Risk Retention: Proposed Changes & Where Lenders Go From Here (Pt. 3)
Last year, some government officials began to realize the fallout that the original structure of the Securitization Safe Harbor Rule (i.e. risk retention) would have on the commercial real estate market. Because of that, some representatives started to look for a way to soften the original regulations while still protecting the public. On March 2nd of 2016, the House Financial Service Committee proposed an amendment called the Access to CRE Capital Act (meant to ease some of the original restrictions) that is supposed to be put up for consideration in the House and Senate this year. Let’s take a look at how this bill could change the current structure.
This bill aims to enable more CRE loans to become “qualified” (and therefore exempt from the risk retention rule) as well as certain interest-only loans to be exempt. Currently, a “qualified” real estate loan would have the following characteristics:
- 10 year minimum loan term
- 25 year maximum amortization
- 60-65% LTV (depending on property type)
- 1.5-1.7x DSCR (depending on property type)
Some of the material amendments that are proposed are the following:
- Single-asset/single-borrowers (which are typically high-quality, low leverage, investment-grade loans) would be exempt from the 5% risk retention
- Up to two “B-piece” buyers could hold retention interest at 5% via senior/subordinate structure (i.e. “B-piece” buyers can allocate the risk among themselves instead of taking equal risk), allowing for more pricing flexibility between what each requires.
Qualified CRE loans will be redefined:
- Interest-only loans would have a path to possible qualification
- There would be no minimum loan term requirements (instead of 10 years)
- 30 year amortizations would be permitted (instead of 25)
- There would be no separate LTV caps on QCRE loans with appraisals using lower capitalization rates
Keep in mind that proposal of this bill by the House Financial Services Committee is only one of several steps in the process of passing it into law; the bill must also be approved by the House of Representatives, the Senate, and the President, so for right now, risk retention will stay in its current form.
What to know more about Risk Retention? See the rest of the series here:
- What is Risk Retention under Dodd-Frank? (Part I)
- How Risk Retention Affects CRE Lenders, Borrowers, & Bond Investors (Part II)