“Illiquidity and volatility are becoming the norm,” he said.

The B Piece's Role

The risk retention rule was adopted by several federal agencies in 2014 after the commercial real estate industry beat back the most onerous provisions that had been originally proposed in 2011.

The rule requires asset-backed loan originators to retain at least 5% of the credit risk relating to the assets that underlie the securities. There are two structures by which this can happen: the sponsor retains 5% of the face value of each class of securities issued in the CMBS transaction or an “eligible horizontal interest” structure in which the sponsor retains 5% of the most subordinate class of the “fair value” of all of the CMBS issued. The B piece buyer would figure into a variation of this form.

To hear the industry talk about the upcoming rule, though, you would think the B piece buyer is the only way in which the 5% retention rule will be satisfied. But there are many doubts about whether these investors can or want to take on this new role.

The Bill Alleviates Some of the Pressure on the B Piece

Hill's bill would take some pressure off of the B piece. One provision would allow one or two third party purchases to take the first loss in either a senior-subordinate structure or pari passu. Under the measure, two B piece buyers can only hold their interest in pari passu.

Other measures provide an exemption for single-asset/borrower deals and allow conservatively-underwritten loans to qualify for risk retention exemption.

Hill, a former banker, introduced the measure with input from CREFC.

WASHINGTON, DC—US House Representative French Hill (R-Ark) has introduced a measure that would modify the risk retention component for CMBS required under Dodd-Frank.

If the bill were to pass – a big 'if' admittedly – its provisions could address, almost in Deus Ex Machina mode, some of the question marks that still exist about how risk retention will impact the CMBS market.

To be sure, it would be an irony if, after years of industry lobbying, this last-minute measure were to handily the save the day much the way the ancient Greek playwrights used their gods to salvage storylines.

But relief that comes at the eleventh hour is still relief and concerns are growing that risk retention could be the tipping point for CMBS especially after this latest bout of market volatility. CRE Finance Council president Steve Renna told Congress shortly before Hill introduced the measure that the CMBS market is at risk of destabilization by the many regulations targeting it.

“Illiquidity and volatility are becoming the norm,” he said.

The B Piece's Role

The risk retention rule was adopted by several federal agencies in 2014 after the commercial real estate industry beat back the most onerous provisions that had been originally proposed in 2011.

The rule requires asset-backed loan originators to retain at least 5% of the credit risk relating to the assets that underlie the securities. There are two structures by which this can happen: the sponsor retains 5% of the face value of each class of securities issued in the CMBS transaction or an “eligible horizontal interest” structure in which the sponsor retains 5% of the most subordinate class of the “fair value” of all of the CMBS issued. The B piece buyer would figure into a variation of this form.

To hear the industry talk about the upcoming rule, though, you would think the B piece buyer is the only way in which the 5% retention rule will be satisfied. But there are many doubts about whether these investors can or want to take on this new role.

The Bill Alleviates Some of the Pressure on the B Piece

Hill's bill would take some pressure off of the B piece. One provision would allow one or two third party purchases to take the first loss in either a senior-subordinate structure or pari passu. Under the measure, two B piece buyers can only hold their interest in pari passu.

Other measures provide an exemption for single-asset/borrower deals and allow conservatively-underwritten loans to qualify for risk retention exemption.

Hill, a former banker, introduced the measure with input from CREFC.