8.4.15: Risk Retention Rules for CMBS Not Far Away

On October 22, 2014, the federal regulatory agencies responsible for implementing regulations under Dodd-Frank risk-retention rules for CMBS transactions finalized the rules. In a nutshell, the rules will effectively apply to the riskiest 5% of each CMBS issue. With CMBS issues averaging roughly $1 billion, the rules will affect $50 million of each deal. The rules go into effect on December 24, 2016. The most risky portion of CMBS issues affected by the rules is purchased on a competitive basis by a handful of high yield investors, commonly referred to as the B-piece buyer. It is anticipated that the rules will have a negative effect on CMBS prices as the B-piece buyer will be required to purchase a higher percentage of CMBS from each CMBS deal either directly or perhaps by teaming up with another investor. In addition, the B-piece buyer must retain the bonds for a minimum of five years.

“Any type of regulation that makes the B-piece buyer alter his investment methodology is going to negatively impact CMBS prices,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “The question is how much?”

Since only 5% of the CMBS structure is affected, perhaps the impact will be muted, particularly if the B-buyer can team up with another investor with the risk-return profile that matched the portion of the 5% investment that the B-piece does not want. What’s more uncertain is the effect of the five-year hold requirement, as there are not many investments today that have a mandatory holding period requirement.


This entry was posted in CMBS, CMBS Securities, Commercial Mortgage-Backed Securities, Michael D. Sneden, News & Recent Closings, The Banker's Mortgage Conduit, Valuexpress and tagged , , , , . Bookmark the permalink.

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