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CMBS 3.0? Dodd-Frank Credit Risk Retention Proposals Redefine Commercial Loan Securitization Rules - YouTube
Channel: Allen Matkins
[5]
the window for public comment is closed
[8]
for the credit risk retention rules
[10]
proposed under the dodd-frank wall
[12]
street reform and consumer protection
[14]
act over the next two years federal
[17]
regulators will develop a set of rules
[19]
with the burdensome task to keep watch
[21]
over an industry that all but collapsed
[23]
during the global economic meltdown the
[26]
downturn that we've had has been worse
[29]
than anyone could have anticipated and
[31]
it's revealed some flaws in the
[33]
structure finance attorney Greg Lou ba
[36]
is keeping track of all developments
[38]
with the new regulations that set out to
[40]
limit the risks taken in commercial
[43]
mortgage origination and limit the risk
[45]
to investors in commercial
[47]
mortgage-backed securities what's
[48]
important is that the regulators create
[52]
a new model for securitization that
[55]
continues to promote the influx of
[57]
capital to the real estate markets and
[60]
doesn't end up killing the patient Lou
[62]
ba says the proposed rules would include
[65]
a five percent minimum risk retention by
[68]
the party depositing the loan into the
[70]
securitization transaction otherwise
[72]
known as the sponsor much of the
[75]
residential mortgage crisis that were in
[77]
today was created by the fact that
[80]
lenders can make loans and sell them and
[83]
not retain the risk that is inevitable
[86]
in underwriting the loans over time to
[90]
regulate commercial mortgage-backed
[91]
securities there are two primary methods
[94]
vertical risk retention where the
[96]
sponsor retains five percent of the risk
[99]
in each of the bond classes or
[101]
horizontal risk retention where the
[103]
sponsor or a third party retains a first
[106]
loss interest equal to at least five
[108]
percent of the par value of all bond
[110]
classes often called the BPS the idea is
[114]
to discourage risky loan practices by
[118]
requiring that the sponsor essentially
[120]
eat its own cooking Lou ba also says
[122]
that the rules proposed that the retain
[125]
risk must be retained and prohibit
[127]
hedging transferring selling or
[129]
financing the retained risk there are
[131]
some restrictions on the rule
[132]
unfortunately the the sponsor can
[136]
allocate up to
[137]
risk to an originator that has
[140]
contributed twenty percent or more of
[142]
the loans in the pool that is being
[145]
securitized so one of the problems are
[148]
the one of the questions is whether this
[150]
will discourage sponsors from accepting
[153]
loans from originator that haven't
[155]
originated enough loans to to contribute
[158]
twenty percent of the loans to the pool
[160]
the rules also set out to patrol
[162]
third-party bp's buyers that may acquire
[164]
the first loss interest in the
[166]
securitisations bp's fire normally has
[170]
the special servicing rights that enable
[173]
it to work out loans that are defaulted
[175]
it had a special position in the
[177]
securitization it had the ability to
[180]
protect its own position in the
[182]
securitization although it was also
[184]
required to act in the best interests of
[187]
all the investors the bp's buyers have
[189]
been criticized for conflicts of
[191]
interest and using special servicing
[193]
rights to manipulate the servicing to
[195]
make up for bad underwriting the new
[197]
rules will allow third-party purchasers
[200]
or be peace buyers to acquire this first
[202]
loss piece but were required that they
[204]
retain it that they can't finance it and
[207]
that they cannot have any role in
[210]
controlling the servicing of defaulted
[213]
loans in the pool there is one exception
[215]
if there is a special operating advisor
[218]
to oversee the servicing then the BPS
[220]
buyer can retain control many
[222]
commentators say that this will restrict
[224]
the VP's market severely the VP spires
[227]
will have to retain that risk and they
[229]
won't have the ability to control the
[232]
destiny of these loans when there are a
[234]
loan defaults in order to protect their
[236]
position regulators are also pitching a
[239]
premium capture reserve account to be
[241]
funded from the excess spread or profit
[244]
from the securitization sponsors this is
[247]
money that would otherwise have gone to
[249]
the sponsor as profit or to cover a
[253]
transaction cost that now in addition to
[256]
the five percent risk that must be
[258]
retained under the related rule needs to
[261]
be deposited into this account and apply
[263]
to two credit losses over time critics
[267]
believe the capture of securitization
[269]
profit will stifle
[271]
and already suffering industry to soften
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the blow regulators are proposing an
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exemption for qualifying commercial real
[278]
estate loans qualifying real estate
[280]
loans are loans that are considered to
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be non not risky because they meet
[286]
certain underwriting standards that are
[287]
set out in the rules and criticism of
[290]
the rule currently is that it would
[292]
exclude most of the most of the loans
[294]
that are currently securitized Lou ba
[296]
says all the criticism and all the input
[299]
will influence the final credit risk
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retention rules that will define the
[303]
next phase of commercial mortgage loan
[305]
securitization
[314]
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