The FDIC in March approved proposed rules to implement key sections of last year’s Dodd-Frank financial reform law, including a provision requiring securitizers to retain 5 percent of the credit risk for new securities by identifying which loans would be exempt from the requirement. NAA/NMHC’s early analysis of the 346 pages of proposed rules has resulted in more questions than answers on how they will impact the future cost and availability of securitized mortgage debt via the CMBS market.
In an apparent victory for the apartment industry, the rules exempt certain CMBS loans by allowing the B-piece buyers (who purchase a first-loss position) to meet the risk retention requirements. However, discussions with special servicers/B-piece investors, originators and issuers suggest that the proposed exemption terms are such that a significant amount of CMBS issuances would not qualify and thus would be subject to the 5 percent retention requirement. Proposed origination and security issuance changes would likely adversely impact lender returns, and there are concerns among special servicing firms over proposed loan mitigation requirements.
NAA/NMHC will continue to evaluate the rule with issuers and originators directly affected by it. NAA/NMHC will also support CMBS issuers in their outreach to regulators seeking more clarity on the proposals. In short, however, more detailed analysis is necessary to fully understand how they will affect the continued recovery of the CMBS market.
Final regulations must be approved by six different regulators before being enacted. The proposal includes 174 questions where regulators could not agree. Public comments on the proposal are due June 10. NAA/NMHC will continue analysis of the proposal and will issue more detailed information on the rule.
The regulations could also have an indirect impact on apartment demand by significantly increasing the cost of mortgages for homebuyers putting less than 20 percent down. Under Dodd-Frank, Congress exempted “qualified residential mortgages (QRM)” from the risk retention requirements and called on regulators to define the QRM. The FDIC proposal imposes a 20 percent downpayment requirement for a QRM, but also requests public comment on an alternative approach that would allow for a 10 percent downpayment and mortgage insurance.
Such changes would have little affect until GSE reform is enacted because the proposal exempts Fannie Mae and Freddie Mac from the requirements. (Legislation has been introduced in the House to remove this exemption and require the GSEs to retain 5 percent of non-QRM loans.)