Bair Invites CMSA Input on CMBS Revival
Federal Deposit Insurance Corp. (FDIC) chairman Sheila Bair addressed several concerns of the commercial mortgage industry Wednesday with statements made at the Commercial Mortgage Securities Association's (CMSA) annual conference. Bair not only emphasized the need to revive the market for commercial mortgage-backed securities (CMBS) - acknowledging "CMBS is different from residential MBS" - but she also invited the feedback of commercial mortgage industry professionals. CMSA for months has raised alarm over "one-size-fits-all" regulatory reform applied to both CMBS and RMBS. CMSA executive committee member Christopher Hoeffel in October indicated he does not oppose reforms, but urged lawmakers to tailor reforms to address the needs of various asset classes. Bair, in her comments Wednesday, reviewed the differences of the commercial real estate industry's slow-down, compared with residential. The commercial slow-down came later than that in residential finance, but it led to a similar freeze of credit and a virtual shut-down of new securitization. A key challenge facing the industry remains restarting securitization and sound underwriting. Bair said one measure the FDIC took to promote stability of the system was the establishment of a safe harbor protection of assets being transferred for securitizations. The safe harbor protects failed bank assets in transfer from being seized by FDIC, so long as an accounting sale took place. But Bair noted the Financial Accounting Standards Board (FASB) adopted financial accounting standards that mean most securitizations no longer meet off-balance sheet standards for sale treatment: "As a result, most securitizations will not meet the test in the FDIC regulation unless we amend that rule." Then FDIC approved a transitional safe harbor for securitizations to clarify circumstances where FDIC could treat a transfer as a sale. This also grandfathered all securitizations or participations in process through March 31, 2010. The FDIC now considers what standards should be applied for safe harbor treatment for transactions created after March 31st. FDIC proposed conditions for a regulatory safe harbor that aims to correct the weakness of securitization that contributed to the crisis, as well as align securitization incentives to support sustainable lending, Bair said. She added the FDIC is anticipating comments from the commercial mortgage industry around whether the proposals would achieve such objectives. "We need your input," she said in her prepared speech. The market will not return without a revival of investor confidence in bank-originated securitizations, Bair said, adding comments from the "buy side" will help regulators facilitate this recovery. "We are working with other regulators to achieve consistent regulatory reforms that will help prevent the arbitrage between different types of lenders and different types of securitizers," Bair said. "That said, I believe it is appropriate to set high qualitative standards for insured institutions, given their federal backing through insured deposits. And if investors respond by being more willing to invest in securities backed bank-originated loans, it is win-win for everyone." Bair's comments came as another government facility to stimulate credit in the commercial mortgage industry drew to a close. The Federal Reserve Bank of New York's Term Asset-Backed Securities Loan Facility for CMBS on Wednesday afternoon closed another day of requests for loans to buy CMBS assets. The Federal Reserve initiated the TALF program to stimulate lending by allowing private investors to purchase securities with a matching government investment. The reach of the program into legacy CMBS aimed to aid price discovery and provide liquidity for the commercial mortgage market, which faces a credit crisis of its own. The Fed in October received requests for $2.12bn of government loans for legacy CMBS. So far, the CMBS TALF for new-issue CMBS has seen relatively little activity. Write to Diana Golobay.