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WASHINGTON, DC-In a preventative measure against a commercial mortgage backed securities market disruption, the Financial Accounting Standards Board has issued a new draft guidance on CMBS transactions under the SFAS 140 accounting standard. The draft was issued July 3 and a final draft is expected this week.

The Real Estate Roundtable and other organizations pushed for a new guidance to aid industry professionals. The FASB responded with a document in a question and answer format discussing the “fair value” call option permitting special servicers and securities holders to purchase defaulted loans in securitization transactions, despite provisions in the April 1 SFAS 140 limiting a special servicer’s discretion to dispose of an impaired loan in a CMBS pool.

“The liquidity and stability of the $300 billion CMBS market are essential to ensuring adequate flows of real estate credit,” says David A. Twardock of the Prudential Mortgage Capital Company and vice chairman of the Roundtable’s Real Estate Capital Policy Advisory Committee. Twardock, who contributed to the drafting of the guidance, notes, “Given the current softening in US economic growth and potential global financial contagion, a healthy CMBS market is more important than ever for real estate and the overall economy.”

Jeffrey D. DeBoer, Roundtable president and COO, adds, “We thank our industry partners — the Bond Market Association, Commercial Mortgage Securitization Association and Mortgage Bankers Association — as well as all our members who worked so diligently on this issue over the past several months. We are hopeful that FASB’s actions will allow new CMBS issuance to proceed uninterrupted.”

A spokesperson for the Roundtable notes, “The CMBS vehicle is now the second largest source of commercial real estate financing — behind only commercial banks — and represents approximately 20% of the $1.5 trillion real estate debt market. SFAS 140′s original limitations on the activities of a special servicer caused considerable uncertainty in the CMBS marketplace in recent months, because they would have forced issuers to treat CMBS transactions as a financing, rather than a sale, for accounting purposes. This, in turn, would have required them to keep the securitization transactions on their books instead of recording them as one-time gains, potentially discouraging new CMBS issuance.”

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