Finance Groups Doubt SEC Plan to Tag CMBS Pools

Proposed changes to bond ratings are raising the hackles of real estate finance groups, which worry that the Security and Exchange Commission’s new rules would slow the recovery of the CMBS market. “It would create extended period of market disruption, and right now, everybody’s trying to figure out an end to the market disruption,” Dottie Cunningham, CEO of the Commercial Mortgage Securities Association, told CPN this morning. At issue are the wide-ranging reforms formally proposed Wednesday by SEC. New rules would require ratings agencies to use different symbols for structured products. For example, the designation “SF,” for structured finance, or “V” for “volatile,” would be tacked on to CMBS pool ratings. An alternative plan would instead require the agencies to issue reports explaining the differences between structured ratings and other securities. While agreeing with the principle of greater disclosure, industry organizations dispute the value of identifying pools of structured loans. “The little ‘SF’ doesn’t tell you anything,” Cunningham contended. She suggested that the sub-prime residential loan crisis has led to misguided reform efforts by creating inaccurate perceptions about CMBS. Among other problems, distinguishing structured products from other bonds would hamper all investors in rated products, Cunningham argued. If the current rating system were changed, investors would have to review the policies that specify which grades of product they can buy. That would slow down efforts to restart the stalled CMBS market. Other provisions of the SEC’s proposal call for expanded disclosure by ratings agencies. For example, agencies would have to make public their ratings and their actions to allow comparisons of the agencies. They would disclose the information about assets that they used to rate CMBS loan pools. And the rules would prohibit ratings not based on information about underlying assets. “We do support other kinds of transparency with regard to ratings for CMBS,” Cunnigham noted. CMSA backs more disclosure about ratings methodology, pre-sale reports and surveillance press releases, for example.