Commercial Mortgage Industry Seeks Skin in the Game Option
The commercial mortgage securitization industry is joining the call for clearer regulation establishing risk retention among originators or securitizers before assets are sold on to investors. The Comptroller of the Currency John Dugan this week urged reform of underwriting standards rather than "skin-in-the game" risk retention proposals. He said the Office of the Comptroller of the Currency (OCC) supports accounting and regulatory changes that more appropriately align securitizations with risk, although they make it more difficult for these transactions to qualify as true sales and move off the balance sheet. Proposals for risk retention requirements, which are intended to assure sound underwriting, call for securitizers to hold from 5% to 10% of credit risk on balance sheet. Dugan said Financial Accounting Standards (FAS) 166 and 167 could affect capital levels when securitized assets are brought on-balance sheet. “Where a securitizer retains a material risk of loss on loans transferred in a securitization, the new accounting and regulatory capital rules may require that all loans in the securitization vehicle be kept on the bank’s balance sheet – not just the amount of risk required to be retained,” Dugan said. “This could significantly increase the regulatory capital charge for such securitizations.” As an alternative to risk retention, Dugan suggested establishing minimum underwriting standards by regulation. If firms meet these standards, they would be exempt from risk retention requirements. “I do not mean to suggest that minimum underwriting standards are a panacea, or even that they would work as well for other asset classes as I think they would for mortgages,” he added. “Other measures, including more robust disclosures, credit rating reform, and changes in compensation practices all merit consideration by policymakers, and that process is underway.” Investors, for their part, are calling for more transparency on the buy-side of the market. William Moliski of Redwood Trust said this week he thought 5% risk retention was already more or less an industry standard, though he remained uncertain what it would offer him. “They give us a small box to think about," he said at the American Securitization Forum (ASF) 2010. "Securitization allows investors to participate at various credit levels. But what is this slug of money there for? A first loss piece for investors?” HousingWire previously sat down with Lisa Pendergast, incoming president of the Commercial Mortgage Securities Association (CMSA), who in the January magazine issue said FAS 166 and 167 could "stop any recovery in the securitization markets in its tracks." Pendergast said that although risk retention proposals out there aim to enforce sound underwriting practices, a clear distinction must be drawn among asset classes within securitization. The CMSA, in an e-mailed statement Thursday, supported Dugan's recommendation of a "skin-in-the-game" alternative: "Over the past year, CMSA has been fully engaged in efforts urging policymakers to ensure that the final regulatory reform package does not negatively impact commercial real estate but, rather, is customized to reflect the unique nature of the CMBS market, which utilizes a third-party investor who purchases the first-loss position and re-underwrites all loans during the pre-issuance period." Lenders and securitizers fear risk retention will make doing business prohibitively expensive and will stifle the ability to securitize and issue. Write to Diana Golobay.