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Wednesday, 28 August 2013

Federal Regulators Relax Proposed Risk-Retention Rules

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Commercial Real Estate Direct Staff Report

Federal regulators are relaxing some of the rules they previously had proposed regarding the retention of risk in CMBS and issuers' ability to immediately capture any profits from the sale of loans through securitizations.

The proposed rules were called for by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The six federal agencies - the Federal Reserve, Federal Housing Finance Agency, FDIC, SEC, Comptroller of the Currency and Department of Housing and Urban Development - two years ago had proposed that excess proceeds from the sale of commercial mortgages through securitizations would go into a "premium capture cash-reserve account" that would be made subordinate to other bonds in a given deal and could only be collected over time. Current practice calls for those excess proceeds to be packaged into interest-only strips that dealers sell.

But the regulators have reversed gears as a result of industry feedback and have eliminated the premium capture cash-reserve account requirement. They're now asking for industry input on the re-proposal. The CRE Finance Council is working with its members to develop a comment letter, according to Stephen Renna, chief executive of the trade group, who noted that the regulators had moved off the original proposal in "most aspects of the original rule that we commented on."

In the regulators' re-proposal this morning, they said, "many commenters asserted that these proposals would lead to significantly higher costs for sponsors, possibly discouraging them from engaging in new securitization transactions."

"This is a significant advancement from the original proposal," explained George Green, associate vice president of commercial/multifamily policy for the Mortgage Bankers Association.

The re-proposal, he said, showed that regulators "were responsive to concerns raised by the industry."

In addition to eliminating the premium capture cash-reserve requirement, the regulators have relaxed their proposed rules governing risk retention.

While the proposed rule still calls for a 5 percent risk piece of every CMBS deal to be retained, it has become more flexible. Two parties can now hold a deal's risk position. And if the two take less than 5 percent of a deal's fair market value, which would amount to perhaps 9 percent of a deal's par value, the issuer can take the remainder in a vertical strip, meaning a piece of every bond up to the least risky. But the amount the issuer retains is subject to a maximum of 5 percent of the risk-retention requirement.

"You now have optionality," Green explained. A B-piece buyer, which traditionally has taken roughly 3-5 percent of a transaction's bonds, can team with an investor that traditionally invests in bonds rated BBB, for a deal to meet the guidelines spelled out in the regulators' re-proposal.

In addition, the parties that retain a deal's risk piece, under the re-proposal, will be able to trade out of it after five years. The original proposal called for only one party to retain a 5 percent risk piece of every deal and retain it for the deal's life. "The MBA was strong in its advocacy that it should be less than the life of a deal," Green said.

Meanwhile, the regulators have retained a proposed exemption from the risk-retention rule for loans that meet certain underwriting standards. For instance, they would have to have low leverage and high coverage levels. The inclusion of many such loans in a CMBS deal, which would be highly unusual, would reduce the deal's risk-retention requirement.

So, for instance, if half of a CMBS deal's loans are very conservatively underwritten, only 2.5 percent of a risk piece in the deal would have to be retained. But the re-proposal says that every deal has to have at least 2.5 percent of its risk retained.

According to the regulators' comments in their re-proposal, fewer than 0.4 percent of all commercial mortgages ever securitized would have met the guidelines to merit being exempt from the risk-retention proposal.

The re-proposal also removed language that would have excluded loans against properties owned by REITs from being able to be exempt from the risk-retention rules. The re-proposal said "the agencies did not intend to exclude otherwise valid CRE loans from the definition solely because the borrower was organized as a REIT structure." The original proposal, and the new one, seeks to avoid unsecured REIT loans from being classified as commercial real estate loans.

Comments? E-mail Orest Mandzy, or call him at (267) 247-0112, Ext. 211.


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Read 1801 times Last modified on Thursday, 29 August 2013

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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