The U.S. House of Representatives just passed sweeping regulatory reform legislation that includes language on financial reforms that support a recovery in the commercial real estate finance market.

Both the Commercial Mortgage Securities Association (CMSA) and the Mortgage Bankers Association (MBA) came out with statements to support the law's language.

By a floor vote of 223-202, the House approved H.R. 4173, The Wall Street Reform and Consumer Protection Act of 2009, which encompasses large-scale reforms the Obama administration sought to prevent future financial crises as well as to regain stability in the overall U.S. economy.

The CMSA explained that as passed by the House, the bill includes language that would structure the "retention" or "skin in the game" requirement that considers CMBS' unique nature.

The legislation grants regulators the flexibility to permit a third-party investor – or "B-piece" buyer – to satisfy the legislation’s new retention requirements.

Typically bonds rated below 'BBB' are classified as “below investment grade,” or otherwise known as the B-piece. B-piece buyers take on the highest level risk in a CMBS deal since they are exposed to the first risk of loss.

CMSA believes recognizing the role of these third-party investors who purchase the first-loss position and re-underwrite all loans is the pre-issuance period is critical.

H.R. 4173 also includes another measure, the CMSA mentioned in the release, one that would require the Federal Reserve and financial regulators to examine the combined impact of new retention requirements and new accounting standards — FAS 166 and 167 — on credit availability, and to report to Congress with specific recommendations before any rulemaking on the retention.

Meanwhile, the Senate has been working on financial services regulatory reform as well and they are expected to consider such legislation next year.

“A risk retention provision that gives market and financial regulators flexibility in overseeing diverse asset types and structures is essential to support an overall recovery in commercial real estate,” said Patrick Sargent, president, CMSA. “Passage of this language by the full House today is a tremendous step toward restoring access to credit in this market,” he said.

“It is crucial that financial policymakers in Washington tailor reforms to recognize the role of sophisticated third-party investors that negotiate specifically for the riskier classes in a CMBS transaction,” Sargent added. “We encourage the Senate to support a recovery in commercial real estate by maintaining and strengthening safeguards in the CMBS market.”

The MBA also came out with a statement supporting the newly passed legislation's language on retention.

Jan S. Sternin, senior vice president of commercial and multifamily at the MBA, issued the following statement after the U.S. House passed H.R. 4173 :

"We are gratified that the bill gives regulators the flexibility to recognize the unique nature of commercial real estate lending and applaud legislators for their efforts to avoid further disrupting the commercial real estate market," Sternin said. "Risk retention already exists in the CMBS business model through a market-based solution in which specialized participants act as gatekeepers by purchasing the B piece, or first loss position. These participants possess a sophisticated knowledge of the underlying market and assume the risk retention role."


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