The CRE Finance Council (CREFC) released its comprehensive and complete market standards for CMBS 2.0.
These "best practices" will build on existing safeguards "to ensure the timely resurgence of a sound and vibrant commercial real estate finance market," the CREFC said in a press release today.
These market standards have been formally sent to the government agencies in charged of promulgating risk-retention regulations, these are: the Department of the Treasury, Federal Reserve Board of Governors, the Federal Deposit Insurance Corp., the Securities and Exchange Commission, and the Office of the Comptroller of the Currency
Together, CREFC’s market standards enhance disclosure, encourage consistent and responsible underwriting and align interests consistent with the Dodd-Frank Act’s risk-retention requirements.
Under the Act, risk retention for commercial mortgages can be satisfied through a number of ways, such as having one or more of the following “adequate” underwriting standards and controls; “adequate” representations and warranties and related enforcement mechanisms; and a portion of the total credit risk of the asset held by the securitizer, originator or a third-party investor.
Specifically, the CREFC initiatives address the Dodd-Frank mandate for commercial mortgages by creating standards for use in the market immediately while retention rules have not gone into effect during the two years after they are finalized, which will be April 2013.
These standards are the result of a year-long project that has seen improvements in three key areas: loan underwriting; additional disclosure; and representations and warranties.
The goals of these new ‘best practices’ are to create market standards that can be used in the CMBS market immediately and to provide support to U.S. federal regulators as they work to implement the Dodd-Frank Act’s goal of better aligning investor and originator interests.
The CREFC’s Principle-Based Underwriting Framework identifies underwriting principles that are necessary to address credit-risk in commercial mortgages. The Standardization of the Annex A builds on the disclosure in the CMBS market.
The CREFC’s Model Representations and Warranties and Model Repurchase Remediation Language initiatives offer consistent and enhanced assurance from originators and issuers regarding their underwriting standards and loan quality. They also provide an efficient dispute resolution mechanism for representation and warranty breaches, according to the CREFC release.
These initiatives will be constantly reviewed and updated as the market evolves.