A new congressional bill, dubbed the Preserving Access to CRE Capital Act of 2016, would ease the heavy CMBS risk retention regulations set to take effect in December 2016 under Dodd-Frank.
The new regulations would require CMBS issuers to keep 5% of a loan’s value on the books, rather than selling it entirely in the form of bonds—making CMBS less profitable to issue, and thereby limiting access to credit.
The Preserving Access to CRE Capital Act, introduced by Arkansas Rep. French Hill, would exempt single-asset or single-borrower CMBS from the Dodd-Frank rule and make it far easier for pooled CMBS to get similar exemptions.
“If the risk retention rule is not modified before going into effect, borrowers across the country could experience significant reductions in access to credit, unwarranted increases in borrowing costs, and reduced liquidity,” Rep. Hill tells us.
Dodd-Frank lets the 5% risk retention be satisfied in two ways: 1) the CMBS issuer may hold 5% of each class of a bond offering or 2) the B-Piece buyer, who buys the bottom class of the bond offering, can purchase 5% of that class and hold it for a minimum of five years, according to COO of Morningstar Credit Ratings Joe Petro.
The first scenario “could make the cost of credit more expensive for borrowers and securitization less economically feasible and less profitable for the issuing banks,” while the second “locks up investor capital (which creates a potential opportunity cost), ties the investor’s hands, and kills liquidity,” Joe tells Bisnow.
The Dodd-Frank provisions would come into effect right in the middle of the looming CMBS maturity wall—the massive amount of CMBS loans coming due during 2016-17. That, combined with recent economic turmoil, is a lot of pressure for CMBS to bear.
Joe says the new bill is, among other things, built to keep capital readily available to typical CMBS borrowers.
That explains why industry groups—including the National Association of Realtors and the International Council of Shopping Centers—have been lobbying hard to get the bill passed, writing to Congress that, without the bill, “borrowers [in] many smaller commercial markets across the country may not be able to finance projects that could spur development and create jobs in the areas that need it most.”