CRE Finance Council: 2010 Issues Overview
The commercial mortgage-backed securities market has been a tremendous source of capital, providing unparalleled liquidity and contributing to economic growth. Today, the CMBS market totals approximately $700 billion, with virtually every Congressional district having commercial projects financed through CMBS loans. However, the turmoil in our financial markets, coupled with the overall downturn in the U.S. economy and falling property values -- creating an “equity gap” -- has severely constrained the CMBS market and created many pressing challenges. With approximately $1 trillion of commercial real estate loans maturing in the next several years, the Council is actively engaged in efforts to promote liquidity and facilitate lending in both the CMBS and other commercial real estate finance markets.
Unlike many trade organizations that represent a single type of constituency, the CRE Finance Council is the collective voice of the entire commercial real estate finance industry. The Council represents all market participants involved in commercial real estate finance – lenders who make loans for securitization and to hold on portfolio, issuers who package loans into bonds, trustees that hold securitized loans, rating agencies, loan and securities investors, loan servicers who service the loans, as well as other service providers. It is from this unique and comprehensive perspective that the Council is actively engaged in issues important to the entire commercial real estate finance market.
Financial/Securitization Reforms: Congressional policymakers and financial regulators continue to work diligently to overhaul U.S. financial regulatory structure. After the Administration “blueprint” for reform was released, Congress held several hearings, with then-CMSA testifying on these issues at the House Financial Services and Senate Banking Committees. With reforms expected to be finalized shortly, the Council is fully engaged in working with policymakers to ensure that reforms are customized and coordinated to support, rather impede, a commercial real estate recovery.
As a result of these efforts, provisions related to the CMBS market have been included in both the House and Senate financial reform bills. Specifically, a Senate-passed amendment would enable regulators to choose the best form of “skin-in-the-game” requirement(s) for the CMBS market (including a percent retention, underwriting standards and controls, and/or stronger “representations and warranties”). Additionally, under the Senate language (similar to a House-passed amendment), regulators would be allowed to consider allowing a "third-party investor" (in addition to the "securitizer" or "originator" of loans) to satisfy a potential retention mandate for commercial mortgage-backed securities (CMBS) as long as any such third-party investor performs due diligence, purchases a first-loss position and retains this risk. The language is critical because it provides important reforms in a tailored manner, while avoiding potential negative complications on capital, liquidity and credit availability.
The CRE Finance Council continues to raise awareness about the importance of securitization, which has been a crucial and necessary tool for growth and success in commercial real estate finance, and to ensure that actions taken by policymakers do not contradict or negate recovery efforts. The Council highlights its work to promote industry “best practices” and to provide tremendous transparency. In this regard, the CMBS market boasts unparalleled transparency made possible by the CRE Finance Council Investor Reporting Package ®, which tracks all property, loan and bond information and allows all market participants to view ongoing surveillance in a standardized form.
In addition, the CRE Finance Council will continue work to ensure that any GSE reform supports the commercial real estate finance market. The Council is currently working to respond to a joint Treasury/HUD request for public comment on the future of housing finance, given the role of the GSEs in the multifamily market.
Lending and Liquidity Initiatives: As policymakers continue to examine and address turmoil in the financial sector, the CRE Finance Council is dedicated to sharing its perspective on commercial real estate finance. Since last year, the Council has been actively engaged in highlighting policy options aimed at providing liquidity and facilitating lending in the broader commercial mortgage market, while assisting policymakers on how the secondary market can be utilized to support a recovery in commercial real estate. Specifically, the association strongly supported the expansion of the Term Asset-Backed Securities Lending Facility (TALF) to new issue and legacy CMBS with a five-year term, as well as the creation of the Public Private Investment Program (PPIP), to promote new lending and investing.
The Council also is committed to working on additional long-term solutions to ensure the market is able to meet ongoing commercial borrowing demands, and the association has testified by Congress on these issues and will continue to advise policymakers on how such tools could be structured to support a commercial real estate recovery. As the Resolution Trust Corporation (RTC) pioneered, the securitization of commercial mortgages can be used as an effective “exit strategy” for the government after an institution has failed and its assets (including CRE loans that were not securitized) are seized by the FDIC. Such a proven mechanism can minimize government and taxpayer exposure, while providing liquidity and capacity to the CRE market. The Council is examining these proposals carefully and extensively to understand short term needs and challenges, as well as long term consequences for the market.
Covered Bonds: As policymakers explores new financing mechanisms, the CRE Finance Council supports efforts to facilitate a U.S. commercial covered bond market in order to provide an additional source of liquidity through new and diverse funding sources. Specifically, the Council is urging the FDIC to consider expanding the definition of eligible mortgages for its existing covered bond pilot program to include high quality commercial mortgage loans and CMBS. Further, the Council worked with Members of Congress on the introduction comprehensive legislation that would include high quality commercial mortgage loans and CMBS as eligible collateral in the emerging covered bond marketplace. The CRE Finance Council also has testified before the House Financial Services on this topic, and the association will continue to advocate for a covered bond market via legislation and regulatory approval.
Securitization Accounting Reform: The Financial Accounting Standards Board (FASB) has concluded its project on proposed amendments to the accounting standards for securitization, with new final rules effective January 1, 2010. As such, the Qualifying Special Purpose Entity (QSPE), which makes securitization possible for CMBS, has been eliminated and all existing QSPEs will become Variable Interest Entities (VIEs) and be subject to consolidation under FAS 166 and 167. Other asset-backed securities, such as home equity lines of credit, student loans, residential mortgage loans and credit card receivables, also utilize QSPE accounting structures for securitization purposes. The CRE Finance Council, as part of the Financial Instruments Reporting and Convergence Alliance (FIRCA), continues to urge policymakers and standard-setters to provide more time for market participants to implement these far reaching and burdensome rule changes. The CRE Finance Council also is urging policymakers to address this issue through a joint project with the International Accounting Standards Board (IASB) so that changes are consistent with efforts underway to converge and harmonize international accounting standards and so that implementation for the securitized credit markets would occur only once and with limited disruption. Finally, the Council is engaging banking regulators and policymakers on the impact of accounting changes, as well as other regulatory mandates, and the need to “decouple” accounting disclosures from capital treatment to avoid issues with capital and liquidity.
Credit Rating Agency Reform: Both the House and the Senate reform bills include credit rating agency reforms. The Council is a strong proponent for more transparency about ratings and the methodologies used, while ensuring that any new mandates are appropriate and not overly burdensome. The CRE Finance Council also opposes rating “differentiation” for structured finance products requiring the use of specialized symbols (e.g. “AAA.SF”). The Council worked on House-passed language to make differentiation ‘optional’ and contingent on not disrupting certain pension/state investment guidelines, while the requirement was excluded in the Senate bill. Although the market may implement this proposal, the Council is opposed given the confusion, uncertainty and implementation issues it creates.
Currently, the House-Senate Financial Reform Conference is considering the “Franken Amendment” that would require the SEC to establish a Credit Rating Agencies Board, a self-regulatory organization that would select which credit rating agency would determine the initial rating for structured financial products. The Council is diligently working to solidify its position on the amendment. As further rating agency reforms are considered, the Council will continue to urge policymakers to ensure that any changes are applied consistently and improve the understanding of ratings in order to instill confidence in our financial markets.
REMIC Reform: Treasury has finalized action on a request from then-CMSA and a coalition to expand the types of permitted modifications allowed to be made to commercial loans held by a real estate mortgage investment conduit (REMIC) to include changes in collateral, guarantees, credit enhancement of an obligation, and changes to the recourse nature of an obligation. The final regulations reflect comments submitted on Treasury’s pilot program to modernize the rules governing REMICs (in place since 1986). While greater flexibility in the REMIC rules is welcome, there remain concerns that the regulations, as finalized, will have serious consequences for the broader commercial real estate finance market. The CRE Finance Council, Mortgage Bankers Association and The Real Estate Roundtable jointly are urging Treasury to reconsider the application of the regulations with regard to collateral releases.
The Council also has been opposed to loan modification proposals that change the terms of contracts in ways that undermine investors who are critical to the flow of credit, and we are pleased that the IRS concluded that there will not be tax consequences for modifications in imminent default, without changing the terms of the PSA contract. Separately, the association also continues work with members on reforms for Real Estate Owned (REO) properties.