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

One of the factors dampening the recovery in the commercial real estate markets is the lack of liquidity. The problem is immense: without liquidity, buyers of distressed debt and foreclosed real estate do not have access to the financing that makes the investment attractive to them; and maturity defaults become a growing reality.

Recent developments show the scope and challenges of this problem, and possibly show part of a possible solution:

• Comments on Proposed Changes to SEC Regulation AB - The Problems: The Mortgage Bankers Association (MBA) and the Commercial Real Estate Finance Council (CREFC) both have issued their comment letters on proposed changes to the SEC's Regulation AB, which is an important rule governing securitization (CMBS).  Both letters explain the key role of the capital markets in furnishing capital to commercial real estate; and both comment upon the proposed rule and offer suggested changes (
• Senior Bondholder Control of Special Servicer - Partial Solution: The current Goldman Sachs CMBS offering contains a unique (and new) structural component: the senior bondholders will have the power to direct and replace the special servicer (a right normally held by the owner of the unrated B-piece bondholder [who often is affiliated with the special servicer]).  This is a very, very significant departure from prior CMBS structures, and squarely addresses a key complaint of the senior bondholders.
• Skin In The Game or Risk Retention - Not Applicable:  The proposed rule would require the sponsor of the securitization to retain an economic interest of not less than 5 percent of the credit risk of financial assets securitized, This would be a dramatic change from CMBS as we know it - because in CMBS, the unrated B-piece holder has first-loss exposure, and thus it has "skin in the game."

Comments to SEC Regulation AB:  Both the MBA's letter and the CREFC's letter artfully articulate the challenges and the importance of the capital markets to commercial real estate.  The CREF's letter succinctly lists them as follows:

• Limited Liquidity/Lending with CMBS Dormant: CMBS accounts for @ 25% of all outstanding CREF debt, and as much as 50% of all CREF debt during the (roaring) mid-2000s.
• Significant Loan Maturities: @ $1trillion of CREF loans will mature over the next several years - yet capital to refinance these maturities is "still relatively constrained."  (Wow. Constrained?  We get the message.)

The CREFC letter focuses on these two primary concerns:

1. Costs: the concern is that the requirements will substantially increase costs for closing a CMBS issuance without real benefits (given the unique attributes of commercial real estate and existing industry practices)
2. Transparency: the concern is that proposed disclosure and reporting requirements (for both public AND private placements) are not necessary, given (again) the unique attributes of commercial real estate and existing industry practices.  This issue is what I describe as the "private is the new public."

Senior Bondholder Control of Special Servicing: This topic has been the subject of much debate within the industry.  Goldman's solution, where the senior bondholder has the power to direct and replace special servicers (a right normally afforded to those owning the B-Piece), is both startling AND new - which I read as meaning the senior bondholder investment market simply refuses to go forward with the current CMBS model, which forces them to sit on the side line as subordinate bondholders approve (and direct) loan level changes, modifications and remedies - at the ultimate expense of the senior bondholder.  Bloomberg has a nice posting on this significant development.

This Goldman structure is very significant, and it will not surprise me if somehow it is "baked into" future CMBS deals (as part of the new CMBS 2.0) - whether pursuant to a new SEC rule or as a customary structure.  It squarely addresses a major investor complaint about CMBS by senior bondholders, and thus it could be part of the liquidity solution.

Skin In The Game:  In its letter, the MBA notes that the SEC's 5% retention risk proposal needs to be consistent with the Dodd-Frank Act.  The MBA asks the SEC to work with other federal regulatory agencies to harmonize risk retention regulations based upon Sec. 941 of the Dodd-Frank Act. And with respect to commercial real estate, MBA said the proposed rule’s requirement that a sponsor of a commercial mortgage-backed securitization to hold a 5 percent vertical strip of bonds issued is no necessary given certain, key structural components of CMBS.

 If you see it differently, or have other information, please comment below.

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Over the last several weeks, I’ve shared and commented upon numerous summaries of the Dodd-Frank Wall Street Reform & Consumer Protection Act.

Last week I discovered two pieces that artfully make sense of the 2,319-page Act, and even offer up some implications. They are very helpful and interesting.

• If you really need to understand the Act, at some point, you’ll need to read the real thing.

But if you’re somewhere between a casual observer and a hard-core regulatory fiend (or simply looking for a few hours of reading), then these two resources need to be on your reading list.

• If you’re looking for ways that the Act will touch your world, then the Deutsch Bank piece will interest you (more than the Harvard Law School links).
• If you’re looking for a detailed summary, then the Harvard Law School links will interest you (it is light on articulating implications of the Act).

Deutsch Bank: The Implications of Landmark U.S. Reg Reform (July 2010)

This 84 page piece reviews the Act from 4 perspectives:

1.  Government\Regulators
2. Banks\Corporates
3. Investors
4. Consumers

It then outlines the timing of implementing the Act, and then lists potential implications for the following sectors:

•  Banks
• Non-bank Financial Service Companies
• Credit Markets
• Ability to Hedge Risk (Derivatives)

This is a very thoughtful piece.  The suggested "implications" are very interesting.

Harvard Law School: Forum on Corporate Governance and Financial Regulation blog 

The blog contains a good collection of materials and commentary on a wide variety of subjects covered by the Act (but excluding Title XIV of the Act, which covers mortgage reform and anti-predatory lending).

Importantly, the blog contains links to a 130-page summary (in bullet format) prepared by the Davis Polk law firm. The table of contents in the summary contains an outline to the Act, with each topic formatted with a hyperlink – so that by clicking on it, you go directly to the topic summary in the 130-page summary. (Note that the summary does not cover Title XIV of the Act, which covers mortgage reform and anti-predatory lending.)

This summary is so long, I’m not going to restate the table of contents here.

In addition and importantly, the blog contains Davis Polk‘s 28-page outline covering the regulatory implementation time-line of the Act. 

If you’re looking for meaningful implications in these materials, look for the “key point” text boxes in the 28-page outline.

From my perspective, this 28-page outline is outstanding and the “key point” boxes are very interesting.

And, the blog also contains other postings covering specific aspects of the Act (such as executive compensation and securities litigation).  So, click around on this very good blog.

One final comment: the title to the Dodd-Frank Act pointedly makes one very important – the Act is intended to address “Wall Street Reform” and NOT Main Street economics.

Chuck Jaffe at the Wall Street Journal’s Market Watch comments that it "took Congress about 2,400 pages to document its plan for reforming America's financial system, but the appropriate reaction for the nation's consumers can be summed up in just three words: Thanks for nothing.”

The Dodd-Frank Act is many things with a long list of implications, but it is NOT a Main Street economic life raft.

As I have noted before, addressing Main Street economic issues seems to be low on the political agenda.   Yes, Congress should address needed reforms in our regulatory platform. However, the electorate has more immediate needs - which literally are points of pain. We’ll see how the pain plays out in the ballot box this November.

If you know of other helpful evaluations of the Dodd-Frank Act, have other resources to add to these two resources, or simply have a different perspective, please post a comment below. 

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This should be the final summary from me on the Dodd-Frank Wall Street Reform and Consumer Protection Act.

My last posting on this topic covered the summary furnished by the MBA, together with links to other resources, summaries, commentaries, etc.

Like the MBA, the Commercial Real Estate Finance Council focuses on the commercial real estate; and it also has a keen interest in the bill.

Here's an outline of the summary commissioned by the CREF-C and circulated to its members (so that you can determine if it interests you):

I.      Securitization Reform
II.    Credit Rating Agency Reform
III.   "Volcker Rule" Limits on Proprietary Trading & Other Activities
IV    Other Reform Provisions:

• Systemic Risk: Financial Services Oversight Council
• Resolution Authority
• Bureau of Consumer Financial Protection
• Federal Insurance Office
• New Investor Protection Provisions
• Executive Compensation
• Corporate Governance; and

V.   The "Pay For" - The Financial Crisis Assessment and Fund

Again, if your interest focuses on commercial real estate, then this excellent summary (prepared by a DC law firm for the CREF-C) will interest you.

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Following up on my collection of summaries and up-dates from Congress, industry organizations, Google sources (via news\blogs\twitter) and one DC law firm, here is the summary prepared by the MBA.

I know that this blog entry is short.

However, if this blog is all about the content, then on the topic of "where can I read summaries of the Dodd-Frank regulatory reform bill" -

Enough said.

But if you have other sources, please tell us about them below.

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If you've been following (here at TTFL) the Dodd-Frank Wall Street Reform and Consumer Protection Act, then you have these resources (and my 2 cent commentary):

• the summary furnished by the House Financial Services Committee, and to a copy of the entire bill [link to all of this]
• tips on using Google Reader to monitor this bill in the news, on blogs and on twitter; and a short summary of 3 commentators on the bill (each with a different perspective [link to all of this]
• a summary prepared by a DC law firm (the number of these summaries are growing like summer maize) (having just returned from the College World Series [a 10.5 hour trek across Oklahoma, Kansas and Nebraska from Dallas], images of this stuff is burned into my retina display)

Next up in the information flow: summaries by key industry organizations.

1. The Long Syndication and Trading Association (LSTA) has circulated a summary prepared by it (attached), which focuses on these three important topics for the syndicated loan markets:

• Risk Retention: these provisions could effect the syndicated loan or CLO market.  Although the CLO market is NOT explicitly targeted in the Dodd-Frank bill, some of the provisions are broad enough to sweep CLOs into the fold.
• Volcker Rules: additionally, these provisions could impact the loan syndication process surrounding CLOs, and importantly, they also could impact swaps on loans known as "total return swaps" (TRS) and "loan only" CDS or CDX (LCD/X - all of which are implicated in a number of provisions).
• 150 & 350: remarkably, the LSTA gives this very unofficial statistic - the bill calls for @ 150 studies or reports AND for @ 350 new regulations; all of which must be completed within 270 days following final passage of the bill.  The Regulators (the Federal Reserve, OCC, FDIC and SEC) will be beyond busy.  Can picture this?
  
  As noted in the attached, the LSTA intends to be very, very involved and busy with the Regulators; as will every other industry organization, lobbyist, etc.

2.  Attached is the July 1 letter from the Commercial Real Estate Finance Council (CREF-C) to the FDIC, which covers the following:

• the FDIC's proposed "safe harbor" rule: this proposed rule addresses the treatment of assets during the potential insolvency of an FDIC-backed institution.   The FDIC offers up this proposed rule in response to new accounting rules (FASB 166 and 167), in order to ensure that assets transferred by an "insured depository institution" into a CMBS pool are protected from any insolvency proceedings of that institution.  The letter notes that the FDIC's approach is NOT consistent with the Dodd-Frank bill.  My guess here is that the FDIC's work on the safe harbor rule will come to a screeching stop - as it joins the other Regulators in the work described above.   This topic becomes part of the 150/350 mix referred to by the LSTA above.

If you have other summaries prepared by industry organizations, please post a comment (below) with instructions on "how" we could obtain a copy.

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On the 4th of July.  I suggested that you celebrate it by becoming more "involved" in understanding what is being called the greatest "reform" or restructure of our national economic platform since the Great Depression (remember: we're only in a "recession").

If you're following this important financial reform bill (the Dodd-Frank Wall Street Reform and Consumer Protection Act), you know that it passed the House on Wednesday, June 30 by a vote of 237-192.  You also know that three Republicans broke party ranks and voted for the bill: Joseph Cao (LA), Mike Castle (DE) and Walter Jones (NC).

How do I know this? How am I following this very, very important bill?

I'm using Google Reader to track all appearances of the phrase "Dodd-Frank" in these three information sources:

• in news accounts on the Internet (using the Google News search engine)
• in blogs on the Internet (using the Google Bog search engine)
• in twitter entries on the Internet (again, using the Google Twitter search engine)

OK, I agree: this sounds way, way "techie" and a real pain - just too many clicks and steps.

Google, however, makes it very, very easy: Google Reader automatically does all of this for me.

Consequently, it is very, very easy to track the bill's progress through Congress, and to read commentary about it.

For example, Google Reader collects these different perspectives and commentators on the bill:

• Open Left, which is a "website dedicated toward building a progressive governing majority in America"
• Deal Book on the New York Times' website, which is starting a "tour" of the sixteen titles of the Dodd-Frank bill
• Commentators such as Tyler Cowen, who give his unique assessment of various aspects of the bill (Wikipedia describes Cowen as a "libertarian bargainer")

Come on - don't you want to watch and read this great debate on this important bill?

It is so, so easy to do using Google Reader.

For step-by-step instructions (6 total steps) on "how" to do this, go to my earlier posting on using Google Reader for your lease surveillance projects.  The six steps are at the end of the blog post.

The instructions are easy.

The benefit to you will be great.

The Internet is the new knowledge bank.  Use it.

And happy 4th of July to  you!

If you have other "hot" topics that you're following, please post them below.

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Earlier this week, I posted a short summary of the Financial Services Reform Bill.   Since then, the House Financial Services Committee posted the text of the overhaul agreed by the House-Senate Conference Committee late last week:

• Now called the Dodd-Frank Wall Street Reform and Consumer Protection Act, the bill is both long (2,193 pages), and being pushed for a vote in the House before the 4th of July.

(Hip, hip, hurrah for the 4th!)  (Question: could you do this in a week - digest 2,193 pages, then think about it, complete the proper due diligence and investigation, and then vote on it - in one week?  Bonus question: could you do this after that week - tell your constituents that your really understood those 2,193 pages?) (Looking for those cliff notes . . . ?)

• So, to assist everyone (maybe even a few Senators and Representatives - or at least those with a busy extra-curricular schedule), the House Financial Services Committee also posted a 10 page summary [PDF] of the 2,193 pages..

We now have our summary.

If you have one work-related item to read this month, this is it. (Since you won't be voting on it, just read the summary . . . not the 2,193 pages.)

At this juncture,  we all start the hard work of figuring out "how" all of this will change the financial services industry; and how each of us will make a living, buy a house, etc.

One quick observation:

• some very important topics are pushed to the regulators (for their decision on important regulatory topics), which means we'll need to build in further delay and uncertainty in our business models pending those decisions

(First we blame and bleed the regulators in hearings staged for the 24/7 media coverage; and now we empower the same regulators or create MORE regulators. Is this political two-step simply an admission that we don't want to be responsible for the hard decisions? Or perhaps this simply is one political black hole in our representative government - the need to pass a bill and then climb the re-election podium?)

Happy 4th.

If you have some early predictions on the "how" flowing from these changes, please post them below.

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