Dodd-Frank Proposed Rule: CMBS At Risk?


Since the peak of the financial crisis, a number of regulatory proposals and actions that could be harmful for the commercial real estate market recovery, such as Basel III bank capital standards, have been introduced. However, one regulatory issue in particular—one that could have an even more damaging impact on the industry—is a credit risk retention or “skin-in-the-game” rule proposed by U.S. regulators.

Bottom line: New rules so narrowly focus underwriting requirements that CMBS loans would be in jeopardy of qualifying.


The proposed rule is a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law last year. Dodd-Frank tasks six U.S. banking agencies to establish rules that would require any entities that securitize mortgage loans to retain an economic interest in a portion of the credit risk.

The Act generally requires 5 percent risk retention for most asset classes. However, the law gives federal agencies broad authority to identify the acceptable types, forms and amounts of risk retention for “low credit risk” commercial and multifamily mortgages.

Proposed Rule

The agencies’ proposed rule outlines low credit risk underwriting standards that would permit asset-backed securities backed exclusively by commercial and multifamily loans to qualify for less than 5 percent risk retention. Specifically, the agencies have proposed zero percent risk retention for commercial mortgage-backed securities (CMBS) issuances that meet a series of underwriting standards.

Moreover, a qualifying commercial real estate loan must meet over 30 different underwriting conditions in order to forgo the agencies’ risk retention requirement. The underwriting requirements are so narrowly focused that virtually no CMBS loans could qualify.

Accordingly, Morgan Stanley estimates that if just three of these requirements are applied (65 percent loan-to-value, 1.7x or higher debt service coverage ratio and an amortization period of 20 years or less at securitization), approximately 0.4 percent of the $671 billion conduit loans that have been securitized since the creation of the CMBS market would have qualified.

What’s At Stake

In the past, the CMBS market has been able to meet the refinancing needs of property owners when the banking sector failed to meet demand from commercial borrowers. The CMBS market currently represents nearly 26 percent of the outstanding balance of commercial and multifamily mortgages. This is down from nearly 50 percent in 2007, when the CMBS market provided approximately $240 billion in financing.

In contrast, the CMBS market provided less than $13 billion in issuances in 2008 and $2 billion in 2009, despite strong credit performance and huge demand from borrowers. Although the CMBS market is showing some signs of a recovery, with $12.3 billion in new issuances in 2010, prolonged weak economic fundamentals continue to limit the CMBS market’s capacity to refinance commercial loans.

In fact, the inability to secure refinancing will result in increased defaults and foreclosures in addition to the forced sale of many properties at greatly depressed prices, creating a ripple effect of financial losses and increased job layoffs, threatening our nation’s economic recovery.

What NAR Is Doing

In an August 2011 letter to bank regulators, NAR stressed its concern that the proposed thresholds for loans to be exempt from risk retention are too restrictive to apply to the majority of commercial and multifamily loans. This would effectively reduce the number of CMBS issuance, increasing borrowing costs, severely diminishing the amount of financing available to the commercial and multifamily sector and exacerbating the current commercial real estate lending crisis.

How To Get Involved

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Commercial Real Estate Has an Advocate in NAR

One of the most important REALTOR® benefits is the tireless efforts NAR and its members expend towards protecting real estate professionals and their clients on local, state and federal levels. For a good overview of today’s issues and how NAR is addressing them, visit to download presentations from the 2011 REALTORS® Conference & Expo, including the Legislative & Political Forum. Alex Castellanos, a Republican media consultant for seven presidential campaigns, and Eugene Robinson, 2009 Pulitzer Prize winner for his commentary on the 2008 presidential race, provide their perspectives of the 2012 campaigns.


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