Previously, one of the largest benefits of being a CMBS lender is having the money that is loaned to the real estate investors replenished once the bonds are sold to investors on the open market. Because these loans are not kept in the lender’s portfolio, the money that is paid for the bonds heads back through the securitizers to replace the money that was lent to the borrowers originally.
Impact of Risk Retention
The CMBS lenders now have to do one of two things:
1) Keep the required 5% credit risk of each securitization, or;
2) Find a qualified “B piece” investor to take on the credit risk.
However, neither of these options are ideal for the CMBS securitizers because of the consequences each would have.
If the CMBS securitizer keeps the 5% risk retention themselves, it is possible their liquidity would go down with each pool of mortgages in the amount of bonds retained. This could add up incredibly quickly. The only way forward down this route would be for the pools to contain higher amounts of qualified CRE loans, which are the only loans exempt from the retention rule.
If the CMBS are able to find a B-piece, qualified buyer who is willing to take on the associated risk, the bond investors would most likely require a higher yield than they do now because of the longer hold periods and higher yield requirements.
Whichever way that the CMBS lenders choose to deal with this new regulation will fundamentally change the securitization process.
Research has found that risk retention significantly impacted the underwriting of mortgages that were securitized. It was found that borrowers were paying a significantly higher interest rate to borrow on less favorable terms if their loan was going to be placed in a deal subject to the new risk retention rules. Therefore, the implementation of the risk retention rules seems to have achieved a policy goal of making securitized loans safer, but at a significant cost to borrowers.
Risk retention rules have substantially altered the look of commercial mortgage securitization. For example, the amount of risk being retained following implementation is roughly three times that of before, while lenders also seemed to accelerate the securitization of originated loans during the months immediately before the rules took effect.