After more than two years of silence, federal regulators have begun issuing the final rules for securitization reform called for under Dodd Frank. This week, they issued the rules on risk retention.
I think the regulators took a reasonable approach for CMBS. Proving they listened to industry concerns, they backed away from the very controversial and costly “premium capture reserve account” proposal.
The regulators held firm on 5 percent retention of fair value of the bonds, but they allowed some flexibility by reducing the hold period from the life of the bonds to five years, allowing more than one entity to buy up the bonds, and allowing the retention to be a mix of horizontal and vertical strips.
In addition, the regulators retained the concept of exempting conservative loans from the risk retention altogether. These loans are defined as having between a 1.50 and 1.75 debt service coverage ratio (depending on property type) and a maximum loan to value of 65 percent.
The regulators only allowed a quick comment period that ends in October. Word is the rest of the regulations, including the all-important Regulation AB rules, will follow shortly thereafter with all rules being final before year end. If that really happens, then we can begin implementing and adjusting to the new reality. Feels like we may have finally reached the beginning of the end.
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Jim Flaherty is CEO of CMBS.com and the creator of the Backshop loan origination system. He is a trained credit professional with experience installing enterprise underwriting systems for commercial real estate lenders, rating agencies and investors.