Investors Urge Sweeping Changes in CMBS

A group of institutional investors has laid out a sweeping agenda of changes it contends are necessary to revive the commercial MBS market.

The proposals would affect nearly every aspect of securitization, from the way rating agencies are paid to the role of originators after loans are packaged for sale.

The suggestions were outlined this week at the Commercial Mortgage Securities Association's annual investors conference in Miami Beach. The investors, including representatives of major insurance companies and asset managers, said that investor demand for CMBS couldn't be rebuilt without the changes.

While the investors don't maintain that every proposal has to be adopted, they said the suggestions represent the types of changes needed for investor confidence to rebound. A common theme of the proposals is that the interests of the various parties involved in transactions need to be better aligned.

But some lenders attending the conference expressed doubts about the prospects for many of the suggestions. They said some of the ideas would be unworkable and had little likelihood of being implemented.

As previously reported, the ad-hoc group, which calls itself the "the investor roundtable," is primarily calling for increased disclosure of loan information and better analysis of risk. At the conference, the group outlined a more-detailed list of suggestions, urging the industry to:

*Simplify deal structures, with fewer tranches - for example, only one class per letter grade.

*Prohibit debt outside the trust, meaning no B-notes or mezzanine debt.

*Require issuers to retain 5-10% of offerings on their own books.

*Set a minimum requirement for debt-service-coverage ratios and a maximum level for loan-to-value ratios.

*Require issuers to hold large loans for a period of time before securitization so investors could evaluate their performance.

*Pay rating-agency fees over time and base them on how a deal performs relative to the ratings.

*Discourage issuers from "rating shopping" by forcing them to disclose the initial ratings proposed by each agency.

*Require ratings agencies to disclose source documents they rely upon.

*Prevent heavy loan concentrations by specifying that the Top 10 loans can't comprise more than 30% of the overall collateral pool.

The proposals were outlined at a conference session moderated by Brian Furlong of New York Life. Other members of the group include representatives of Hartford Life, MetLife, Principal Financial, Prudential, TIAA-CREF, Blackrock, Fidelity, Prima Capital, Fannie Mae, Freddie Mac and Dechert.

One focal point was a complaint about a lack of data to track the performance of loans that back CMBS. Broadly speaking, the investors think that investment-grade buyers should have access to much of the detailed information traditionally made available only to B-piece buyers.

The shortage of information is contributing to the sharp decline in CMBS prices, because bond investors can't evaluate the likelihood of defaults, especially below the triple-A level, investors said.

The investors' wish list of available information includes operating statement analyses, rent rolls, up-to-date reports on cash reserves, intercreditor agreements, retail sales reports and transfer-of-ownership information.

"We have been in the position of finding out that a property was sold only when we Googled for it," said one investor. "That information was never reported by the servicers, which is pretty amazing."

There was some behind-the-scenes discussion that the investors could potentially form a permanent group that would seek to obtain more-detailed loan information. The buzz was that some third-party due-diligence providers had already begun to pitch their services to the investors.

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