According to several mortgage market sources, the long-awaited proposed amendments to the Erisa "Underwriter Exemptions," issued by the U.S. Department of Labor in order to expand the ability of private pension plans to invest in mortgage-backed and asset-backed securities, is expected to be published during the early part of this week.
The Erisa amendments will go into effect right after their publication, sources said.
The Erisa changes would allow Erisa-restricted investors to purchase down to the triple-B level, and would probably have the greatest impact on CMBS.
"Of the different structured product out there, CMBS has the largest amount of newly qualifying securities," said Brian Lancaster, a CMBS analyst at Bear, Stearns & Co. "It has more than in the residential market, where subordination to the triple-A level is only 4%, versus the CMBS market, where it is between 18% and 25%. There are a far greater amount of lower rated CMBS available, so it will benefit that sector the most."
While much of the reaction to the Erisa amendments has already been priced into the market, the effect on the triple-B sector will probably be spread out over time, similar to the market's reaction when CMBS was included in the Lehman index.
Still, some of the more knowledgeable CMBS investors might be able to immediately take advantage of the changes directly following their publication.
"This is quite a favorable development, and more people will go into these sectors, but people will have to get comfortable with risk," Lancaster said. "To the extent that an Erisa pension manager has managed non-Erisa money and has real estate experience to invest down to those lower levels, once it happens, they can immediately go into that. But other guys that don't feel comfortable going down that low, or that have liquidity issues with it, will not take advantage of it right away. So, I don't expect an immediate pop' in the market because of it."
Most important, however, is the fact that the Lehman/Erisa index will have to be expanded to include the new Erisa-qualifying securities. Because many investors stay close to their indexes, if the Erisa changes are issued next week, but not incorporated into the index for weeks after that, there could be a lag in the market for triple-Bs.
"This is the second green light for these guys," Lancaster said. "Lehman would have to adopt this quite quickly [into the index]."