The Commercial Mortgage Securities Association (CMSA) today issued a White Paper that outlines its opposition to REMIC regulatory proposals specifically aimed at loan modifications, which require the restructuring of contracts for commercial real estate loans.
REMICs (real estate mortgage investment conduits) are statutorily created trusts and are the principle vehicle for the securitization of CMBS. For the past several years, CMSA has actively sought additional servicer flexibility within the REMIC rules to allow collateral improvements and substitutions that provide performing borrowers more flexibility while at the same time enhancing the protection of asset value for investors.
The recent reform proposals seek to dramatically expand the circumstances constituting ‘reasonably foreseeable default’ which allow the terms of the commercial real estate loans to be modified. These proposals would allow distress determinations to be made well in advance of the widely accepted current servicing standard and without a clear set of principles to govern servicers’ decisions to modify the loans.
The CMSA said it opposes these loan contract modification proposals for two primary reasons: They create uncertainty for bondholders and, secondly, because servicers believe the current standard for reasonably foreseeable default is sufficient. Under some of these proposals, this ‘reasonable’ belief can be formed merely on the basis of a borrower representation that at some point in the future, it ‘may be’ unable to obtain refinancing.
“Reliance solely on borrower representations of market conditions to justify a loan modification is inconsistent with the servicing standard which obligates the servicer to act prudently and in the best interests of the certificate holders,” said the CMSA in its paper. “Some of these overly broad proposals, if adopted, would have a significantly negative effect on CMBS investors because any new laws that authorize servicers to prematurely modify the terms of mortgage contracts already in place can change the construct and dynamics of investor cash flows and liquidity,” said Patrick C. Sargent, President of CMSA