WASHINGTON, DC-The Senate Committee on Banking, Housing & Urban Affairs held a hearing on the state of the securitization markets. Testifying to the committee was Lisa Pendergast, president of the CRE Finance Council. Her message was succinct and blunt: please take care in crafting the rules that will implement Dodd-Frank, as they could have a detrimental impact on the budding CMBS market.
Yes, she noted, there is $35 billion in CMBS expected to be issued this year, compared to $12 billion last year. That, though, is still minuscule compared to the $240 billion issued in 2007. More to the point, Congress could inadvertently render the CMBS market unviable if they do not take a deliberative approach in crafting final rules for such provisions as risk retention, she said--especially if they rush to meet a statutorily imposed rulemaking deadline.
“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 testified. "We are concerned that this will result in the issuance of hastily crafted final rules.”
The CREFC would like to see regulators extend the current June 10 rulemaking response date and then repropose the draft rule. That way, she said, it will be possible to incorporate “the extensive industry feedback regulators are sure to receive.”
Some of what the commercial real estate industry has seen thus far has been, simply put, alarming. At the end of March the Federal Deposit Insurance Corp. unveiled a proposal to supplement the legislation’s risk retention proposal, the so-called skin in the game requirement for originators, forcing certain transactions to be structured with a "premium capture cash reserve account." The practical effect is that it would keep CMBS lenders from claiming profits up front on such transactions until all other bonds have been paid off, John D'Amico, the then-interim CEO of CRE Finance Council in New York City told GlobeSt.com in an earlier interview (the organization’s permanent CEO, Steve Renna, took over on May 2). "That has created much consternation among issuers," he said. "They are running analysis now to see what it would do to their profitability and the cost to borrowers."
FDIC also proposed that an operating advisor be appointed who could remove a special servicer for cause. This entity would have to be consulted on all loan workouts. Again, more consternation, this time on the part of special servicers, said D'Amico. Ditto for this one: a proposal would require B piece buyers to retain the interest of the B piece for the entire life of the transaction, which would naturally affect the price the B piece buyer is willing to pay, he said. The proposals also call for the creation of criteria for a qualified CRE loan. Unfortunately, D’Amico said, "I have never seen a loan that would meet all of the criteria they have listed."
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Erika Morphy
Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.
