Category

Regulation

HVCRE update

By | Commercial Real Estate, Construction financing, Regulation

Our prior article about the Highly Volatile Commercial Real Estate (HVCRE) rule that was part of the Dodd-Frank Act’s Basel III capital rule needs an update.

May 22, 2018, the unclear and illogical HVCRE rule was amended. It now allows land to be valued at a current appraised value! This is a huge and welcome change. Previous to that, contributed land value was valued based on the prior sale. The new rule states, “the value of any real property contributed by a borrower as a capital contribution shall be the appraised value of the property.” Hopefully, this will help regulated banks make more loans on commercial real estate for acquisition, development, and construction.

The new rule better defines an HVCRE acquisition, development and/or construction (ADC) loan. It also allows banks to make such loans without the 150% capital weight– a huge penalty for a bank.  And for borrowers, there would no longer be a 15% cash contribution requirement (because the land would be accepted capital) and once the property begins to produce income, that income could “taken out,” for example, to payback the project’s investors.

What is a high volatility commercial real estate (HVCRE) loan?

By | Commercial Real Estate, Construction financing, Regulation

Defined by federal regulators, an HVCRE loan is any commercial mortgage loan used to acquire, develop, and construct (ADC) commercial real property prior to a conversion to permanent financing as HVCRE where there was not at least 15 percent cash contributed by the developer. Watch out for this requirement on commercial mortgage loans that are considered high volatility commercial real estate. It’s just one of many insane rules bankers are having to comply with today. No wonder smaller banks are selling out to larger banks.

Banks must now hold 150 percent of their capital for all HVCRE loans—typically CRE loans are 100% capital weighted. The new rule went into effect back on January 1, 2015, but for whatever reason, banks are only recently (within the past year or so) rejecting loan requests that cannot meet the HVCRE requirements. The new rule is designed to protect the lender by increasing the developer’s equity cushion above the lender’s loan amount.

Surprise!

This could be a big surprise if you haven’t sought a commercial mortgage loan in recent years. The new requirement for obtaining a commercial mortgage has restrictions on the use of land as equity and regulators want to see 15 percent cash contributions from borrowers.

How it impacts developers

Here’s the biggest shock that will be a challenge. Your contributed capital into the commercial property must be at least 15 percent of the “as completed” appraised value in cash or unencumbered readily marketable assets! Yep, you heard that right; dirt, land, or ground isn’t of any value to bank regulators back in Washington, D.C. It should be noted that the “as completed” value is typically lower than the “stabilized value.”

In other words, what this means is, if you land banked some property for the past 20 years and now want to develop it and build a commercial building on it, you will have to demonstrate that you have paid in 15 percent equity of the “as completed” appraised value in cash or prove that the property was recently acquired with a sales contract showing what you paid for the property.

The other scenario where this would come into effect is you buy land and it appreciates while you are getting ready to raise debt. The bank would not be able to use that appreciated equity above what you paid for it.

Remember any and all cash into the project has to be documented, such as land purchase and soft costs. If you cannot show that what you paid for the property represents 15 percent of the “as completed” appraised value, the lender is now forced to ask you to pay cash or contribute unencumbered readily marketable assets (stocks and bonds, or cold hard cash) of 15 percent into the project before they lend a dollar.

For example, let’s say you found the perfect commercial project and use of your land that you have held for the past 20 years—say it was inherited. And let’s say it is now worth $750,000. You determine your construction budget will be $5 million. You think perfect, my land is 15 percent of the total costs and I have another 10 percent in soft costs and cash—thinking a LTC of 75 percent. So you call up your local banking friend and ask for a construction loan.

He says, sorry, we cannot accept that land as equity, so you will need to deposit $750,000 in the bank as collateral instead. And then, he looks at your balance sheet and says, hmm, you won’t have enough liquidity in your balance sheet after the deposit, so I am sorry, we have to decline your construction loan request. Huh?

Land isn’t considered tangible equity… Say what???

Why? It appears the regulators do not like to see a borrower requesting a commercial mortgage from a bank without having “tangible equity” in the project. Regulators would argue that one of the factors that led to the last financial crisis was borrowers claiming they had equity in a property (because of the land’s appreciation) when really the equity or capital they contributed was really just price appreciation. When real estate prices were moving up so fast that you could buy a property and within 6 months the property increased by 20 percent or more, that inflated price they would say is not really an equity contribution by the borrower. Ok, that’s understandable. But, shouldn’t the land still be worth something? In short, the regulators are arguing that the borrower didn’t really have any of their own capital or cash in the deal—no skin in the game.

A few exceptions

There are a few exceptions if the loan is secured by:

  • 1-4 family residential projects.
  • Properties that qualifies as a community development project.
  • Agricultural land

So basically, if you have a multifamily property that qualifies as a community development project for low to moderate income residents, then any bank that would finance the property would not be subject to this regulation. Unfortunately, this leaves out all other commercial properties that require financing. And of course, an SBA 504 loan may also be exempt from the HVCRE rule if it meets the requirements for community development and fits into the lender’s community develop act lending activities.

Therefore, real estate that does not have any tangible contributed capital is considered highly volatile commercial real estate. It is highly volatile because the borrower has not paid in enough of their own tangible cash. Apparently, there isn’t enough pain in the deal for the borrower. The borrower could theoretically walk away and not suffer a significant loss.

Of course, this is short-sighted at best. The regulators have not completely thought this through because they are not considering the value of the developed project—maybe “as completed” value but not the intangible value of creating something from raw, undeveloped land. The value of the end product as completed does provide skin in the game—not to mention the land contributed. Just ask anyone who lost their shirt during the financial crisis in 2008-2009 and they will tell you they did suffer some pain—even if they didn’t contribute 15% cash into the deal.

Banks must comply

Why do Bank’s care about this rule? First, they have to comply or be criticized by their banking regulators which can cause increased deposit insurance premiums, limit new branches, or limit any new products they might want to offer. Second, even if they made the loan, capital weight restrictions on the amount of the loan at 150 percent of the bank’s capital, reduces their already thin margins. 150 percent capital weight creates an additional cost of capital because it ties up 50 percent more capital that could otherwise be lent out to other bank customers. So, if they don’t follow all aspects of the regulation, bank examiners would likely criticize the bank for not following the regulatory guidance. Banks aren’t happy about this rule either, but it is the current regulatory environment they must operate in.

How can a borrower avoid being classified as HVCRE?

There are three conditions anyone of which triggers HVCRE:

1) The LTC is less than or equal to the maximum LTC requirements found in the Interagency Guidelines for Real Estate Lending. For construction loans, its 80 percent LTC, but most banks are lending at lower percentages.

2) The borrower contributes at least 15 percent of the “as completed” value of the property in cash or unencumbered marketable assets prior to any lender’s advance. Some banks are accepting soft costs as part of this contribution.

3) The borrower’s contributed capital and any capital generated is contractually required to remain in the project until the project is completed, stabilized, and converted to permanent financing.

If you’re looking to a bank for a construction loan and have held the property for a while, be prepared to show your skin in the game!

Good news!

We have non-bank construction lenders who aren’t under such silly regulations. Give us a call if you have banked some land years ago and now want to develop it.

Helpful links

This article isn’t meant to be legal advice and does not answer all the questions about the HVCRE rule. So if you want to learn more here are some links to the regulation, guidance Q&A and others interpretations.

https://www.fdic.gov/regulations/capital/capital/faq.html

http://www.gibsondunn.com/publications/Documents/High-Volatility-Commercial-Real-Estate–US-Federal-Banking-Agencies-Release-Answers-to-FAQs.pdf

https://www.paulweiss.com/media/3774954/19oct2016nylj.pdf

http://www.williamsmullen.com/news/%E2%80%9Chigh-volatility%E2%80%9D-how-can-banks-avoid-having-loans-classified-hvcre

 

Reversing The Risk Retention Rule For CMBS Could Improve Commercial Lending

By | Bond Market, Commercial mortgages, Financial Markets, Lenders, Regulation

There are several key bank regulations in the Dodd-Frank Act which if loosened could improve bank lending. One important one, is the risk retention rule for asset-backed securities including commercial mortgage-backed securities (CMBS). Reversing the risk retention rule, Section 941 of Dodd-Frank could help improve the CMBS market. The rule became effective December 24, 2015 and gave CMBS an additional year to comply which has caused lower CMBS loan origination volumes over the past year as CMBS lenders prepared to comply. It caused some smaller CMBS lenders to withdraw from CMBS lending altogether.

The risk retention rule problem

The main issue causing problems with the rule is that the CMBS issuers must have “skin in the game” by retaining 5% of the aggregate credit risk of the commercial mortgage loans that it adds to a securitization. Typically, a transaction goes like this. A lender originates a commercial mortgage and either holds on to it or sells it to a larger CMBS issuer. The CMBS issuer is an investment bank who pools other commercial mortgages from various lenders as collateral to support the CMBS. The CMBS issuer does its own homework on the loan before it purchases it.

So a lender will only sell loans that it feels would be accepted by the CMBS issuer. To do otherwise, risks the lender’s reputation with the CMBS issuer. There is already a lot of risk reduction going on before they get to the risk retention rule of holding 5%. That was not the case before the crisis for residential mortgages leading to the risk retention rule.

With the rule, the CMBS issuer, not originating lender has to hold a 5 percent interest in each mortgage they sell to a CMBS issuer. This causes issues both with the originating lender and with the CMBS issuer because the CMBS issuer must really know the lender’s origination and underwriting practices to have the assurance when purchasing loans from a lender. The bottom line is lower margins for all, higher interest rates and higher requirements for loans stemming from another rule that restricts lending. Loans that need to be refinanced and could be before the rule, now might struggle to get refinanced.

Additional issues occurring

A recent Wall Street Journal article expresses some of these issues.

“Pressures have been mounting on these firms for more than a year as volatility and risk have increased in the commercial mortgage-backed securities market.

Profit margins have narrowed in the past few months and are likely to be squeezed further as new rules take effect that require issuers of commercial mortgage-backed securities to keep at least 5% of the bonds they create.”

Some of the smaller lenders have left the business because of the new rules. Other lenders are having to increase their interest rates due to added cost of holding the 5 percent retention piece.

What to expect if you’re in the market for a commercial mortgage

CMBS lenders have, in the normal course of business, also been faced with increasing delinquency and default. As a result, according to another Wall Street Journal article more stress on CMBS lenders is causing additional requirements for commercial real estate borrowers. Some of the cautious steps lenders are taking to reduce their risk include the following. If you haven’t been in the market for a commercial mortgage recently, these are some things  you can expect.

  1. Lenders are keenly focused on their fundamentals of lending. Other than the top markets, commercial real estate geographic markets, lenders are really doing their homework and reviewing everything they can about the property in question. They are looking at the strength of the tenants, the lease terms, the net cash flow and looking closely at the sponsor’s liquidity globally not just on the subject property for example.
  2. The new risk retention rule has made borrowing more costly and complicated. Some property owners will not be able to refinance loans obtained prior to the financial crisis, or if they are able to it will be at a higher interest rate.
  3. Construction lending by banks (while not a CMBS product) has become more strict– with some of the big banks out of the business for certain property types. Part of this is the supply of new commercial properties, the other part is less permanent lending options available with CMBS. There are other non-bank lenders making construction loans, however. Some property types that remain strong candidates include industrial and multifamily.
  4. Increasing interest rates are causing lenders to underwrite commercial mortgages to higher interest rates than the current market rates -called a phantom rate. Note, a phantom rate is not the contractual rate– think of it as a stress test rate. By using a higher phantom rate, prospective borrowers will find that they are being approved, but at a loan amount lower than what they requested. So be ready to add additional cash to get a deal funded.

These and other lending rules have led to an increase in specialty finance sources to fill the gap that regulation has created with the big bank lenders. We are contacted almost daily by these lenders seeking deals to finance.

Reducing the regulatory burden

The Trump administration is working to reduce the regulatory burden that banks and financial markets are under. It could be a key step to improving the lending environment. Lenders were punished enough through their own mistaken lending practices to have the additional burden of more regulations imposed. Before any of the new regulations were written or became effective lenders had already learned their lessons. Lenders made the necessary changes to reduce their risk and make prudent loans. Banks don’t need post-crisis regulation to do it for them. Lenders are the practitioners, they know better than regulators what mistakes were made and how to correct them.

The regulatory backlash always happens after a crisis. A crisis happens, regulators point to the mistakes (that’s the easy part) and then write more rules to prevent the mistakes from occurring in the future (the hard part)– the problem is every crisis is different and rules don’t get repealed very often. Regulators have never predicted or stopped a financial crisis from occurring and it is not their mission. Even with prudent lending, lenders will have losses when the economy turns down and goes through a recession. If regulators wrote rules to prevent lenders from taking on risk and suffering losses, then there wouldn’t be any banks– because the rules would essentially prevent them from lending in the first place.

Finally, on a positive note, the economic outlook is strong and commercial real estate remains solid, and there are many lenders lending in a competitive environment so it’s still a great time for both lenders and commercial property owners.

 

 

What Commercial Real Estate Trends To Focus On For 2017

By | Bond Market, Commercial Real Estate, Economy, Federal Reserve, Interest rates, Regulation

2017 is almost here! We will be watching the following commercial real estate trends in 2017. These will be important especially if you need financing or are looking for a new property to develop or buy and need financing to do it.

Unemployment

One of the biggest trends to watch will be unemployment– particularly over the next two years. If you followed only unemployment you would have a good feel for where commercial real estate values are headed. Cap rates tend to follow the unemployment rate. So understanding the health of the labor market is an important indicator. It affects how much office space a company needs, the sales volume of a retailer, the industrial space needed for distributors and manufacturers, how many travelers are booking hotel rooms and household formation which drives occupancy and affordability of multifamily. All of this is dependent upon how many people are employed. Closely related unemployment is interest rates.

Interest Rates

What the Fed does will influence interest rates for sure. But unemployment is also what the Fed is watching that influences them to take action too. The Fed’s dual mandate to influence unemployment and control inflation is only done by changing interest rates. The Fed has the ability to change short-term rates by changing their federal funds rate. That’s on the short end of the yield curve. They can also influence the longer end of the market through their HUGE multi-trillion dollar bond portfolio.  It’s the long end that can impact borrowing rates. Raising short-term rates has a direct impact on long-term rates.

Inflation

Recently interest rates spiked up because of the Fed’s anticipated decision to increase the federal funds rate. But it was also because of market factors such as an increase in commodities and President-elect Trump’s election win and commitment to infrastructure spending.  The bond market has had a big reaction to those two events. It will take time for both increasing commodity prices and any infrastructure spending to impact an increase in prices generally that would lead to inflation. At this time, inflation is still not a concern. But with low unemployment, the largest drivers of inflation is wage growth and with low unemployment, employers have to pay more to get qualified workers. More people working with rising wages will eventually lead to inflation. So we are watching this closely too.

Tax Reform

With President-elect Trump, tax reform is a top priority. The benefit of this is he’s a commercial real estate developer and operator too! So we can expect that whatever actually happens to tax reform, there will be some beneficial change that is positive for commercial real estate. One of the likely benefits is the 1031 exchange will remain. That’s a close item of the tax reform that we will be following, in addition to lower tax rates– another plus for economic growth.

Financial reform

The Dodd-Frank Act, unfortunately, is not going away. But with President-elect Trump, some of its provisions hopefully will. By reducing the regulations that banks are under they will be more nimble to expand their commercial real estate lending in smart ways. Banks do not need regulations to force them to make better loans. Banks are very cognizant of making safe and sound loans. The fewer regulation banks are forced to comply with allows them to make loans that make sense for both them and their borrowers. Yes, there may have been some bad actors, but generally speaking, less banking regulation will allow our economy to function more efficiently, productively and grow at a healthier rate.

To much success in 2017!

Happy new year!

 

What Trump’s Election Could Do for Commercial Real Estate

By | Commercial Real Estate, Economy, Regulation

Now that the election results are in and our country’s president and congress makeup has been determined, we can look forward to a further period of growth and opportunity in commercial real estate.

Trump’s acceptance speech

It was reassuring to hear President-elect Trump’s acceptance speech right after the election results were in. He immediately highlighted the need for more government spending:

“We are going to fix our inner cities and rebuild our highways, bridges, tunnels, airports, schools, hospitals. We’re going to rebuild our infrastructure, which will become, by the way, second to none. And we will put millions of our people to work as we rebuild it.”

For those unfamiliar with American politics, the idea that a Republican president would put more government spending at the top of his agenda is anathema to the party’s traditional “smaller government” stance. Unfortunately, as Milton Friedman said, “We are all Keynesians now.”  While a smaller federal government with a smaller budget would be ideal, if increased growth and prosperity results from more of this type of spending (rather than the prior eight years of transfer payments) it should improve the outlook for our country.

In case you nodded off in your Economics 101 class, Keynesian Economics is the theory that the government should increase spending (and cut taxes) to stimulate a slow economy, and conversely, should cut spending (and raise taxes) when the economy is at risk of overheating.  Of course, that’s theory.

Nevertheless

The one thing that matters about what Trump said, is that he wants to actually develop and redevelop our infrastructure. That to me means that where ever that happens, the properties close to it will also rise in value or be a great redevelopment site as well. That translates into more opportunities for all.

Commercial real estate plays an important role in the U.S. economy. As new policies are written and legislation moves forward and as regulatory burdens are lessened, it will be good for the industry, your tenants, and the economy generally will benefit from fair and steady government policy that incentivizes growth.

We at Tower Commercial Mortgage are optimistic that the president-elect will develop and successfully advance a pro-growth agenda for all Americans. What is good for commercial real estate is good for our country!

Much success!

Banks Get Increased Commercial Real Estate Oversight

By | Lenders, Regulation

U.S. Bank Regulator Toughens Commercial Real Estate Oversight

Credit risks have increased in U.S. commercial real estate as lenders more aggressively compete in a low-rate environment, according to the Office of the Comptroller of the Currency’s semiannual risk report. The report indicates that the Federal Reserve has held down interest rates for more than seven years to help the economy recover from the 2008 financial crisis, which is putting a damper on bank profits and increasing competition among lenders. However, that competitive pressure is increasing risk. Comptroller of the Currency Thomas Curry said, “It’s at this stage of the cycle that we also see strong loan growth combined with easing underwriting to result in increased credit risk.” The regulator also flagged risks in commercial and industrial loans and indicated that it is monitoring financial technology and marketplace lending.

via (Rueters)

Commercial mortgage loans less available as Bank mergers increase

By | Commercial mortgages, Commercial Real Estate, Lenders, Regulation

One in Six Banks Will Have to Merge: CBA Chief Hunt

Thanks to the Dodd Frank Act bank mergers and consolidation in the banking industry continues. The reasons cited below certainly are driving the trend at an accelerating rate. The impact to commercial property owners is that they will not have as many commercial mortgage loans choices among traditional banks. As a result, it could be harder for commercial property owners to obtain the financing that best meets their needs. The American Banker article summary below explains the probable cause for this trend.

In a recent interview, Consumer Bankers Association President and CEO Richard Hunt said consolidation will keep community banking viable in the face of such persistent threats as the economy, technology, and regulation. He expects mergers and acquisitions to pick up among banks with $10 billion to $100 billion in assets. “We have been saying for some time there are three great disruptors in the marketplace today — the economy, the evolution of technology, and the burdensome new regulatory environment,” he said. “Any one of those would have a dramatic effect on banking, but to have all three happen simultaneously creates the perfect storm. We expect more [mergers] to continue throughout 2016 and years beyond.” Hunt said there are more than 6,000 banks currently, and even if 1,000 to 1,500 were lost, the industry would still be competitive. However, he noted that “the definition of competition will become greatly different. You don’t have to have a branch in a hometown in order to be competitive because of the Internet.” Hunt said consolidations ultimately will benefit consumers because “by combining forces and achieving the economies of scale, the technological platforms will be better.”  From “One in Six Banks Will Have to Merge: CBA Chief Hunt” American Banker (02/12/16) Stewart, Jackie

We have many lender relationships outside of traditional banking that are actively funding commercial mortgage loans. We have established relationship with wholesale lenders, private equity firms, conduit lenders or life insurance companies that rely upon third parties to introduce borrowers to their commercial lending products. The bottom line is we have lender relationships that the typical commercial property owner does not have access to or possibly even knows that such lenders exist. If your local bank is not able to provide the commercial mortgage loan that you need, we would be happy to work with you and our lender network to find the commercial mortgage that fits you and your property.

Regulators issue commercial real estate lending guidance

By | Commercial mortgages, Commercial Real Estate, Regulation

The federal regulators have issued an interagency statement providing guidance to banks on commercial real estate (CRE) lending. Typically, regulators issue such guidance as a result of seeing trends in lending practices among the banks they supervise. Some of their concerns also are based on geographic markets which substantial growth and increasing competitive pressures. Such market forces can result in lower capitalization rates and rising property values.

High commercial real estate concentrations could expose a bank to greater risk of loss and failure. Regulators site increased non-performing loan and charge-off rates in banks commercial real estate portfolios. An easing of commercial real estate lending standards can increase the risk to the banking industry. As competition among banks to underwrite loans increases there can be a loosing of underwriting standards. Easing underwriting standards could include higher loan to values, lower cash flow requirements, lower vacancy requirements, and absorption rates and other less-restrictive loan covenants. Banks have also been extending maturities and offering longer interest-only payment periods, and limited guarantor requirements.

The federal regulatory expectations that lenders have:

  • established adequate and appropriate loan policies, underwriting standards, credit risk management practices, and concentration limits that were approved by the board or a designated committee;
  • established adequate and appropriate lending strategies, such as plans to increase lending in a particular market or property type, limits for credit and other asset concentrations, and processes for assessing whether lending strategies and policies continued to be appropriate in light of changing market conditions; and
  • established adequate and appropriate strategies to ensure capital adequacy and allowance for loan losses that supported an institution’s lending strategy and were consistent with the level and nature of inherent risk in the CRE portfolio.
  • conducted global cash flow analyses based on reasonable (not speculative) rental rates, sales projections, and operating expenses to ensure the borrower had sufficient repayment capacity to service all loan obligations.
  • performed market and scenario analyses of their CRE loan portfolio to quantify the potential impact of changing economic conditions on asset quality, earnings, and capital.
  • provided their boards and management with information to assess whether the lending strategy and policies continued to be appropriate in light of changes in market conditions.
  • assessed the ongoing ability of the borrower and the project to service all debt as loans converted from interest-only to amortizing payments or during periods of rising interest rates.
  • implemented procedures to monitor the potential volatility in the supply and demand for lots, retail and office space, and multi-family units during business cycles.
  • maintained management information systems that provided the board and management with sufficient information to identify, measure, monitor, and manage concentration risk.
  • implemented processes for reviewing appraisal reports for sufficient information to support an appropriate market value conclusion based on reasonable market rental rates, absorption periods, and expenses.

As regulators exam banks during 2016, the interagency guidance states they will be looking closely at commercial real estate lending. Such guidance will certainly impact banking organizations across the nation. However, as discussed in an article in the Wall Street Journal, it will not restrict the non-bank lenders who are actively seeking to finance commercial real estate.

Are you having troubles finding suitable financing for your commercial property? Please contact us to see what options may be available to you and receive a no obligation quote.

Don’t Blame the Fed for Low Rates

By | Bond Market, Federal Reserve, Regulation

William Poole’s editorial published in the Wall Street Journal Opinion section today may provide some confirmation to what you might already be thinking about the slow growth the US economy has experienced for the past seven years. Here’s the editorial:

“The frequent claim that Federal Reserve Chair Janet Yellen and her colleagues are responsible for continuing low rates of interest may be correct in the small, but not in the large. The Fed does set the federal-funds rate—the overnight interest banks charge to lend to each other—and surely affects the timing of rate changes, but not the longer-run level. The real villain behind low interest rates is President Obama.

Long-term rates reflect weak job creation and credit demand. As the Fed correctly points out in its Statement on Longer-Run Goals and Monetary Policy Strategy: “The maximum level of employment is largely determined by non-monetary factors that affect the structure and dynamics of the labor market.” The same argument applies to all real variables, such as the rate of productivity growth.

The Fed has successfully kept inflation close to its 2% target. But the real rate of interest, currently negative for short-term interest rates and only slightly positive for long rates, is a consequence of non-monetary conditions that have held the economy back.

The recovery since the recession trough in June 2009 has been the weakest since World War II. Why? Disincentives to business investment deserve special notice. Despite the lowest interest rates for a sustained period since the 1930s, business investment has exhibited weak growth. Lagging business investment has meant smaller than usual demands in credit markets, and thus low interest rates.

The Obama administration has created one disincentive after another. One is the failure to pursue tax reform and the president’s insistence on higher tax rates. Another is the constraint on investment flowing from environmental activism. Cancellation of the Keystone XL pipeline is a metaphor for the entire range of environmental policies that inhibit growth. Businesses cannot expand if they cannot obtain the required permits.

The regulatory environment is a disaster, ranging from growth-killing overreach in the Affordable Care Act and Dodd-Frank to the Consumer Financial Protection Bureau, the Environmental Protection Agency and the Labor Department. The Federal Reserve is not responsible for this mess.

The Fed is responsible, however, for not defending itself by explaining to Congress and the public what is going on. The Fed is too afraid politically to mention any details of its general position that it cannot do the job on its own. Yes, there are “headwinds,” but they are largely the doing of the administration. I say largely because some of the problems have been inherited from prior administrations. The Obama administration didn’t create Fannie Mae and Freddie Mac, for instance, or the government’s affordable-housing goals—both of which fueled the 2008 financial crisis.

But the Obama administration has failed to correct the economic problems it inherited. It has simply piled on more and more disincentives to growth. These disincentives have kept long-term rates low.

Mr. Poole is a senior fellow at the Cato Institute and a distinguished scholar in residence at the University of Delaware. He retired as president and CEO of the Federal Reserve Bank of St. Louis in March 2008.”

via (wsj)

Buck Stops Where? CMBS Shops Must Choose

By | Bond Market, Commercial mortgages, Financial Markets, Lenders, Regulation

Commercial MBS issuers will soon have to decide which executive at their operations will personally vouch that deal information supplied to investors is accurate.

Under an SEC rule that takes effect Nov. 24, a senior executive must sign a one-page form saying that he has personally reviewed the prospectus of a transaction being floated and is familiar “in all material aspects” with the collateral assets, the deal’s structure and “all material underlying transaction agreements.”

The form goes on to say that the signer certifies that the prospectus and supporting documents don’t contain untrue statements or omit material information.

Industry lobbyists last year tried to persuade the SEC to permit the signer to stipulate that he is relying on information provided by other parties, because a transaction’s collateral can be contributed by multiple lenders. But the regulator wouldn’t budge on the wording, which is outlined in the latest version of “Regulation AB,” the SEC’s sweeping set of disclosure rules for all types of securitizations.

The rule is intended to force issuers to more closely scrutinize collateral and raise their credit standards, following extraordinary losses on residential MBS transactions during the market crash. Violations of the certification carry no criminal liability, but could leave signers personally liable to civil lawsuits by investors or to SEC charges of civil violations of securities law.

The form must be signed by the chief executive of a securitization’s “depositor” — the entity that registers the transaction with the SEC and transfers collateral mortgages from the originators to the securitization trust.

While the depositor is essentially a paper entity, it has a board of directors made up of executives from the securitization’s lead bank. In the past, the chief executive was usually a CMBS executive, but sometimes has been a more-senior officer — such as the overall head of securitization or a risk officer. But going forward, because of the certification requirement, that post will have to be given to an executive working closely on the transaction. The most likely candidates are CMBS group heads or senior executives on their teams.

“Clearly, no one expects that Jamie Dimon will be signing the certification for J.P. Morgan deals,” said one industry attorney. “It will have to be somebody more familiar with the ins and outs of the actual deals.”

That will mean more time and effort for the selected executive and for other bankers delegated with performing some of the due diligence and briefing that person. “Signers of the CEO certification will need to consider what level of diligence will provide them with sufficient familiarity with the overall transaction to be comfortable making the required certifications,” said Janet Barbiere, a partner at law firm Orrick Herrington.

Some CMBS bankers are upset about the requirement, arguing that it’s unfair to subject them to personal liability for what should be a corporate responsibility.

“If something goes wrong in one of these deals — and you never really know everything that’s going to happen over the 10-year life of a loan — the SEC will come after you personally with all guns blazing,” said one group head at a major bank.

Another senior CMBS executive was less concerned, saying he assumed his employer will indemnify him against personal responsibility. What’s more, he added, “I have a high comfort that the descriptions of the loans we’re providing in the prospectus are accurate.”

The certification, required for public offerings, is one of a host of changes required under the Regulation AB amendments, which were finalized last year. Three conduit shops — Bank of America, Deutsche Bank and J.P. Morgan — participated in a pilot program with the SEC to devise model versions of shelf registrations that would comply with the changes. Those shelf registrations contain the boilerplate language to be used in the prospectus and the pooling and servicing agreement, with blank spaces to be filled in later with deal-specific information.

The templates, finalized in the past several weeks, followed months of discussions between the lenders and the SEC that clarified uncertainties about the changes and the exact wording to use. But there was virtually no discussion of the language for the certification, because the SEC had previously indicated it would not change the draft wording for the certification that it had unveiled last year.

via (CMA)