CRE professionals warn Dodd-Frank could undercut CMBS recovery
Commercial real estate finance professionals warned lawmakers Wednesday that the securitization risk-retention framework outlined in Dodd-Frank is potentially the greatest threat to a recovery in the commercial mortgage-backed securities segment.
Lisa Pendergast testified before the Senate subcommittee on securities, insurance and investment Wednesday morning on behalf of the Commercial Real Estate Finance Council and said proposed rules on premium cash capture reserve accounts, conditions for a third party to purchase risk and an exemption for qualified commercial loans are all areas that could negatively impact the industry.
"It is critical that the six agencies that are charged with implementing the CMBS components of that securitization risk-retention framework take whatever time they need now to get the rules right," she said. "If not properly constructed, the risk-retention rules could potentially result in a significantly smaller secondary market, less credit availability, and increased cost of capital for CRE borrowers."
Pendergast said this may lead to portfolio lending at more competitive rates, "which would be counter to historical experience, thus attracting the safest risks to the portfolio space and leaving the smaller and/or riskier loans for the CMBS where borrowers will have to pay higher rates."
Pendergast said if lawmakers do not address uncertainties raised by the proposed rules, the industry will continue to wonder if "CMBS will be able to satisfy the impending capital needs posed by the refinancing obligations that are coming due."
"Without CMBS, there simply is not enough balance sheet capacity available through traditional portfolio lenders such as banks and life insurers to satisfy these demands," she said. "It is for this reason that Treasury Secretary Geithner noted two years ago that 'no financial recovery plan will be successful unless it helps restart securitization markets for sound loans made to businesses – large and small.'"
Tom Deutsch, executive director of the American Securitization Forum, asked lawmakers to recast risk-retention rules after considering all of the feedback provided by the industry. The deadline for comments is June 10.
"Attempts to realign incentives in many types of securitization structures, where those incentives have demonstrated through strong performance to be well-aligned between issuer and investor, only serves to risk harm to the American economy, American consumer and to investors," Deutsche said.
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