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CMSA Wants Fair-Value Accounting Reform to Add Specifics
Mar 31, 2009 - CRE News

Proposed changes to the fair-value accounting standard are insufficient to improve CMBS trading, according to the Commercial Mortgage Securities Association.

The CMSA today is set to advise the Financial Accounting Standards Board, or FASB, on how to refine proposed guidance from that board's staff that would fine tune the FAS 157 standard, which requires investors to value assets at market-clearing levels.

FASB is reviewing guidance for amending the application of FAS 157 during periods of reduced transaction activity, which force investors to rely on factors other than actual trading values when marking their assets.

"We will strongly comment on major changes required to make (FAS 157) function like we and Congress think it ought," said Rick Jones, chairman of CMSA's political action committee and a partner with the law firm Dechert. He added that FASB "rushed" to complete its guidance for revising the standard to meet an early April deadline that a congressional subcommittee set for the revisions.

The guidance from the FASB staff lists criteria that investors can use to determine if the markets they trade in are not active. In that case, investors have leeway from FAS 157 rules for valuations. The guidelines also set the criteria used to determine if transactions were completed while sellers were under distress, which would mean they do not fully reflect property market values.

The CMSA has in the past said that the recommendations for revising FAS 157 fail to provide "concrete, specific guidance" on when investors could employ the alternate valuation techniques and on criteria that the SEC and the Public Company Accounting Oversight Board would use in evaluating the alternate valuations made.

FAS 157 rules should also allow investors in CMBS and other securities "to incorporate internal management's assumptions and judgments to produce realistic valuations," CMSA testified in a hearing earlier this month before the U.S. House of Representatives' Financial Services Subcommittee on Capital Markets.

The guidance being considered by FASB could give CMBS investors an alternative to the market's reliance on the CMBX indices to set values. FAS 157 has made CMBX a primary indicator of CMBS values while actual CMBS trading is near-dormant, despite CMSA concerns that those indices inadequately reflect assets' true value.

Jones, who criticized the proposed guidelines for changing FAS 157 in a CMSA teleconference Monday, also warned that the proposal could jeopardize the federal government's plan to partner with private investors to acquire a wide range of financial assets that include CMBS and mortgages.

"Unless we get this fixed the way we think it should be, it would significantly impair sellers' ability to price assets in a way that would clear the market in order for TALF to work," Jones said. TALF refers to the government's Term Asset-Backed Securities Loan Facility, which would partially fund the acquisitions by the planned Public-Private Investment Program.

Jones did not specify just how the FAS guidelines would impact the PPIP program. But valuation conflicts with the guidelines could arise because of the program's vast size. It is expected to encompass the sale of $1 trillion worth of financial institution loans, CMBS and other securities to partnerships between the Treasury and private-sector investment managers that are backed by debt financing from the FDIC.

The CMSA also used the teleconference to express concerns about the PPIP program, including the need for the Department of the Treasury to provide more details about how it will select partners and the terms of the debt financing it would provide.

FAS 157 was the teleconference's subject topic partly because it's more imminent. FASB's governing board on Thursday is scheduled to decide on possible changes to FAS 157 that would be based on its staff's guidance and on commentary from third parties such as the CMSA.

The Financial Services subcommittee set the early April deadline for FASB action after hearing the CMSA's March 12 testimony, according to Lee Cotton, CMSA's immediate past president. "Congress got a bit agitated, bless their hearts," he said.

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