Last week the CRE Finance Council (CREFC) described how its members are seeking some flexibility with respect to risk-retention requirements in a Wall Street Journal article.
The CREFC is hoping that its new set of CMBS standards will provide support to regulators as they work to implement the Dodd-Frank Act's goal of better aligning the interests of investor and originator in the securitization market.
"The biggest concern we have as an association is crimping the availability of credit to the commercial real estate market," said Lisa Pendergast, the CREFC's president and managing director of CMBS strategy and risk at Jefferies & Co.
Under Dodd-Frank, risk retention for commercial mortgages can be satisfied in a number of ways, including one or more of the following: "adequate" underwriting standards and controls; "adequate" representations and warranties and related enforcement mechanisms; and a percent of the total credit risk of the asset held by the securitizer, originator or a third-party investor.
The Federal Deposit Insurance Corp.'s proposal on risk retention also allows CMBS issuers to satisfy the retention requirements by selling a 5% horizontal first-loss position to a B-piece buyer. According to Royal Bank of Scotland analysts, since the B-piece buyer and the special servicer are sometimes the same entity, conflicts of interest might exist. Regulators are proposing to require the appointment of an independent operating adviser to oversee servicing to avoid any such conflicts of interest.
The CREFC initiatives specifically address the Dodd-Frank mandate for commercial mortgages by creating standards for use in the market immediately while retention rules would not go into effect for an additional two years after they are finalized, or April 2013.
One of the new standards' goals is to create models for representations and warranties in an effort to have specific, uniform disclosures about the quality of loans and the underwriting principles behind all deals. The CREFC's Model Representations and Warranties and Model Repurchase Remediation Language initiatives provide consistent and enhanced assurance by originators and issuers for their underwriting standards and loan quality as well as an efficient dispute-resolution mechanism for representation and warranty breaches.
"In the past, representations and warranties were unique to each deal," said Brendan Reilly, senior vice president in government relations at the CREFC. He added that although there might still be a need to deviate somewhat from the standards, issuers will have to make it clear to potential investors by disclosing it in written documents.
The aim of these enhanced safeguards is to promote certainty and confidence in the commercial real estate finance market, which has already received some criticism over the slipping of standard in some of the latest 2011 vintage deals that have come to market.
"We believe CREFC's standards are consistent with the risk-retention provisions in Dodd-Frank and go beyond the required government directives to improve transparency and promote a strengthened foundation," said Margie Custis, co-chair of the CREFC's CMBS 2.0 advisory committee. "We have little doubt that our industry's initiatives will help commercial real estate in its recovery efforts." This CREFC committee oversees all of the trade group's standard setting and best-practices efforts.
