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Thursday, 23 October 2014

Regulators Approve Final Rules on Risk-Retention

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The following has been edited to reflect a correction published on Oct. 24, 2014.

Commercial Real Estate Direct Staff Report

Federal regulators this week approved final rules regarding the retention of risk in asset-backed securities, including CMBS.

The rules do not differ much from the proposed regulations that the SEC and other federal agencies had proposed a year ago. But because they impose what could be a hefty cost to investors in deals' most subordinate classes, the rules are expected to increase borrowing costs for securitized commercial mortgages by 20 to 30 basis points. The new rules, which are part of the Dodd-Frank Wall Street Reform and Consumer Protection Act that was signed into law in 2010, go into effect in 2016.

The rules require a risk piece of every CMBS transaction, totaling 5 percent of a deal's market value, as opposed to its face, or par value, to be shared by up to two investors on a pari passu, or equal basis. In addition, they'd have to retain the investment for a minimum of five years. Issuers would be responsible for the buyers being in compliance with the rules.

Historically, B-piece investors have purchased only the bottom 5 percent or 6 percent of a deal's face value - generally up to the bonds that are rated BB. Because those bonds are sold at steep discounts, to reach the 5 percent of market-value threshold could result in B-piece buyers investing in bonds rated as high as A. As a result, B-piece investors will need to be compensated for the bigger investments they'll have to make, as well as the required investment time-frame.

The CMBS industry unsuccessfully had sought to get regulators to change the required amount of risk held to 5 percent of a trust's face value versus its market value.

The rules include provisions under which issuers could share some of the 5 percent stakes with the B-piece buyers.

"We could also see a rush to securitize loans through CMBS before (the rules) take effect two years from now," Barclays Capital wrote yesterday in a research brief. Barclays also said the rules would result in a 20 to 30-bp increase in borrowing costs. The CRE Finance Council previously had warned about a similar potential increase in borrowing costs.

Meanwhile, the final rules keep the same standards as those previously proposed for exempting commercial real estate loans that meet the following criteria: amortization terms of 25 or 30 years for multifamily loans; loan-to-value ratios of 70 percent for multifamily and 65 percent for other property types, and 10-year loan terms for all types.

The regulators also did not exempt single-borrower/single-credit deals from the risk-retention rules. The CREFC had argued for that exemption because of those deals' lower risk.

Still, the industry won some concessions, such as an elimination of a proposed requirement that issuer's profits be placed in a first-loss position. The final rules also require that a minimum of 20 percent of a trust's bondholders vote on whether to replace a trust's special servicer versus as few as 5 percent that would have qualified as a quorum under the previously proposed rules.

Comments? E-mail John Covaleski or call him at (267) 247-0112, Ext. 208.




“The Weekly”

“The Weekly” is Commercial Real Estate Direct’s PDF newsletter, sent to subscribers every Friday morning. With over 100 news stories published on Commercial Real Estate Direct each week, “The Weekly” features the top stories in commercial real estate that industry participants need to know first. “The Weekly” also contains:

  • Breaking mortgage, CMBS, and REIT news

  • Quarterly league tables with rankings of B-piece buyers, book runners, and lenders

  • Industry moves and changes in “The Insider“

Additional Info

  • Syndicate to Realpoint: No
  • Subject: CMBS - non-deal specific (CMBS-G), Legal Issues (LEGL), Mortgages/Financing (MOR)
  • Private: No
Read 1174 times Last modified on Tuesday, 16 December 2014

Data Digest







Top Bookrunners Domestic, Private-Label CMBS - 2017
Investment Bank #Deals Vol$mln MktShr%
Goldman Sachs 17.59 11,819.34 13.68
JPMorgan Securities 14.52 10,968.11 12.70
Citigroup 12.04 10,012.71 11.59
Wells Fargo Securities 14.02 9,936.06 11.50
Deutsche Bank 12.55 9,879.74 11.44




cppichart FP



CMBS 2.0 Spreads


Top CMBS Loan Contributors - 2017
Lender #Loans Vol$mln MktShr%
Goldman Sachs 146.89 11,719.34 13.63
JPMorgan Chase Bank 117.68 10,114.14 11.76
Deutsche Bank 198.48 9,689.97 11.27
Morgan Stanley 166.18 8,539.78 9.93
Citigroup 199.05 8,088.24 9.41





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