Borrowers should expect a modest increase in loan spreads beginning in late October as the market prepares for the economic impact of risk retention rules that take effect December 24. Initially CMBS lenders projected the increase on loan spreads would be as much as 50 basis points (bp), but now market professionals believe the impact might be as little as 15 bp.
The challenge for CMBS conduit lenders is when to begin adjusting spreads. Since it takes roughly 45 days to close a CMBS conduit loan and then 15-30 days to securitize, that would suggest October 15 as a cut-off date for old pricing. But the exact timing is creating a conundrum for CMBS lenders. Some lenders are telling borrowers that spreads will rise in late October, while others are citing early November. Lenders do not want to increase spreads too soon and risk angering customers or driving away business. But they also do not want to wind up with mispriced loans in January.
Despite this short-term predicament, the good news is that the effect on borrowing rates from risk retention appears to be less than anticipated. Part of the reasoning is lenders began working early to find efficient structure to mitigate negative economic effects. For example, Wells Fargo, Bank of America and Morgan Stanley have already issued risk-retention compliant CMBS that achieved the tightest spreads since the summer of 2015. For details, see our 8.5.16 and 7.8.16 news articles.