Commercial real estate experts are concerned that a new Credit Risk Retention Rule from the Federal Deposit Insurance Corp. and five other federal agencies could weaken the US commercial mortgage-backed securities markets.
The rule, born from the 2010 Dodd-Frank Act, compels lenders to hold at least 5% of the debt they package or sell. While two SEC officials have dissented, citing concerns for the residential market, others said the commercial real estate markets could take an even heavier blow.
“The impacts are much more severe on CMBS, where you’ve got a lot of issuance,” said Christina Zausner, vice president of industry and policy analysis with the CRE Finance Council. “This is a strict regulation being applied to a marketplace that’s thriving.”
While many realtors, bankers and consumer groups hailed the new rule which was approved this week, it could hinder lenders’ ability to lend. On the CMBS side, Zausner said that shocks to the risky side of the market could ultimately have a “contagion effect” across the CMBS markets, especially as maturities from 2006 and 2007 come due.
“You already have more regulation than in ‘06 and ‘07, which suggests tighter parameters,” she said. “It’s okay to say that some of those loans should not have been originated in the first place. Maybe they should be refinanced with tighter terms. The market will have to absorb that.”
But, she added, “What you cannot ensure is that capital will be sufficient enough in the coming years – when risk retention is in place and refinance needs are in full swing – to meet the needs of the borrowers that really deserve to be funded.”
The rule is in part an effort to avoid the slipshod practices that fueled the recession via the subprime mortgage defaults of 2006 and 2007, and lawmakers believe lenders will be less likely to issue risky mortgages and securities if they are forced to absorb some of the losses.
Two republican SEC Commissioners, including Michael Piwowar, dissented. Piwowar called the 5% “imprecise and arbitrary,” arguing that additional economic analysis is necessary to strike the right balance. He was also “troubled” by rules that favor government lenders over private lenders, as loans guaranteed by Fannie Mae and Freddie Mac will automatically be exempt from risk-retention requirements.
“I remain concerned about the continued dominant role in housing finance played by the two government-sponsored enterprises,” he said.
On the commercial side, some government-sponsored deals falling under Freddie Mac’s multifamily “K Certificates” and Fannie Mae DUS loan programs may qualify for the exemption.
The FDIC developed the rule along with the Federal Reserve, the Department of Housing and Urban Development, the Federal Housing Finance Agency, the OCC, Securities and Exchange Commission and the Treasury Department.
The rule will be effective one year after publication in the Federal Register for residential mortgage-backed securities and will begin to impact the commercial mortgage-backed securities after two years.