Trepp Sees Bank Risk in CMBS Shortfall

Fink says banks could see reduced income from fees in a decline of CMBS issuance.

NEW YORK CITY—The diminution of the CMBS market could pose long-term risk for both larger and smaller banks, Trepp LLC recently told the Federal Reserve’s Board of Governors. That risk stems from both a reduction of capital available to banks through CMBS and from an increase in exposure to commercial real estate.

With issuance already down year to date, Trepp sees a further drag posed by the the new risk retention rule mandated under Dodd-Frank. After the new rule takes effect on Dec. 24, “Many participants are saying that we’ll see market share reductions for CMBS, because CMBS volumes could be cut by as much as 50%,” Thomas Fink, SVP and managing director, told the Fed governors in a presentation now available as an on-demand webinar through Trepp.

Given fewer lenders in the marketplace, borrowers will need to compete for the remaining capital. “The end result, we believe, will be a 25- to 50- basis points decrease in borrowing costs, which in today’s low interest rate environment is an increase of 8% to 15% depending on what your current coupon is,” Fink said in the presentation. He also predicted the elimination of securitizations on single-asset trophy properties “because traditionally that has not included a risk retention or a B-piece installment to it.”