06/11/2010

Council Pushes Loan-Modification Disclosure

The CRE Finance Council is close to unveiling a proposal to increase the level of detail that servicers must disclose when they modify securitized loans.

The trade group - formerly known as the Commercial Mortgage Securities Association - is also ready to release a proposed list of "best practices" that investors want commercial MBS issuers and servicers to follow in the wake of the market debacle of the past few years.

Both initiatives will be hot topics at the council's annual convention in New York next week. Almost 800 people have signed up so far for the gathering at the Waldorf-Astoria hotel, up from 633 last year.

The increased turnout reflects the brighter outlook for the lending market. While attendance will still fall well shy of the 1,262 peak in 2007, there's no question that the mood of the market has improved since last year's convention.

Attendance is also being bolstered by the association's decision last year to expand beyond its traditional securitization focus to other parts of the lending market. The group created six "forum" groups, for investment-grade bondholders, CMBS issuers, portfolio lenders, multi-family lenders, servicers and investors in securities or loans.

A council committee is expected to release key elements of a proposal to expand the information provided to bondholders when a CMBS loan is modified. Modifications have become much more frequent as the number of loans in special servicing has soared, but bondholders have complained about the difficulty of tracking the changes.

"Investors want more-straightforward, brief descriptions of modifications on a more-timely basis," said council president Patrick Sargent, a partner at law firm Andrews Kurth. "We are duty-bound to be responsive to people that are putting capital into the market."

The proposed change would be incorporated into the standardized "investor reporting package," which was created by the council more than 10 years ago. Those standards specify the deal data that servicers must report to investors throughout the life of securitizations. The pooling and servicing agreements of many CMBS deals require servicers to follow the standards. The trade group maintains the investor reporting package via its IRP Committee, headed by director Lisa LaBelle of TIAA-CREF and vice president Kathleen Olin of CWCapital.

That committee is looking at ways for servicers to clarify when, how and why a securitized loan has been modified. For example, the data fields that servicers use to draft their monthly servicer reports could be expanded to include space for explanations about why one workout solution was chosen over another, Sargent said.

The committee was still discussing recommended changes this week, and it was unclear whether the formal proposal would be ready for release at the conference. But, at a minimum, key aspects of the proposal will be discussed. Once the proposal is released, the association will consider its members' comments, after which standards for modified loans will be adopted.

Separately, the group's forum of investment-grade bond buyers this week was on track to finalize a wish list of features and guidelines that it thinks should be incorporated into CMBS deals. The panel is working on an 8- to 10-page draft of guidelines that issuers would be encouraged to follow.

One proposal that might spark debate is the panel's position on risk-retention requirements for CMBS issuers. Insiders said the buy-side panel would like to see lenders retain a 5% stake in each class of bonds backed by loans they originate. But many lenders oppose that idea, which the SEC is thinking about incorporating into its Regulation AB guidelines for securitizations.

The panel is also expected to recommend that securitizations carry fewer classes than in the past, that servicers disclose more information on collateral performance and that B-piece buyers be barred from selling their positions. Before the market crashed, it became common for B-piece buyers to shed risk by transferring those holdings to CDOs. Investors suspect that practice might have led to less-thorough due diligence on the underlying loans.

The investor draft of guidelines is the starting point for discussion on a list of best practices that the council's entire membership could eventually endorse. Ultimately, the interests of other parties - below-investment-grade investors, issuers and servicers - would also have to be weighed.

"The idea will be to try and coordinate these issues because, quite frankly, there are too many opinions floating about," said one portfolio manager at a major life insurer.

While the guidelines wouldn't be binding on issuers, they would likely carry significant weight.

Apart from the council's own initiatives, convention attendees are expected to focus on the state of the commercial-property market and the wave of potentially conflicting regulatory reforms under consideration.

Even as the real estate market seems to be bottoming out, industry participants still need to get a handle on soaring loan delinquencies and a widespread bid/ask gap on commercial properties, Sargent said.

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