Trade group continues quest for liquidity in secondary market.
The Capital Consortium - a Washington, D.C.-based federation serving the real estate industry - was formed in 1992 to fight the emerging credit crisis. But times have changed. In today's more credit-friendly climate, the organization is turning to other agendas.
Backed by the resources of its five trade associations, the real estate advisory group is dedicating itself to creating greater capital liquidity for commercial property lenders and owners.
Expanding the secondary market One example of the Consortium's mission is the U.S. Department of Labor's current review of the Employee Retirement Income Security Act of 1974 (ERISA) underwriter exemptions proposed by The Bond Market Association (TBMA), New York, one of the five Consortium member organizations. The other members include Washington, D.C.-based Mortgage Banker Association of America (MBAA); New York-based Commercial Mortgage Securities Association (CMSA); and the National Association of Realtors (NAR) and the Real Estate Roundtable, both based in Washington, D.C. The ERISA proposal, which is expected to be approved by the end of this year, calls for underwriter exemptions that would allow private employee benefit plans to purchase a broader range of mortgage and asset-backed securities.
The exemption would significantly enhance marketability and liquidity in this key sector of the fixed-income markets, says George Miller, deputy general counsel for the TBMA. He expects the proposal to be accepted in whole or with some changes.
Adds Deborah McKinnon, a staff vice president for the MBAA: "This is truly an expansion of the secondary market by allowing pension funds to invest in formerly prohibitive investment classes."
The securities that could be purchased by employee benefit plans include:
- Subordinated and/or investment grade asset-backed securities (ABS) and mortgage-backed securities (MBS) issued in motor vehicle, residential mortgage, home equity, manufactured housing or commercial multifamily loan transactions;
- ABS/MBS backed by residential mortgage loans or home equity loans with loan-to-value ratios of up to 125%, provided that the ABS/MBS issued are not subordinated and are rated double A or better;
- ABS/MBS from issuers whose assets include interest rate swaps and yield supplement arrangements with notional principal balances;
- ABS/MBS issued by owner trusts, special purpose corporations, partnerships or limited liability companies.
Current ERISA underwriter exemptions generally restrict plans to non-subordinated ABS/MBS rated single A or better. By expanding the exemptions to include both subordinated and triple-B-rated securities, the proposal is expected to generate significant diversification and other investment benefits to private pension plans, while boosting demand and liquidity in affected sectors of the ABS/MBS market.
Expanding the investment options available to employee benefit plans is just one example of the Capital Consortium's current mission. The creation of standardized procedures for CMBS transactions is the Consortium's latest initiative. To accomplish this, the MBAA recently wrote three proposed standards that are under review and expected to win the approval of the other four Capital Consortium members.
The first standard would provide a description of contracts surrounding CMBS transactions; the second would explain the roles of primary servicers and master servicers in CMBS transactions; and the third would create a commercial property inspection form. According to the MBAA's McKinnon, the guidelines should clarify generally accepted business practices.
"We fully expect that the standards will be approved in their original form or modified somewhat and then approved," according to McKinnon. "These standards were developed to be living documents, and as the industry business lines change, the MBAA, as the originator of the documents, would update and modify them to meet the current business climate, and then resubmit them for approval by Capital Consortium."
The first proposed standard describes the types of contracts commercial mortgage bankers must negotiate and execute to originate and service CMBS loans. The standard also includes a summary of controlling documents used in CMBS originations and servicing. "For the first time in the eight-year evolution of CMBS, the industry now has a primer encapsulating the key elements of documents that essentially comprise standard industry operating procedures today," says Mark Hill, senior vice president of Charlotte, N.C.-based Laureate Capital.
The second proposed standard aims to facilitate faster turnaround times for borrowers conducting CMBS transactions. The guidelines also serve as a starting point for contract negotiations between primary and master servicers.
"In addition to helping educate new primary servicers, we expect these documents to reduce rating agency concerns regarding the absence of clearly defined roles and responsibilities in CMBS transactions," says Ann Hambly, managing director of Prudential Mortgage Capital, Dallas.
The third proposal would create a standardized commercial property inspection form. Developed by MBAA's Property Inspection Task Force, the form will be in a Microsoft Excel file that can be downloaded from MBAA's www.mbaa.org Web site. The task force included representation from many real estate professionals such as life company representatives, mortgage bankers, CMBS servicers and vendors.
"The task force discovered that the different forms currently required by investors have approximately 85% of the same data elements," says Janice Smith, vice president of New York-based Chase Manhattan Bank. "With so much consensus in the market, the time seemed right to adopt a standard form."
The working groups Consortium policies are set by a steering committee composed of representatives from each sponsoring trade association. Collectively, members of these five associations represent the broad spectrum of commercial and multifamily real estate professionals active in both the primary and secondary real estate finance markets.
To achieve its objectives, the Capital Consortium has three working groups:
- Creating the Instrument: Responsible for developing rateable documents and identifying due-diligence needs; drafting the Capital Markets Mortgage plan to facilitate the underwriting, origination and pooling of loans intended for securitization or for sale in the secondary market; and drafting the Due Diligence Checklist to streamline transactional reporting needs.
- Making the Market: Charged with developing the Data Elements Guidelines, which are aimed at providing a uniform framework for issuers, investment bankers, loan servicers and investors.
- Clearing the Barriers: Responsible for identifying regulations that impede the development of the commercial secondary mortgage market, and working with Congress and regulatory officials to remove these barriers.
An international scope In the future, the Consortium plans to expand its geographic boundaries to include international business. As it works to determine its international goals, the Consortium also is considering a joint project with a European mortgage, financial or banking association. "The desire to look to international sources is just the manifestation of the marketplace's globalization," says McKinnon.
Consolidation in the banking and financial industries is limiting securitization choices, adds McKinnon. Due to this trend, Europe and other international regions are becoming more desirable to companies that want additional securitization opportunities, she says.
One leader in the Consortium's international quest is the TBMA, which recently took a first step by opening its own securitization association office in Europe. The office gives the trade association a physical presence and sets the stage for European business development.
In the past, language barriers always presented obstacles to global business.
However, with the advent of telecommunications and the Internet, international business has become much easier to conduct, and more opportunities are available for accelerated globalization efforts, according to McKinnon.
"The Consortium's associations, as well as its member companies, have all come to the realization that if they lack some type of global presence or opportunity to participate in globalization, they're going to miss out on a lot of opportunities, not to mention the next market expansion," says McKinnon.
Despite the advantages that telecommunications and the Internet offer, international expansion is still a difficult step, notes McKinnon.
An era of globalization Most member companies of the Consortium don't have the resources to tackle international business. Even one of the federation's associations would find international expansion to be a drain on both financial and personnel resources.
However, as a group, the Capital Consortium believes it can set up international business for all members and enable them the opportunity to participate in globalization.