion over the course of the next few years. So, a $600 million profit on basically zero equity. I’ll take one of those. …
GateCapital is born
In 1996 Hanford/Healy was sold to GMAC-CM to become the B Piece buying platform for the “car company.” The Hanford/Healy alumni scattered, with my colleagues landing in B Piece/distressed positions in the U.S. and Japan.
I was able to leverage a H/H client, Conti Financial, to back me on starting a due diligence company. Conti put up $350,000 of initial equity for a 35% stake and became an instant client. I joined forces with another H/H senior person, Jim Kehoe, and formed GateCapital, LLC in June 1997.
Conti was riding the initial CMBS wave and had positioned itself as a “subprime” conduit lender that made loans on less desirable real estate assets but charged wider spreads. They sourced the loans through mortgage brokers, who underwrote the loans for origination in an Excel/Word template environment, then securitized them and made great profits.
The low end of the credit curve is a lonely place
Conti was an innovator is securitizing mortgages backed by self storage and mobile home properties. Our job was to take the closed loans and manually take the data out of the Word documents and put them in a Microsoft Access Database we developed so we could organize the data for presentation to the rating agencies and to the investors. Volume peaked at 100 loans a month in the summer of 1998 when disaster struck and the bond market froze in August of that year. While that “event” only lasted about 12 months, it lasted long enough to wipe out Conti Financial. When things turn conservative, the low end of the credit curve is a lonely place.
Fortunately my partner’s business was booming. He ended up bringing over a Lehman Brother’s servicing book that grew to about $4 billion, and I realized how necessary long-term recurring revenue is for any undercapitalized company.
Servicing may not be sexy, but when transactions grind to zero, the recurring revenue is like gold. We ended up doing some loan sales, and I spent 1999 in Tokyo setting up the Lehman special servicing operation known as Capital Servicing. I came back and started putting business plans together to try and ride the .COM wave.
In July 2000, we sold our Lehman servicing contract to Hatfield/Philips (although the price and terms were set by Lehman). We ended the LLC with Kehoe, forming an Asset Management company called Belrad (www.belrad.com). And I found the angel money to form this company.
The moral of the story
Looking back on my career so far, I’d say the common theme has been my ability to organize information in a way that helps determine the values of assets.
Early on, I was writing business plans to determine asset values to justify the acceptance of discounted pay-offs. As I was trained in real estate and loan valuations, I learned the underlying math and built a Web-based way (Backshop loan origination software) to do the valuation.
The power of the Web allows us to push this capability to investors and the entire CMBS community. That’s where www.cmbs.com comes in.
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In May at the MBA tech conference in Chicago, I laid out the CMBS.com master plan to Mike Lipson of Capmark, a major master servicer and traditional mortgage broker. I have known Mike since GMAC bought Hanford/Healy in 1996 (where I worked before founding GateCapital) but he had not heard of the CMBS.com name (we have been known simply as Backshop).
Lipson said I should change the name of the company because CMBS has such a bad connotation.
He went on to predict that CMBS would never return as a dominant financing source, and the old days of private transactions and non-public data was the way of the future.
I countered that the borrowers already made the reporting trade when they took out the CMBS loan and signed their conduit loan documents which required reporting on rent rolls and operating statements to a master servicer for dissemination to investors. Plus, Google and CoStar already make that information public anyway. He was not convinced, and we agreed to disagree.
He makes a good point, though, as real estate has traditionally been very private. If we “fix” the CMBS industry by providing transparency but, in doing that, we kill the industry because borrowers do not like the product anymore, we did not accomplish the goal.
While we can address some of these concerns through technology (aggregating rent roll data, dropping tenant names, password protection), the fact remains that if the whole industry is more open and transparent, it is more open and transparent.
Will borrowers be willing to take CMBS loans in the new world of CMBS 2.0? Stay tuned. …
Two major events today: Lehman Brothers filed for bankruptcy, and Bank of America went live on Backshop.
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September 15, 2008 – Lehman Brothers filed for bankruptcy today.
In 2000, I sold my first company (GateCapital) to Lehman Brothers. My partner, Jim Kehoe, ran a $5 billion primary servicing portfolio for them consisting of the assets that brought the company down — land development loans, condo construction loans, commercial developments, and even some traditional first mortgages. My experience with the firm was always positive and we were always treated fairly. A good firm with good people and, at least a few years ago, good real estate positions. They will be missed, and I am sorry to see them go.
Oh, and the Dow dropped 500 points, Merrill Lynch conducted a fire sale to Bank of America, AIG is going down the tubes because they insured all these bonds, and who knows what else is coming. So why did the entire company (at least those of us in Sausalito) hop on our boat, pop some champagne, and drink the afternoon away at Sam’s Anchor Café in Tiburon?
Because Bank of America went live on Backshop today!
Enterprise software roll outs are never easy. However, when you roll out a brand new risk management system for mortgaged backed securities in a money center bank during the worst credit crisis in a long time, the project gains a lot more focus and attention. The Backshop team within Bank of America managed all the internal approvals, and we made sure all the functionality was there for the users. As of today, Backshop is the system of record for the capital markets group at the Bank.
This represents a key date for CMBS.com because having one of the major survivors and primary issuers using the standard makes wide spread adoption a little more possible. …
To have the need for 2.0 of anything, by definition, 1.0 could have been better.
Certainly that was the case with many of the internet’s first sites, and it is the case with Commercial Mortgage Backed Securities.
CMBS 1.0 had all sorts of problems, including:
- Too many lenders chasing too few deals resulting in high-leverage and low-cost debt financing that inflated the equity markets. Classic “Bubble” behavior that tolerated incomplete or inaccurate broker/borrower disclosure.
- The diminishment of the “B Piece Buyers” credit check as a result of the CDO arbitrage opportunity that existed from 2004–2007.
- Conflict of Interest between the issuers and the rating agencies.
- Inadequate reporting requirements and tools to effectively share true credit risk with all interested parties.
- And a whole lot of other things. …
Some of these items have a way of fixing themselves. There are no more CDOs, so B Piece buyers care about credit again, and no one would say we have too many lenders right now. The rating agency issue is a bit tricky given the historical roles of these companies; regulators will likely help decide their future role/revenue model. That leaves us with reporting requirements and standards as the only things we can truly affect as we wait for the market to return.
So what would be different about CMBS 2.0?
Lots of things but, primarily, a standardized real estate underwriting and data platform.
The “math” associated with real estate loan underwriting is basically broken up into two items: Notes and Properties. After modeling the Note to include the debt repayment terms (the liability) and the Property to model the net cash flow available after collecting the rent on the leases and paying expenses (the asset), the user can determine the Debt Service Coverage Ratio (or DSCR = Cash Flow From Property / Cash Requirement of Notes). The higher the DSCR, the safer the loan. The lower the DSCR, the riskier the loan.
On a typical CMBS loan, the debt side stays constant as most loans are fixed rate. On floating rate loans, interest rates and, therefore debt service requirements, change. As an industry (CMBS 1.0), we do a good job on the debt side of the equation, so that is not the problem.
Strengthening the property side
Since rental rates change and tenants come and go, the property side of the equation changes all the time.
As an industry (CMBS 1.0), we did not do an adequate job on reporting on the property side. The problem can be pinpointed to a lack of reporting on rent rolls and the inability for investors to run models on existing CMBS pools based on current rent rolls.
The good news is borrowers need to submit updated rent rolls as often as once a quarter, so the info is contractually available. The bad news is the Investor Reporting Package (IRP) does not require disclosure of the rent roll. So, the master servicers do not provide them electronically and the existing investor / CMBS bond modeling systems do not handle rent rolls adequately for underwriting because, historically, an underwriting was nothing more than last year’s income and expense number (as adjusted, or not, by the servicer).
There are many paths to fix the property reporting deficiencies, and the issue raised above is not a new problem for the industry. To date, standardization efforts have been waged by the CMSA and the MBA. Being actively involved in these industry efforts, I can say the timeline to reach standards is still measured in years, not months. In good times, that may have been acceptable. Not today.
The power of a common underwriting platform
When we all share a common underwriting platform and have open access to required data, we will have much-needed transparency, and every member of the CMBS market will enjoy improved processes:
- Borrowers and brokers who are either looking for a new CMBS loan or reporting on an existing CMBS loan could enter the required data and report it to the lender or servicer in a standardized format.
- Existing borrowers would send their rent rolls and operating statements to the master servicer in an XML format that seamlessly updates the terms of the new rent roll in the investor system.
- Mortgage brokers could put together packages that feed directly into the lender’s system.
- Lenders would be able to analyze credit risks of new loans for internal approval and share that data efficiently with the rating agencies and investors.
- Investors would have access to updated surveillance reports conducted by the rating agencies, and they would be able to create their own versions of the cash flows for their bond books.
- Appraisers could create their valuation models using the same objective data as the lenders.
- These all seem like good enough ideas. …
We are building CMBS 2.o now
We are working to make CMBS.com the common CMBS platform. We are promoting acceptance by offering free accounts for all existing CMBS borrowers and individual user accounts for as little as $49/month.
Will it work? Will the borrowers come and register their loans? Will investors gain unique insight into the bonds? Will brokers prepare debt and equity marketing packages on the standard? Will the old-line banks get off their proprietary systems?
Who knows? Stay tuned.
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There is no question that the way in which we have conducted securitizations in the past is broken.
I agree with Ethan Penner (in his July 10, 2008 Opinion Article in the WSJ, The Future of Securitization) when he says “Yesterday’s business model has been invalidated.” However, I do not agree with his conclusion that securitization can survive “with a simple tweak.”
Mr. Penner makes the case that, in addition to transferring credit risk, the two primary benefits of securitization are
- a vehicle that allows a lender to match the terms of its assets and liabilities and
- the “transparency that it brings to bear on the system.”
Penner’s article concludes that for securitization to return the lender must originate loans and have enough equity/balance sheet to keep the first loss piece, while securitizing the senior pieces with CMBS bonds to get the benefit of risk transfer and to match fund the loans.
In other words, by the lender keeping skin in the game, the interests of the lender and the investor stay aligned and, therefore, everything will work again. The article makes no mention of the role of transparency and standards (other than them being one of the key benefits of securitization).
While aligning economic interest is absolutely a good idea, I would suggest that point is so fundamental that it should be assumed as mandatory. If the equity and the investor do not have aligned economic interests, we should not even consider bringing back securitization.
But how much equity is needed to keep all players’ interests aligned? 10%, 20%, 50%? The amount of required equity will no doubt vary depending on the market, the assets and the relationship between the equity (lender) and the investor.
History has shown that in good times the lenders will be required to keep very little (if any) skin in the game. In bad time, lenders will be required to put up more equity.
While coming up with equity is a fairly simple “tweak,” it does not represent the permanent reforms that are required.
Standards and transparency
For me, Skin in the Game is not the long-term answer (although it will probably be required for lenders to re-enter the securitization market as it crawls back to life).
The keys are standards and transparency with all parties using common underwriting models. Having spent the last eight years creating the most widely used common underwriting tool in the CMBS market, I can say that all lenders do the math the same way. Bank of America, Royal Bank of Scotland, Hypo International, CWCapital, AIG and Genworth all underwrite using the same software. Rating Agencies including Standard and Poor’s and DBRS underwrite using the same tool. The reason the market has not historically shared underwriting has to do with the fact the no common underwriting platform existed, not because the math is different from shop to shop.
The systems used by the big players were developed (at great cost) internally and typically have an Excel-based calculator. Since the models are fairly complicated (although the math itself is fairly simple), each party sets up its systems a bit differently. They do not share identical structures, and they do not communicate. And, since these systems were expensive and painful to develop, many people have vested interests in keeping the systems in place — so they don’t look like wasted technology dollars.
Underwriting is NOT an “art form”
Of course, some lenders have not been interested in sharing the math because, when times were good, they simply did not need to. I remember one prospectus where the issuer actually called underwriting an “art form” and, therefore, could not explain the math behind the numbers.
If underwriting is defined as an Art Form, then making up numbers because of aggressive assumptions becomes OK and very hard to detect. If they could sell the assets without the disclosure, why bother? One true benefit of the credit crash is that this position, as we have said, has been declared invalid.
A common underwriting platform
How do we, as an industry, get to a common underwriting platform?
To date, the industry effort to create standards has been led by the CMSA through its work on the IRP (Investor Reporting Package) and the MBA under the C-MISMO banner (Commercial Mortgage Industry Standards and Maintenance Organization).
The CMSA IRP is a decent standard in that people generally use it, but the data available in the file is deficient. The MBA has tried hard (and continues to try hard) to “herd the cats” and get everyone to agree on the data standards. It should be noted that CMISMO is not trying to standardize underwriting, only data terms and structures. Even with this reduced scope, the process of creating standards has been painfully slow and, after eight years of trying, only a handful of standards have been created with minimal industry adoption.
However, even if CMISMO were successful in short order, since there is nothing in the standards regarding underwriting, the ultimate value of the standard is questionable. That being said, we are members of CMISMO and have offered our tools, free of charge, to help the CMSA gain traction in rolling out IRP 6 (in XML).
On the private sector side, my product (Backshop) has been the most successful in gaining market acceptance. It is the only third party application in which 100% of the underwriting is done within the website and the database (no Excel!), so the system is 100% structured.
But Citi Bank, Goldman Sachs, JPMorgan, Morgan Stanley, Wachovia and others still use proprietary models. I can attest that selling enterprise software into these big companies is a slow and painful process with all sorts of barriers that often have nothing to do with the product. That being said, these institutions have never experienced an “Invalidated” business model, so the time may be now.
True, long-lasting change
If we, as a market, all used the same “calculator” and were willing to share our underwritings with the rating agencies and the investors in an open, transparent manor, that would bring true and long-lasting change to the securitization market.
It is more than a “tweak” — because creating standards is harder than raising capital.
However, if the legacy systems of a few major players are shelved and the remaining players have a path to join a common standard, the math would open up, and the risks of the loans and securities would be transparent.
Investors would no doubt return if they were comfortable they were getting a positive risk-adjusted return and that, in my opinion, is the way to bring back the CMBS market.
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It is September 11, 2008 and I have started preparing content for my soon-to-be released-blog, CMBS 2.0. The history of the company is deeply connected to September 11, 2001 and what better day than the 7-year anniversary of the attacks to chronicle that history.
The birth of Backshop
The company was incorporated in July 2000 with $500,000 of “Angel” money. We used that money to convert our starting technology (that we created at my first company, GateCapital) from Microsoft Access to Microsoft SQL and ASP (a desktop application to a Web based enterprise application).
By early 2001 we had a product that was functional (albeit grossly deficient in underwriting tools) and started the effort to sell the software. Right away we realized how hard it was going to be because we had two big strikes against us.
First, we were an undercapitalized “.com” from San Francisco (this was well after the internet bubble burst) competing against well capitalized competitors ($50MM each for CapitalThinking and MortgageRamp).
Second, we were trying to convince lenders that their Excel models were useless and they needed to dump those models and join Backshop.
In fact, I used to go into meetings with a button that had the word Excel on it with a line through it and was preaching my “No Excel” mantra. Needless to say, we could not find any banking executives who had vision and confidence in our ability to deliver on the promise of “Goodbye Excel”. So we started looking at other ways to survive.
In the summer of 2001 I had (I thought) found it. A local Bay Area company called LoopNet (a commercial real estate multiple listing service) was going through a tough time as a result of the .com crash. They were forced into a merger with a competitor, had investors screaming for better cash flow and did not have a proven revenue model.
In August 2001, I put up $75,000 and signed a contract to buy a division of LoopNet called LoopLender. The strategy was to link our newly created loan origination software with the equity listings on LoopNet to create deal flow which, in turn, would help us close software business because the banks would not only get a no-Excel, kick-ass system, they would also get deal volume.
So, on September 10, 2001, with the LoopLender business plan fresh off the printer, I took the “pink” eye to New York, Checked in to the Soho Grand (Canal and W. Broadway), and woke up bright and early on Tuesday the 11th to go and raise the money to fund LoopLender.
My 9 a.m. meeting was on Wall Street with Steve Schwartz at JPMorgan/Chase, and I had a 10:30 a.m. meeting ON THE 26th FLOOR OF TOWER 1 with Jim Kehoe, my old GateCapital partner. In fact, Kehoe and I had talked about a breakfast meeting at Windows On The World before the JPMorgan meeting but, thank God, we are both a bit too lazy for that so we settled on the 10:30.
On my way to my 9 o’clock on Wall Street, the first plane hit, and I witnessed firsthand the destruction of that day. The explosions, the realization it was a not an accident but a terror attack, the people jumping from the burning towers, and then, the collapse of the towers. I went back to my room, called my family to tell them I was OK, and then slept until 4 o’clock that afternoon. For the next few days (I did not leave New York until Friday), I lived 10 blocks from Ground Zero and spent time with all sorts of people who had similar stories of close calls. In the days immediately following the attack, the spirit of New Yorkers was amazing and I built on that vibe for my healing process.
So, when the realties of the event sunk in, I realized that the deal I had cut to buy LoopLender was not going to get funded. Of course I should have just taken my $75k hit and walk away. But, being the optimistic entrepreneur, I figured if I could get LoopNet to lower its price, maybe I could close it. I ended up chasing the deal for another 6 months, throwing another $125k in deposits to keep the deal alive while I was trying to close the equity. While I had negotiated hard and got the pricing way down, I could not get my equity to close (Wimps!), and ultimately lost $200,000 when I could not close without them. Ouch!
For those of you who don’t know, Loopnet had (is having) a happy ending. They dominate the commercial MLS space and had a successful IPO. Check them out on the NYSE under the ticker “LOOP.”
Time to rock
After a rough couple of months and a move out from an office in San Francisco to a desk in Sausalito, I finally got a break in November 2002. Through an introduction from Chris Tokarski of Coastal Capital (and later Countrywide), I met Perry Gershon at RBS Greenwich Capital (now of Loan Core Capital). He had just been brought in with Mark Finnerman to ramp up the real estate group.
I went in for my sales call, gave my “No Excel” pitch, and finally got the response I had been praying for: “You’re the first guy who knows what he is talking about.”
Perry had developed an Access database at Nomura under Ethan Penner, so he knew the value of getting out of spreadsheets and getting the business into a database. And he is one of the smartest folks in the business.
Over the next 12 months, we built out the deficient pieces of Backshop (we called it cUnderwriter back then) so you could do lease-by-lease underwriting and everything you needed to originate and securitize loans on stabilized properties.
We started marketing the product in January 2004. We signed up our second client (Chris Tokarski and his partners at Countrywide) in April and have been rolling ever since. We were lucky enough to get different types of clients who needed discounted cash flow modeling for properties other than stabilized real estate in the United States. So, we built out the multiyear cash flow models and construction lending models, and we could account for different currencies and date formats, etc.
We also made two significant acquisitions. First, we acquired Conquest bond modeling software and CMBS database from Standard and Poor’s in late 2005. This acquisition has positioned us to become a content as well as software provider. Second, we acquired DealCentral from MortgageRamp / CapMark in 2007 (one of our $50MM funded competitors). We consolidated DealCentral clients onto Backshop and eliminated a competitor.
Transparent standards — today!
And now, we embark on perhaps our biggest challenge: the adoption of a transparent standard for the real estate finance industry.
This mission is bold but necessary.
We are committed to making the software widely available to all who want to join the standard. We hope, with continued widespread adoption, we can balance the transparency requirements with privacy issues and create a more credible, open standard for the resumption of the CMBS business.