MBA, Trade Groups Urge Changes to SEC Act CRE Risk Retention Rules

Sorohan, Mike msorohan@mba.org

March 02, 2016

The Mortgage Bankers and other industry trade groups asked the House Financial Services Committee to approve a bill that would amend the Securities Exchange Act to modify requirements for qualified commercial real estate.  

H.R. 4620, the Preserving Access to CRE Capital Act (https://www.congress.gov/search?q={"source":"legislation","congress":"114","search":"HR+4620"}), addresses MBA concerns with regulatory implementation of the Dodd-Frank Act's risk retention rules. The bill makes minor, but important, modifications to credit risk retention rules for commercial real estate loans.  

Specifically, H.R. 4620 would allow very prudently underwritten, low-risk commercial real estate mortgages to meet the criteria for qualified commercial real estate loans under risk retention rules. The letter noted these revisions were based on actual performance data and correlate to those loan characteristics that performed the best from 1997-2013. As "qualified" loans, they would not be subject to risk retention and the associated punitive costs associated with it. The bill also provides relief for prudently underwritten, single asset-single borrower loans.  

"Barring some form of relief, borrowers many smaller commercial markets across the country may not be able to finance projects that could spur development and create jobs in the areas that need it most," the letter said.  

"Those rules are going to fundamentally impact the commercial mortgage backed securities market, which currently holds more than $500 billion in commercial real estate loans," said MBA Senior Vice President of Legislative and Political Affairs Bill Killmer. "As finalized, we believe they could hamper the CMBS market by too narrowly defining the commercial real estate loans that qualify for a risk retention exemption. Passage of this legislation will keep the new regulatory regime from having a chilling effect on the commercial real estate finance industry, as well as the overall economy."  

The letter noted credit risk retention rules are a product of six federal agencies and cover all securitized assets and were intended to incentivize better underwriting.  

"Despite best efforts by the regulators to write one set of rules encompassing all differing securitized asset types, the rule in its current form, will not achieve the objective, especially when operationalized at the same time as so many other new requirements that are also targeting securitizations," the letter said. "H.R. 4620 makes minor modifications to the rule, while maintaining the core components of the risk retention, to ensure continued liquidity and affordable financing options for commercial real estate borrowers in every Congressional district."  

Under the final rule, MBA and the trade groups noted only 4 percent of all outstanding commercial loans meet the definition for "qualified," or QCRE treatment, which is too small a target to influence underwriting trends. The letter pointed out that as one of the largest sources of credit for commercial and multifamily real estate in the United States, the commercial mortgage backed securities market is an important element of the $3.5 trillion commercial real estate debt market, currently comprising roughly 26 percent of the overall market. In secondary and tertiary markets, the percentage of liquidity is even greater.  

"CMBS provides financing to retail, office, apartments, industrial, health care and many other types of commercial real estate," the letter said. "If the rule is not modified before going into effect at year-end, a large percentage of borrowers across the country will not be able to refinance their loans without additional capital and higher monthly costs. Following the stress this will cause elsewhere in the system, valuations will be hurt and savers' investments will suffer as a result of the reduced liquidity in the system."  

Joining MBA in the letter: the Commercial Real Estate Finance Council; the Real Estate Roundtable; the National Multifamily Housing Council; the National Association of Home Builders; the National Association of Realtors; the American Land Title Association; the National Association of Real Estate Investment Trusts; NAIOP, the Commercial Real Estate Development Association; Building Owners and Managers Association; the International Council of Shopping Centers; the U.S. Chamber of Commerce; and The Appraisal Institute.

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