Capital Consortium: Lowering the Barriers for the CMBS Market

At the height of the 1992 real estate capital crunch, the Real Estate Roundtable at Harvard University formed an offshoot, the Capital Consortium, to aid the development of a broader-based commercial mortgage-backed securities (CMBS) market. The Capital Consortium comprises the Mortgage Bankers Association of America, the National Realty Committee, and the National Association of Realtors.

During 1991-92, the Resolution Trust Corporation's introduction of securitizations for performing and nonperforming commercial loans revitalized the CMBS market. In fact, at this time the CMBS market became a major player in the capital-starved commercial finance arena.

Lack of refinancing capital contributed to the poor performance of the commercial real estate market during the early 1990s. More recently, capital flows into the commercial market have improved dramatically. Traditional lenders such as commercial banks, pension funds, and life insurance companies have returned to the commercial market in force.

However, the long-term stability of the commercial real estate market depends on developing stable capital sources that do not leave the market when the cycle becomes unfavorable. Because the CMBS market is viable in good times and bad, it has emerged as a stabilizing force for commercial real estate. Unfortunately, regulatory, legislative, and structural barriers have impeded the development of the CMBS market. To overcome these barriers, the Capital Consortium created three working groups: Clearing the Barriers Working Group, Creating the Instrument Working Group, and Making the Market Working Group.

Because capital markets were not "wired" for the purchase of CMBS issues, significant legislation and regulation hampered the development of the CMBS market. The Clearing the Barriers Working Group was charged with eliminating these obstacles to allow the development of a broader CMBS market. This working group has successfully lobbied for the approval of key legislation and regulatory policy that is favorable to the development of the CMBS market. Some of these successes include:

  • Passage of the Riegle Community Development and Regulatory Improvement Act of 1994, which eases the restrictions on commercial banks to purchase CMBSs. The Capital Consortium is working with the Office of the Comptroller on regulations that will implement the legislation, which should be completed in mid-1996.
  • Changes in the National Association of Insurance Commissioners (NAIC) Model Investment Law, which states may adopt to govern the investment practices of life insurance companies. The loan-to-value ratio for bullet loans was increased from 75 percent to 80 percent, provided the amortization period of the loan is 30 years or less.
  • Superfund provisions favorable to the real estate industry; in particular, language addressing the "innocent landowner" and "lender liability" issues. Key provisions include limiting liability for lenders that hold property simply as security for a loan and clarifying the phrase "participation in management." Congress is expected to take action on this legislation by mid-1996.
  • A decision made during the NAIC's Invested Assets Working Group allows rated real estate investment trust (REIT) debt and rated CMBSs to be treated as bonds for purposes of risk-based capital treatment by life companies.

The Creating the Instrument Working Group was charged with resolving one of the major problems with the CMBS market-the lack of uniform loan documents. This working group is leading the effort to develop ratable documents; establish uniform terminology; and identify relevant terms and underwriting criteria, as well as appropriate due diligence requirements.

The standardized documents would have four basic sections: the mortgage instrument; the security agreement; state laws; and business issues (possible negotiated variations to the documents, such as provisions on insurance coverage and yield maintenance). The document is intended to serve as a baseline, with all parties of a transaction free to change the document's wording and/or add conditions. The Capital Markets Mortgage is expected to be presented to the investment community in 1996.

Another CMBS market problem is the lack of consistent data-reporting standards. The Making the Market Working Group is developing ideal data-element guidelines for loans intended for securitization or for sale in the secondary market. These guidelines would enhance market liquidity and create efficient pricing through complete, accessible information at the security, pool, loan, property, and tenant levels. In addition, this working group is developing consistent industry terminology for the data-element definitions, with borrower cooperation issues and other legal, regulatory, and practical concerns related to data collection and access. The data-element guidelines will be presented with the Capital Markets Mortgage.

When the Capital Markets Mortgage document and data elements are released to the investment community in 1996, much of the Capital Consortium's objective of assisting the development of a broader-based CMBS market will be accomplished. In addition, most of the Capital Consortium's agenda will be implemented during 1996, structuring the framework for the continuation of a vibrant CMBS market.

George Green

George Green is a policy representative/senior economist for investment real estate at the National Association of Realtors in Washington, D.C.