Witnesses at Senate Banking Committee Hearing Urge Careful Implementation of CMBS CMBS Risk-Retention Rules

At a Senate Banking Committee hearing on Wednesday (May 18), witnesses including Commercial Real Estate Finance Council (CREFC) President Lisa Pendergast expressed concern about pending regulations to implement the Dodd-Frank law’s risk retention (“skin in the game”) provisions, warning that they are hampering the recovery of the commercial mortgage-backed securities (CMBS) market. Pendergast, who sits on the Roundtable’s board of directors, urged regulators not to rush the process and to take care in crafting the rules; otherwise, they could inadvertently render the budding CMBS market unviable, GlobeSt. reported May 19. (download Pendergast testimony)


Commercial Real Estate Finance Council (CREFC) President and Roundtable Board Member Lisa Pendergast expressed concern about pending regulations to implement the Dodd-Frank law’s risk retention (“skin in the game”) provisions.

Joining Pendergast on the witness stand was American Securitization Forum Executive Director Tom Deutsch; Association of Mortgage Investors Executive Director Chris J. Katopis; Duke University law professor Steven L. Schwarcz; and top executives from Redwood Trust and R&R Consulting. (All testimony here)

“CREFC supports the basic framework for CMBS within the proposed rules,” Pendergast said. “However, there are fundamental aspects within the proposal that have the potential to render the CMBS market unviable. Given the complexity, the rulemaking process must be an iterative one rather than a ‘one-and-done’ proposition,” she said.

Specifically, Pendergast asked the Senate panel to urge regulators to move with appropriate deliberation in the rulemaking process and not act in haste to meet statutorily imposed deadlines. “It is critical that the six agencies that are charged with implementing the commercial real estate finance components of the securitization risk retention framework take whatever time they need to get the rules right,” Pendergast said.

Both Ms Pendergast and other panelists called on regulators to re-propose the risk retention rule. (View the archived webcast on C-Span here)

The Roundtable is also working to educate policymakers and regulators about the potentially negative impact of proposed risk-retention rules on the CMBS market and overall credit capacity for commercial real estate. As the real estate community has urged, the rules unveiled by federal regulators in March would allow third-party CMBS investors (“B-piece buyers”) to satisfy the new “skin-in-the-game” requirements in a variety of ways — including the retention of a “vertical” slice, a horizontal slice or an L-shaped slice. However, they contain elements that, if not appropriately calibrated, could undermine the economics of new CMBS issuance.


Senator Jack Reed (D-RI), left, after the hearing with CREFC President Lisa Pendergast

Specifically, we are concerned about the potential imposition of a Premium Capture Cash Reserve Account (PCCRA); liquidity restrictions imposed on B-piece buyers; and the creation of an added layer of servicing accountability (in the form of an “Operating Advisor”) to oversee special servicers. Although risk retention may be intended to safeguard bondholders, it also introduces the potential to raise costs for borrowers or to limit the amount of credit and liquidity that are available, particularly to borrowers in secondary and tertiary markets.

The CMBS Risk Retention Working Group (part of The Roundtable’s Real Estate Capital Policy Advisory Committee [RECPAC]) continues to meet regularly on this issue and is developing formal comments on the proposal — due to regulators by June 10.

CREFC’s Risk Retention Task Force is also working to form a response to the proposed rules. Its members are strongly encouraged to share their opinions on the risk-retention rules and CREFC’s draft by sending feedback to retention@crefc.org.

Given the fragile state of commercial real estate markets, particularly for smaller properties, and the fact that approximately $600 billion of CMBS loans and $1.2 trillion of bank CRE loans need to be refinanced over the next five to six years, it is important to have a healthy new-issue CMBS market.

Source:  The Real Estate Roundtable


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