REQUIRED READING: Is It Time For Electronic Commercial Lending?

ently, President Obama attempted to address the credit crisis by announcing a comprehensive package[/b] to address commercial mortgage-backed securities (CMBS) and commercial loans. The Term Asset-Backed Securitized Loan Facility (TALF) program was extended to CMBS and residential mortgage-backed securities, with the intention of jump-starting commercial lending activity that had ground to a halt. I applaud Obama's proactive approach to this problem. However, the TALF measure presents only a short-term solution to a problem that will likely resurface unless investors regain long-term confidence in CMBS. For one thing, nothing in the TALF program and other new programs forces banks to make loans. For another, investor confidence in this type of financial vehicle has been shaken, and it will not be restored simply by what amounts to a federal loan program to aid in its purchase. The rationale for investors' opinions of these offerings is best likened to a landlord/tenant relationship. Would you ever rent a home to a tenant when you cannot evaluate his or her income? If not, you are probably like most landlords, who would not enter into a lease agreement without knowing whether a tenant would be able to pay rent every month. Today, investors feel exactly the same way when it comes to CMBS, because like a questionable tenant, these securities lack the transparency needed to accurately assess the level of risk associated with each commercial or multifamily loan associated with them. In order to analyze the likelihood of a future default, the goal is to have the information needed to evaluate whether an owner and his/her business will be able to generate enough cashflow to support the debt. Without having access to detailed property-level data, such as rent rolls and lease agreements, investors fear that they cannot properly evaluate which loans within a CMBS deal might default and what the recoveries on these assets might be. This fear is particularly relevant in today's economy, which is characterized by corporate bankruptcies, declining retail sales and a general decline in demand for commercial space. As a result, sources of commercial financing, such as conduit lenders, have gone away, taking with them precious sources of funding necessary for commercial borrowers to refinance their loans or even purchase new properties at historically attractive valuations. If commercial lenders are unable to package loans to sell to investors, refinancing the estimated $530 billion of commercial debt scheduled to mature through 2011 will be considerably difficult. As a result, it is likely that the commercial lending space will be the next major challenge of our the ongoing credit crisis. In order to offset this looming crisis, immediate action is of utmost importance. The long-term remedy for this crisis of investor confidence in CMBS is for government and financial institutions to collectively mandate the use of existing electronic lending technology to provide transparency needed to alleviate investor scrutiny. Doing so will ensure that as banks and conduits begin lending on assets that are continuing to decline in value returns, they will ultimately have a market for their securitized debt. Electronic lending technology is currently used by a number of lenders and financial institutions in the residential mortgage space to electronically consolidate the entire lending process. Investors are able to quickly access loan information online without having to deal with stacks of physical loan documents that need to be stored, shipped and reviewed. Similar to what is being done in the residential lending space, electronic lending technology can be used by commercial lenders and property owners to increase transparency for investors in the following areas: – [b][i]Loan prospectus accessibility.[/i][/b] Prospecti are currently available online from a variety of sources, but not in a standard format. Electronic lending technology can provide security issuers with an easy way to create an online prospectus of a CMBS. Doing so would provide investors the ability to quickly and easily reference important key numbers and information in a standard online format. It prevents investors from having to spend hours sifting through hundreds of pages of loan documents in search of information. – [b][i]Property listings.[/i][/b] Each CMBS might contain as many as 300 different properties. However, just a few of those properties might make up roughly 50% of the securities' total value. In the standard data packets that accompany each security, information is typically only provided for the top 10 loans, leaving investors to question the risk and stability associated with the remaining second tier that comprises smaller loans. By documenting loans electronically, investors have the ability to view detailed information for all loans that make up the security, giving them more confidence in knowing exactly what properties a security contains. – [b][i]Historical and ongoing cashflows.[/i][/b] Similar to property listings, critical cashflow elements of CMBS are often absent from loan documents. Some type of historical cashflow is generally provided for each property, but the issue is that the data are often provided in the Annex A of the prospectus, a spreadsheet that varies by deal, rather than in the Commercial Mortgage Securities Association (CMSA) data file that is available electronically in a standard format. The CMSA data file shows the cashflow at the time of underwriting, but it does not show the prior year's trailing cashflow, or revenues and expenses over the last 12 months consistently. Forward-looking rent rolls are important so that you can estimate what cashflows will be going forward. For example, the trailing 12-month or prior-year cashflow for a property may reflect a bunch of leases that are about to roll. With electronic lending technology, lenders and property owners would have the ability to efficiently document trailing and ongoing rent rolls in an online document, making it possible for investors to make a more thorough and timely risk assessment of securities. – [b][i]Lease terms and conditions.[/i][/b] Buried within the lease agreements of many commercial properties are insights into the property performance that are not obvious from the property location and cashflows. For instance, a co-tenancy clause might specify that in the event of an anchor tenant's leaving the property, the lessee be entitled to reduced rent or terminating the lease in full. Essentially, electronic lending technology offers conduits and major commercial lenders the ability to provide potential investors with more detailed and streamlined data, allowing them to more thoroughly analyze what they are buying. Although this technology will not provide an immediate solution to the current problem, it will provide the transparency necessary to build confidence in a future CMBS market, as well as whole loan sales and loan syndications. [i]Andrew Dubinsky is president and CEO of Encomia LP, a Houston-based provider of electronic signature technology for the mortgage industry. Dubinsky can be contacted at (713) 623-4366 or adubinsky@encomia.com

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