The industry is debating the impacts of risk-retention and other new regulations as a wave of US CMBS maturities looms over the horizon.
At the PERE New York Summit today some claimed that the new Credit Risk Retention Rule, born from the 2010 Dodd-Frank Act, had the potential to unravel the CMBS markets. The “skin in the game” rule compels lenders to hold at least 5% of the debt they package or sell.
“There’s another storm brewing that we don’t really understand,” said Jonathan Schultz, managing principal with Onyx Equities,” noting that $1.3tr of loans will come due between 2015 and 2017.
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, but some have argued that it will put a significant dent in the capital needed for the refinancings on the horizon.
As evidence that the banks may be bracing for the storm, Schultz pointed to news that Deutsche Bank is said to be selling most of a $2bn portfolio of commercial real-estate loans to U.S. private-equity firm TPG.
“Why?” he asked the audience. “They’re performing loans! We might not know inside what’s happening, but to me they’re getting ready for these reserves.”
Others believe the impacts of the rule are being overblown. Jon Peiper, director with Sumitomo Mitsui Banking Corporation, claimed there’s still time to prepare.
“Luckily these regulations are in the future, so there’s time for planning,” he said. But he still urged caution, recalling a so-called “low-leverage” debt deal he closed in 2007 at an 85% loan-to-value.
“The mindset that that was actually low leverage was baffling then, and it didn’t make any sense,” Peiper said, “So because of all these regulations coming up the banks are going to have to be very careful about these types of investments… but there’s still time.”
Asked for advice on how to prepare for the next big market correction, Scott Stuckman, managing director of USAA Real Estate Company, passed on an opportunity to use the typical baseball analogy, arguing that the cycle is akin to a game of cricket.
“You don’t really know when it’s going to end,” he said. In terms of CMBS, he shared a simple piece of advice.
“As a general rule, avoid CMBS,” he said. “It’s addictive because it’s easy to get to. It’s the cheapest drug to get your fix, but there’s no way out, and that’s the problem.
“This is not an infomercial, but we didn’t have one foreclosure and not one loss of property during the downturn. We did not have one CMBS loan.”