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

Once again [link to earlier letter], in a letter dated March 25, 2010, the 21 key industry groups band together in an attempt to focus the Senate on the importance of the securitization market, and to caution the Senate on the proposed reforms relating to the securitization market. The players in this group represent an extremely broad segment of the US economy:

• American Bankers Association
• American Hotel & Lodging Association
• American Resort Development Association
• American Securitization Forum
• Associated General Contractors of America
• Building Owners and Managers Association International
• Certified Commercial Investment Member Institute (CCIM Institute)
• Commercial Real Estate Finance Council (formerly CMSA)
• Community Mortgage Banking Project
• Institute of Real Estate Management
• International Council of Shopping Centers
• Loan Syndications and Trading Association
• Mortgage Bankers Association
• NAIOP, Commercial Real Estate Development Association
• National Apartment Association
• National Association of Real Estate Investment Trusts
• National Association of Real Estate Investment Managers
• National Association of Home Builders
• National Multi Housing Council
• The Real Estate Roundtable
• Securities Industry and Financial Markets Association

The challenge is to keep the message, and the Senate’s focus, simple despite the expansive scope and length of the “Restoring American Financial Stability Act of 2010”  – yet financial reform is a topic that invites amendments. (Recall the 473 amendments made on the bill in the Senate Banking Committee.)

The letter [download] addresses the importance of the securitization market as a key source of liquidity for economic recovery. The message is very simple and pointed:

• credit markets are constrained despite enormous demand for credit and significant loan maturities – all in the face of declining values
• new accounting changes will limit balance sheet capacity and the overall amount of credit
•  the bill’s proposed “risk retention” terms will further limit balance sheet capacity and lending capacity

The letter states that “given the totality and far reaching implications of regulatory and accounting changes, there are serious concerns about the future viability of the securitization markets that are critical to borrower access to credit and an overall recovery.”

Perhaps because the letter is from a broad segment of the US economy, it does NOT address several important topics of importance to commercial real estate, such as -

• Covered bonds: note that on March 18, the House Financial Services Committee – Capital Markets Subcommittee (ranking members are Scott Garrett, R-NJ, Chairman Paul Kanjorski, D-PA, and Spencer Bachus, R-AL) introduced covered bond legislation. I’ll address this important bill in a future blog posting (For background on covered bonds: link)
• Rating agency reform: clearly this is a topic of key importance for securitizations involving commercial real estate (i.e., CMBS).

Regardless, it is good to see a broad spectrum of key industry groups join together is support of a specific, and focused, aspect of the reform legislation.  The collective strength will be needed.  It will be an up-hill battle.

If you have thoughts or comments, please post them 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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