Notes from the CMSA Investor Conference: Investor Forum

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.

So, the promised “Lively Debate” turned out to be a scolding and, frankly, the people who have been working on these problems were a bit put off. But, the list of needed improvements made sense — and it is exactly what I have been saying here.

The panel was comprised of real estate people at insurance companies — Freddie and Fannie — that bought AAA CMBS and thought they didn’t have to do any real estate work. Now that their positions are worth about 60 cents on the dollar, their bosses are asking them to do a bunch of real estate work to support the value of the bonds. “Re-underwriting” is the term used. When they turn to the masters and trustees, they realize all the problems with getting data through the system.

They came up with this list of changes/improvements:

1. Simpler capital structures with much fewer bonds that have bigger percentages. This is more a suggestion for new deals, but far fewer bonds (2 to 4) would be less volatile than 15 bonds in a capital stack.

2. Release all data and eliminate the concept of Restricted Data. AAA investors now find themselves in an equity position and have the right to the data only the B Piece Buyer used to get.

3. Clean the form and quality of the data, especially as it relates to rent rolls, reserves and the liens in the capital stack.

4. Any changes we make to the PSAs to increase transparency should be retroactive to the existing deals so we do not create this $800 billion of forever-toxic assets. The panel said it best with “We built this thing while flying at 35,000 feet at Mach III. We should not be surprised we have to make a few changes.”

5. Master Servicers are not paid enough.

6. Special Servicers have a huge conflict of interest because of the value of the servicing contracts.

7. Rating Agencies should move away from the Black Box, at least when it comes to surveillance.

8. Structures work better if everyone has “skin in the game.”

9. They are willing to pay for the improved data.

The good news:

IRP X can and should be the standard and tool we use to meet the investors’ demands.

We are not far away from an implementation point of view, and my position at MISMO can only help. But we will need help compelling master servicer participation, and we might need legal cover if we change the PSAs on existing deals that specifically exclude the restrictions on some data.

Stay tuned for more from Miami.

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Jim Flaherty is CEO of and the creator of the Backshop loan origination system. He is a trained credit professional with experience installing enterprise underwriting systems for commercial real estate lenders, rating agencies and investors.

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