On May 20, the Senate approved far-reaching new financial rules aimed at preventing the risky behavior and regulatory failures that brought the economy to the brink of collapse two years ago and cost millions of Americans their jobs and savings. As the broad legislation heads to a U.S. House-U.S. Senate conference committee, where lawmakers will work to resolve differences between the Senate and House, the mortgage industry is working to make sure a provision in the bill does not derail CMBS and residential mortgage-backed securities (RMBS) securitizations.
The bill contains a provision requiring lenders to keep on their books 5% of the value of their loans. By requiring them to retain part of the risk, lawmakers aim to raise loan standards and force lenders to keep “skin in the game,” instead of passing along all the risk.
The CMBS industry is concerned about the risk-retention measure; however, the risk-retention measure has received less attention than the higher-profile battles over consumer financial protection and a system to dissolve failing financial firms. In addition, senators added tough amendments including restrictions on credit agencies, higher capital requirements for banks and limits on merchant fees on credit/debit cards.
The CMBS industry lobbied to ensure that buyers of subordinate CMBS would meet the “skin in the game” test. Language in the bill is fuzzy on whether subordinate bond buyers allow a CMBS issue to meet the test because the current language is not specific. The hope is that clarity on subordinate buyers of CMBS meeting the test will evolve from the reconciliation process.
“With the CMBS industry struggling to get back on its feet, I hope the financial reform bill will recognize that subordinate CMBS buyers are sophisticated investors,” said Michael D. Sneden, Executive Vice President of ValueXpress. “The CMBS industry cannot afford another setback as it tries to recover to normalcy.”