Tough Times for Lenders : Financial Services Lawyer & Attorney : Winstead Law Firm : Finance, Banking, Bankruptcy

As I sat in the January Conference of the CMSA (now known as the Commercial Real Estate Finance Council), I noticed some startling changes (link to my blog postings):

• the January meeting once was called the "Investor's Conference," with a focus on CMBS bond holder issues and topics
• with the CMBS market "kind of" alive, and the new issuance market "kind of" alive, the organization was broadening its target market beyond simply companies participating in securitized commercial real estate
• the new targets would be the entire commercial real estate sector: securitized loans; portfolio lenders (banks, life insurance companies); note buyers (whole loans; A\B structures; participations; syndications); etc. - you name the type of CRE financial structure or product
• this all-inclusive approach is reflected in the purpose statement: "To promote the strength and liquidity of commercial real estate finance worldwide"
• this greatly expanded footprint is reflected in the strategic plan and in the "forum" structure of "CREF C"

My first though was: "hum, sounds like they're trying to be like the Mortgage Bankers Association.  Now we have two industry organizations for the commercial real estate finance industry?"

So, I wasn't surprised when recently, as I participated in a conference call, the discussion wandered off into the topic of a possible merger of the MBA and the CREF C.

The discussion was pretty animated.

I quickly learned that some mortgage bankers are very, very opposed to the idea - and are alarmed that this topic would be in play at the very time that the MBA needs to focus its effort (and limited resources) on advocacy issues in the financial reform bills working their way through Congress - and in the other regulatory changes in play.

• what are your thoughts on this possible merger?

Please post your comments below.

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On Monday (March 22, 2010), the Senate Banking Committee voted along party lines and passed the "Restoring American Financial Stability Act of 2010" (with a 13 to 10 vote).  So, Senator Dodd's financial reform bill makes its way out of the Senate Banking Committee.  And now the bigger battle begins.

But not before Committee members filed 473 amendments to the already lengthy bill (1336 pages).

Fortunately for us, the CMSA has updated its summary of the provisions of interest to its members.

Like the Commercial Mortgage Securities Association (CMSA), the Mortgage Bankers Association (MBA) has circulated a short summary of the bill, which focuses (as it should) on issues important to its membership.  (Note my blog last week covered the CMSA's initial summary of the bill).  The MBA's summary focuses on securitization, and attempts to revive the CMBS market (commonly referred to as "CMBS 2.0"). 

Succinctly stated, the MBA believes that "the market already has retained risk embedded in its structure and risk returns. In addition, we will underscore our position that an uniform approach to risk retention can create unintended consequences and stymie further efforts toward economic recovery."

Here is the MBA summary, as it focuses on those two positions:

• Reduces risk retention from 10% to 5%
• Requires separate rules for different asset classes - residential, commercial loans, etc.
• Provides for exemptions, exceptions and adjustments of risk retention for assets that are deemed to have high quality underwriting and in the public interest.
• The Federal Banking agencies (the OCC and the FDIC) and the Securities and Exchange Commission (SEC) are required to jointly prescribe regulations to mandate that any securitizer retain an economic interest in a material portion of the credit risk for any asset through the issuance of an asset-backed security (ABS) that is transferred, sold or conveyed to a third party
• These regulations must: 1. Prohibit a securitizer from directly or indirectly hedging or transferring credit risk that the securitizer is required to retain with respect to an asset; 2. Require a securitizer to retain: a. not less than 5% of the credit risk for any asset that is transferred, sold or conveyed through issuance of an ABS by the securitizer; b. less than 5% of the credit risk for an asset that is transferred, sold or conveyed through issuance of an ABS by the securitizer if the originator of the asset meets the underwriting standards that must be established by the regulator that specify the conditions, terms and loan characteristics within each asset class that indicate a "reduced credit risk" with respect to the loan; 3. Specify the permissible forms of risk retention and the minimum duration of the risk retention, 4. Apply regardless of whether the securitizer is an insured depository institution, and 5. Provide for: a. a total or partial exemption of any securitization as may be appropriate in the public interest or for the protection of investors; and b. the allocation of risk retention obligations between a securitizer and an originator in the case of a securitizer that purchases assets from an originator, as the Federal banking agencies and the SEC jointly deem appropriate.
• The definition of an originator is "a person who sells an asset to a securitizer."
• The effective date of the regulations would be 2 years after the publication date for the commercial market.
   

Click here for a copy of the MBA's press release covering its position on that the bill needs a more explicit risk retention exemption for mortgages [download] and for a copy of the MBA's summary of the risk retention provisions in the bill [download].

After the tough battle over health care, it will be beyond interesting as we watch Congress go to the mat over financial services reform - and hopefully legislation that supports recovery of the CRE finance markets and the economy.

If you have any comments or questions, please post a comment below.

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On Monday, March 15, the Senate Banking Committee released it's draft of the "Restoring American Financial Stability Act of 2010" [click name to download it]. 

It is long: 1336 pages.

And no surprise at this: it is complicated.

Provisions include creation of a consumer protection watchdog housed in the Federal Reserve; creation of a nine-member Financial Stability Oversight Council chaired by the Treasury Secretary; an “advanced warning system” for systemic risk; an end to “too big to fail;” increased transparency and accountability for “exotic” instruments such as derivatives; streamlined federal bank supervision; increased regulation of credit rating agencies; and a “say on pay” provision for shareholders on executive compensation

Fortunately, the Commercial Mortgage Securities Association (CMSA) furnished a preliminary summary of the bill [click to download it] - it is 11 pages.

Note, however, that the CMSA summary focuses (as it should) upon issues important to its members.  So, if you are a bank or a life insurance company, you probably need to reach out to your industry advocate group for details of importance to you.  (Did I say "this is complicated?")

Here is the summary of the summary furnished by the CMSA (further proof that this is complicated):

• For ABS, including CMBS, a reduction in the retention requirement by “originators” and/or “securitizers” from 10% to 5% and a clarification that this applies only to securitized loans;

• A requirement that regulators (the OCC, the FDIC and the SEC acting jointly) tailor retention rules by “asset class";

• Regulator authority to lower or eliminate retention if “underwriting standards” (as jointly established by the regulators) are satisfied, or if the regulators jointly find that the reduction or elimination of the retention is appropriate for any other reason;

• Enhanced Credit Rating Agency transparency for investors and related operating requirements;

• Modification of Treasury’s proposal that the SEC direct credit rating agencies (CRAs) to “differentiate” ratings with a requirement that CRAs disclose the basis of ratings and that symbols be used consistently across the types of securities to which they apply (with the CRA discretion to differentiate if chosen). 

Remember, the House already passed financial reform legislation last fall.  So, this bill will be debated in the Senate, and then if it passes, it'll go to joint committee for reconciliation.

No doubt, we'll be reading much about this from many sources.  In the interim, here are my quick thoughts:

• Time is short, and the mine field already is full of controversial issues (such as health care).  Mid-term elections are approaching; and after August, a significant portion of Congress will have one thing in mind: re-election.  And thus no time for financial reform.
• This is a long, long, long bill.  This is complicated.  One criticism of the American Recovery and Investment Act [track it here] was that it was long and complicated.  A topic as important as financial reform needs careful consideration.  This just strikes me as too much with not enough: is there really enough time and attention bandwidth in Congress to give this topic the proper consideration?
• U.S. Senate Banking Committee Chairman Chris Dodd (D-CT) is not running for reelection. He is the key in keeping the necessary focus, and in acting as the moderator and mediator in this process.  This is good.  But, as the next bullet shows, he isn't pulling the other side of the aisle with him (yet).
• But I still come back to this point: is a 5 month period (full of other political issues) really enough time to vet a Senate Bill and a House Bill, and then to overhaul the financial services industry?  This is an overhaul of a very, very important industry.  Sure, other topics in front of Congress are important, such as education and the overhaul of the "no child left behind" bill.  But will the net effect of a financial reform bill, passed under intense time pressure, simply give us a financial services industry "left behind" in a very competitive world economy?  The "new" world order no longer has the US imposing our will on the world financial markets.  There's real competition now.
• Already, the committee’s ranking Republican, Richard Shelby, R-Ala., and nine other Republicans on the committee sent Dodd a letter saying the proposed timetable does not give members adequate time to understand the scope of the proposal: “Given the sheer magnitude and complexity of the financial reform package you intend to introduce, this legislation will inevitably have a substantial impact on our financial system and overall economy. Accordingly, we urge you to allow for sufficient time to review the language.”

This is complicated.

Please post your initial thoughts, comments, and questions blow.

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Commentators note that one great attribute of the Internet, and the communities formed within and around it, is this: when someone wanders off (or climbs on a ledge), the community does a good job of nudging each other back to the group.

Yes, I was a little disappointed (OK, even upset) at the lack of focus by the CMSA on covered bonds at the January conference (see my comment regarding the session called "Lessons From CMBS 1.0").

However, my friends at the Covered Bond Investor (link) correctly note that the Mortgage Bankers Association lists covered bonds as part of "legislation among the organization's legislative and regulatory priorities for 2010."  (posting on the MBA list)

My sense, however, is that covered bonds will NOT be a near-term reality. 

But thank you, Covered Bond Investor, for talking me off the ledge.

If you have an interest in covered bonds, visit the Covered Bond Investor.

And if you have any questions or comments for me, please post them below. 

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Sick and beyond tired of the inflexibility of CMBS servicers in making needed modifications to CMBS loans that we all know are in the ditch?  Help might be here:

On September 15, 2009, the IRS and the Department of the Treasury issued three pieces of guidance relating to commercial mortgage loans held by a securitization vehicle (a CMBS loan).

• The final rules (see PDF entitled "TD 9463") regarding "Modifications of Commercial Mortgage Loans Held by a Real Estate Mortgage Investment Conduit (REMIC)" include changes in collateral, guarantees, credit enhancement of an obligation and changes to the recourse nature of an obligation.  These rules expand the list of exceptions that will not be considered "significant modifications" of a CMBS loan obligation held by a REMIC.
  
• The IRS also issued Revenue Procedure 2009-45 (PDF), which is a final ruling that describes the conditions under which modifications to certain mortgage loans will not cause the IRS to challenge the tax status of REMICs.  Specifically, note the factor that allows a servicer to take action more than one year prior to maturity.  Furthermore, a servicer is able to rely on information provided by the borrower unless it has knowledge to the contrary.  More importantly, while past performance of the loan is a factor in assessing risk, a "significant risk of default" (based upon a "reasonable" belief standard) can be found by the holder or servicer even if the loan is currently performing (This is great news for principals who are keeping the loan payments current from sources other than rent).
  
• In addition, the IRS and Treasury issued Notice 2009-79 (PDF) and are requesting comments on what additional guidance, if any, is needed regarding modifications of commercial mortgage loans held by investment trusts.

Additional information can be found on the CMSA's Web site (link to REMIC Reform).

Hopefully, these guidelines will allow CMBS loan servicers and borrowers greater flexibility to assess risk and allow for appropriate modifications to CMBS loans.  It is desperately needed.

We know that the public is in no mood to support a "rescue" plan for commercial real estate.  Maybe,  just maybe, "tweaking" the tax code like this will be the approach that will be taken by the government—sort of a "back door" rescue plan for commercial real estate.  However, I believe that it'll take much, much more than tweaks like this one to help commercial real estate to QUICKLY recover.

Kudos to the broad cross section of the commercial real estate industry that worked on this initiative (Mortgage Bankers Association, Commercial Mortgage Securities Association, ICSC, Real Estate Roundtable, and others).

If you have any questions or other information, please post a comment.

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