Obama Signs Financial Overhaul Bill

For more, on the financial overhaul bill and it's impact, watch for the upcoming Distressed Assets Investor.

WASHINGTON, DC-At 2,200 plus pages, it was understood there was much included in the financial overhaul that would not be immediately apparent, and that might have an impact on commercial real estate finance. As the bill, which President Barack Obama signed into law today, becomes the law of the land, one such development is beginning to emerge: Standard & Poor's, Moody's Investors Service and Fitch Ratings have all said they do not want their ratings to be used in documentation for new bond sales until they better understand the implications of the law. 

The new law subjects credit-rating agencies to greater liability, permitting them to be sued if they "recklessly" fail to review key information. The law also gives the Securities and Exchange Commission two years to address the inherent conflict of interest at rating agencies. If it doesn’t establish a procedure, a board will be created to assign rating agencies to debt issuers. 

That, though, is a problem for another day. For the moment, the rating agencies are not allowing bond issuers to use their ratings, the Wall Street Journal reports.

Bonds consisting of consumer loans are required by law to include ratings in their official documentation, the Journal noted, which means new bond sales for mortgages, autos, student loans and credit cards could easily shut down.

It would not be surprising to see this uncertainty spread to the CMBS market, says Dennis Nason, CEO of Nason & Nason, an executive search firm for banking and finance based in Coral Gables, FL, and a former investment banker with Wells Fargo and Citigroup. “This law will have an impact on anything that requires ratings, and right now everyone is second guessing whether they have rated an asset correctly or not,” he tells GlobeSt.com. 

That, coupled with the liability provisions in the law, will be enough to put a damper on the just-emerging CMBS market, he speculated. 

When rating agencies have assessed their exposure, he predicts, they will proceed slowly and perhaps with more resources devoted to each rating, which could drive up costs. “My guess is that they won’t let a recent business-school graduate be the point person on these things anymore.”