Page 22

CRE Finance World, Winter 2014

improving economy, and generally benign interest rate environment — that will continue into next year. I would expect loan mod activity to drop and active special servicing continues to drop; it gets more interesting the closer you get to the close of 2014 and start dealing with the early ripples of the 2015 -2017 maturity tsunami. Unless things continue their improvement, I think not all of those loans will hit their maturity, and certainly that will presage another potential boom of special servicing and mod activity. Certainly that is the latter part of next year. Brian Lancaster: And same for special servicing volume? Dan Bober: Absolutely, it is the same fundamental drivers there. Brian Lancaster: You have been working on reforming and changing CMBS watch list items which a number of people believe are inappropriate or archaic. These are the types of “plumbing or market architecture“ issues that people don’t focus on until it pops up in the media causing an outcry. Can you tell us a little bit about what you’re working on in that part of the market? Dan Bober: Yes, and just to be clear, there are probably several people participating on this Roundtable who have people working in the working group, so I’m not to be confused with a laboring oar. This summer, CRE Finance Council started a working group of servicers, rating agencies, issuers, and I think a couple of investors, looking at the watch list. The watch list, as it stands today, is largely unchanged from the early days of the CMBS business. As with everything, it bears, for a lot of reasons, some re-freshening. Among the things they have done is they have looked at all of the different watch list items or criteria, established which were being used, and, not unsurprisingly, there were some that were rarely, if ever used. Among servicers, there wasn’t always consistent usage, and among rating agencies and investors, not always consistent interpretation or understanding. So all of that has been focused on in the working group. I think probably the single best outcome of this, for investors in particular, is that the watch list is really going to be divided into two pieces, one which will definitely speak to credit based issues, and the other of which are really more informational in nature. So I think, as investors come to look at the product of this working group,, they’ll appreciate that and certainly there is ample opportunity for investors to participate in the working group. It becomes important, particularly between an issuer, a rating agency, an investor and a servicer, if you’ve got a new issuance deal. For example, let’s assume you had a large property with large tenant with a lengthy free rent period. The lender would have established a reserve, and there isn’t universal agreement among all the parties as to how that should be treated as it gets securitized. Certainly from an investor or rating agency standpoint, they want CRE Finance World Winter 2014 20 the transparency to see that there are, until the free rent burns off, some training wheels required to support the property and get it to its factory-issue debt service coverage. From an issuer standpoint, obviously there is some concern and consternation by seeing a loan immediately pop up on day one on the watch list. That is being sorted out through this working group, with a best and consistent practice emerging. Brian Lancaster: So what are the most significant areas that are at the top of your list to work on? Dan Bober: It is sort of across the board. Depending on where one sits, I think everyone has their area of focus. I don’t know that there is a universal answer to that question. The important thing is they have all been through the process of being sorted out and ultimately divided into two camps; again, those that are truly credit focused and others, which tend to be much more informational in their nature. So, I think for all parties, you can turn to the information page when it is an item of interest or dial down much more quickly to the credit issue and watch list item that was relevant for your particular pool or area. Brian Lancaster: We talked a little bit before about attempts to standardize rating agency NRSRO information requests. Could you talk a little bit about that? Dan Bober: I think this is primarily a servicer issue, although it certainly does have effects for everyone else in the community. As a result of the crisis, there was a doubling, in effect, of the rating agencies. You get a lot of variability in the information that they seek from all of the master servicers and primary servicers and, as a result, you’ve got six different opportunities for the rating agencies to take the same basic information and call it something different. You get a lot of opportunities for definitional differences, which of course ultimately translates into opportunities for less transparency or confusion amongst investors or anyone digesting information coming out of the rating agencies. So as a result, servicers and rating agencies have just very recently started, it might have been last week, working together to try to get some commonality among all of the rating agencies, common data definitions, without stealing any rating agencies perceived “special sauce” or analysis, or for any given area, get to a point where everyone is at least talking apples to apples and oranges to oranges. So ultimately the outcome should be better transparency and certainly a servicer’s dream of less work to do. Brian Lancaster: Are there any specific incidents that have come up in particular that you saw big differences among rating agencies taking the same data and interpreting it differently? CRE Finance World Roundtable Discussion: 2014 Outlook


CRE Finance World, Winter 2014
To see the actual publication please follow the link above