The CMBS Market During the Pandemic: Q&A with Dechert’s Richard Jones

MBA NewsLink interviewed Dechert Partner Richard Jones.He focuses his practice on sophisticated capital markets and mortgage finance transactions. He leads Dechert’s commercial mortgage-back securities team and serves as co-chair of the firm’s global finance group.

Jones frequently publishes and speaks on a wide range of issues affecting the capital markets and mortgage finance markets including topics such as CRE CLOs, LIBOR replacements, risk retention and new financial structures. He is the founder and principal author of the Dechert blog Crunched Credit, which takes a critical look at the global financial markets.

MBA NEWSLINK: The political landscape for real estate owners, lenders and tenants has shifted in unthinkable ways. What thoughts would you share about lender strategy in this context?

Richard Jones

RICHARD JONES: Well, first let’s reset the question a bit…all the changes we are about to confront are indeed “thinkable.” We’ve just been through an election that matters and we’re still in the throes of a pandemic. Do you think there’s change out there? As I said in a recent commentary, the Biden administration is likely to bring enhanced prudential regulation to bear on the financial sector but at the same time ask the financial sector to contribute to support the new administration’s policy goals around consumer protection, fairness and the green agenda.  This will require more than a bit of nimbleness from us all. 

The banking sector will have to align themselves with this enhanced prudential initiative and to embrace, or at least not impede the new administration’s fiscal policy goals. The alternate lending space will become increasingly competitive to the banking sector for commercial real estate finance and, of course, the GSEs will continue to be a robust source of capital in the multi-family space under the new administration. Very clearly, the rules of the game are going to change and success will require innovation, persistence and courage. 

NEWSLINK: You are outspoken about the significance of advocacy in your chair as a securitization lawyer and a voice that contributes to Dechert’s Crunched Credit blog. What do you see as key challenges facing the CMBS industry? Do market participants understand these issues and are we acting appropriately to address them?

JONES: The CMBS industry should have a good year and start a good run under the new administration. While some on the new team have a considerable amount of distrust for structured finance writ large, CMBS will thrive because it is a means of de-risking bank balance sheets, generating fee income and distributing risk across a broader community of investors.

There are challenges facing our commercial real estate securitization industry. While we will surely see our industry thrive, distrust amongst those who hold the levers of power in the new administrative state will certainly mean that we will have enhanced regulation, enhanced intrusiveness from the government and net/net more transactional friction. We may see new disclosure obligations from the SEC and changes in the current ratings agency model. We could see enhanced regulation to align sponsors with risk through risk retention and other means and we could see regulations which could have the effect of suppressing investor demand in certain sectors. 

We need to pay close attention to what’s happening in our polity and in our government. While it’s hard to carve out bandwidth sometimes for the unknown unknowns, in a period of significant change, we must stand ready to contest bad ideas and bad policy prescriptions before bad ideas and bad policies ossify into law and regulation. We have an industry that contributes significantly to the success of the U.S. economy and we need to trumpet that.

NEWSLINK: You are often a critic of regulators and bring an entertaining and critical tone to your essays and explanation of pending regulations. Why is regulation so important to you and what are some examples of regulations you feel are effective and efficient?

JONES: We live in a world of big government. Regardless of what Ronald Regan may have said decades ago, government simply seems to get bigger, more intrusive and represents a more important part of our economic lives as participants in the financial markets. We are on the precipice of a period of enhanced regulation designed to push the capital markets into accord with the new administration’s policy objectives, most notably enhanced prudential regulation, and support for ESG and the consumer. All these initiatives will be compounded with a foundational concern that the private capital formation, left to its own devices, will not do the “right thing” and will embrace excessive risk. 

Consequently, I foresee a regulatory environment which is more intrusive, will require a great deal more expensive compliance and will continue to press market participants to hold more capital. This may be true not only for the banking sector but, if certain sectors of the left-er side of the new team get their way, could even happen in the alternate lending sector. 

Current regulations still in flux, such as CECL, the Fundamental Review of the Trading Book and the Troubled Debt Restructuring Rule are consequential. While they have been suspended in light of the stress on the economy from the pandemic, they wait in the wings. I would expect other initiatives coming out of the international banking community, most notably through its rulemaking body in Basel. Given the Atlantist and Internationalist predilections of the current administration, we are at threat of becoming more European (good as to wine, bad as to financial regulation). I fear that the rulemaking will overshoot its target of safety and soundness and result in an unhealthy suppression of capital formation in the years to come. 

NEWSLINK: One of the topics you have been calling attention to for years is the LIBOR transition. How is the CRE finance industry doing in its preparations? What is your over-under on a legislative fix getting done in New York or Congress? Will that fix the problems as you see it?

JONES: LIBOR remains a hot mess. Thankfully, the regulators blinked back in December and pushed out the transition date back into 2023. Frankly, the pandemic has pushed LIBOR transition out of any sort of top-of-mind attention for the past nine months and we are only really now beginning to re-engage. 

Certainly, there’s been progress particularly in the derivatives market and with the GSEs who have successfully begun to lend floating-rate money on a SOFR index. However, the vast bulk of the commercial real estate lending market is simply not ready and will struggle to be ready even by June of 2023. Remember that the legacy book will require transition in 2023 is likely to continue to grow at least through the end of 2021. While one should typically stop digging when already in a hole, this is a hole we must continue to dig as there really is no alternative here in the first quarter of 2021. 

SOFR remains a deeply flawed index due to its failure to include a credit component and therefore will be problematic for our industry on going forward. For the first time in a while, I am quite hopeful that given the extra time for transition, perhaps an alternative to ARRC’s SOFR may develop traction with several enterprises proposing a substitute rate or an add-on credit component to SOFR. Stand by for this. 

We’ve seen some proposed legislation from New York and at the federal level to facilitate LIBOR transition. While none of this is a perfect fix, it is helpful and anything that disappoints the plaintiff’s bar is a good thing. National legislation would be great if we could get through the current dysfunction in Washington, but perhaps that’s a bridge too far. 

NEWSLINK: There are a number of threats facing the CMBS industry. Record delinquencies or defaults if not simply a record pace for spikes in these numbers, challenges with servicing writ large during a pandemic when collateral cash flow dries up, a dearth of collateral interesting to investors for some retail and hospitality which made up a significant percentage of CMBS 2.0 pools. You have been in this business since it got off the ground. What are you most optimistic about?

JONES: You can’t be in the business and be a pessimist, it would just be too sad. So, indeed I am an optimist about our industry. We are going to have a tough patch here and the government’s intrusion into foreclosure and eviction the private contracts around foreclosure and eviction are not going to help.

The feel good now will be replaced with a very bad later. When all the forbearances wear off, there’s going to be hell to pay and we will see a significant transfer of value from buyer to seller and vice versa.  But look, this business always has winners and losers. It has rewarded innovation, it’s rewarded intelligence, solid diligence and courage and will continue to do so. 

At 50,000 feet, the trend toward of moving capital formation in the CRE space from the portfolio model to the securitization model is a genie that cannot and never should be returned to its bottle. Being able to finance commercial real estate through the capital markets with its nuanced and capital efficient capacity to deploy invested dollars across a broad range of investors with different yield, maturity and risk tolerance is an unalloyed good. It’s not going away.

(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes your submissions. Inquiries can be sent to Mike Sorohan, editor, at; or Michael Tucker, editorial manager, at