The market for commercial mortgage bonds is becoming “fragile,” even before new regulations take effect that will drive up the cost of borrowing, a trade group warned Thursday.
In prepared testimony before the House Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises Wednesday, the Commercial Real Estate Finance Council (CREF) said that “illiquidity and volatility are becoming the norm.”
Because of this burden, the market is losing institutional capacity, the CREFC said. “Banks and mortgage originators are leaving, or substantially reducing, their commitment to the market. Once industry capacity is shut down, it takes a long time before this capacity can be re-generated.”
Some 25% of all commercial real estate lending, or about $100 billion per year, get bundled into collateral for bonds. These securities expand the pool of available loan capital beyond what banks and insurance companies can keep on their balance sheets.
The CREF is lobbying Congress to exempt certain kinds of mortgage bonds from regulation taking effect in December that would require sponsors of mortgage bonds to retain a 5% economic interest in deals. The trade group argues that bonds backed by a single, large mortgage on one asset such as a mall, hotel or office building are easier to analyze, and perform better, than securitizations of multiple loans.
Representative James French Hill (R-Ark.) is promoting a bill that includes an exemption to risk rules, for single asset, single borrower CMBS, which the trade group supports.
“Financing for these large, high cost assets is often beyond the scope of one lender,” CREFC testified. “Therefore, it’s more efficient to use CMBS financing.”
Risk retention was to protect investors by better aligning the interests of lenders with investors by giving them “skin in the game.” The CREFC argues that it will do more harm than good for single-asset mortgage bonds, however.
“Not only does this add cost to borrowers and reduce yield to investors, it is expected to hamper the competitiveness of SASB to the point that capacity leaves the sector,” the group testified. It noted that conduit lenders are starting to close their doors.
Earlier this month, Redwood Trust announced that it would stop making conduit loans.