CMBS pros are keeping a close eye on proposed regulatory reforms that could dramatically affect the future of the industry. In the wake of the financial crisis, policymakers and regulators have proposed rules and regulations aimed at banks and other financial institutions to curb excessive risk-taking. A notable provision in the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Premium Capture Cash Reserve Account (PCCRA) could derail CMBS issuance depending on its final form.
PCCRA would require issuers to hold some level of risk retention from a CMBS issue. Most issuers work with a business model to pool and issue CMBS, and they have no intention — and in many instances no capacity — to retain a portion of the CMBS issue. It is likely PCCRA would discourage CMBS issuers from participating in the market and cause many current issuers to close shop.
Another proposed provision of concern targets the ability to transfer B-piece (also known as first loss bonds) investments. The proposed rule would prohibit a B-piece buyer from selling, leveraging, or hedging its first loss bonds. Ultimately, the B-piece buyer or first loss buyer would be required to hold its position for the full life cycle of the mortgages in the pool, which for most CMBS issues would be at least ten years. The universe of B-piece investors in CMBS is not that deep, as the first loss bonds have high risk, but also provide high returns. Any “handcuffs” on these investors could drive them away from investing in CMBS, and the ability for issuers to create CMBS falls apart without these investors.
The proposed rules have been slow to materialize into law. Hopefully this is a sign that regulators are giving the rules thoughtful consideration rather than the usual delay due to the inability to get things done. But should PCCRA or B-piece restrictions become law in their present form, it is quite likely that CMBS issuance will cease.