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CRE Finance World, Summer 2012

Securitization is a Good Thing……Really! Second, the CMBS business which many of us worked so hard to The other flaw was that as good as the servicing communication build during the ’90s and early 2000s had many great features was, it was and is still a problem for borrowers. They never got that ultimately helped further the industry, but of course a fatal used to the fact that even though UBS originated their loan and flaw or two. On the positive side, underwriting standards, servicing Midland was now servicing it, that if they had a problem they had standards, transparency of information, centralization of information, to wait to talk to CW Capital. Somehow there was a controlling utilizing multiple checks and balances, (rating agencies and investors), class representative thrown in there and now maybe an operating new information systems and an active membership group (CMSA advisor! We could also talk about all of the fees involved but that now CREFC) to disseminate information were all great additions is a topic for another article. to the commercial real estate finance industry. They were and are great enhancements to this business but also have other applications The question then is how do you create a commercial real estate throughout the securitization industry. (I always wanted to apply lending industry that has sustainable and acceptable delinquency some of this to the ABS market!) Did you ever scrutinize an Annex and loss percentages over many cycles? A and all the 100 plus fields of information collected on each loan or review the performance reports on Trepp, or just look at Everyone should utilize many of the things that were developed the Investor Reporting Package (IRP) of information promulgated for the CMBS securitization market like published underwriting by CMSA now CREFC? The IRP includes a Special Servicer standards, transparency of information, centralization of infor- Watchlist, Delinquent Loan Status Report, REO Status Report and mation, servicing standards and multiple checks and balances. Comparative Financial Status Report. These and other information Life companies could and should use securitization to increase sources provide substantial information, processed in a standard- discipline and as an additional check and balance for their on-book ized manner that provides investors and risk managers with real lending to maintain and enhance performance. They could even detailed information at the property level. buy most (but not all!!) of the bonds themselves but going through the process will help maintain quality. The number one fatal flaw was that no one ultimately had any real investment or “skin in the game.” This wasn’t true until the mid This holds especially true for the banks and thrifts. They certainly 2000s because there was no real market for below investment have skin in the game from a capital perspective but they could grade securities and the classes and subordination levels were greatly benefit from the discipline, standards, centralization of large enough that the B-piece buyer had a real investment. A information, checks and balances and other enhancements that combination of shrinking subordination levels, shrinking below securitization would bring to their lending platforms. investment grade classes and securitizing below investment grade bonds in CDOs, reduced real risk dollars to an unacceptable level. Regulators could create incentives for life companies, banks and Sure it is not likely that someone will execute a CRE CDO anytime thrifts to provide enhanced capital requirements for complying soon with a substantial amount of subordinate CMBS bonds, with standards for securitization as a way to encourage quality however it is still easy to argue that the below investment grade lending and part of that would be the requirement to sell some of classes are not large enough, i.e. the embedded leverage is too the bonds they create so there is additional 3rd party validation. high, to maintain the quality of underwriting required to have delinquency rates maintain comfortable levels throughout cycles. A publication of Summer issue 2012 sponsored by CRE Finance World Summer 2012 21


CRE Finance World, Summer 2012
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