CMBS Risk Retention Looms: A Mountain or a Molehill?

Commercial mortgage-backed securities loans maturing in December could suffer from a decrease in liquidity as issuers wrestle with the upcoming risk-retention rule, said Morningstar Credit Ratings, Chicago.

Starting December 24, CMBS issuers must retain 5 percent of every new deal issued or find a B-piece buyer willing to take on that risk.

“Mandated under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the [risk-retention] rule…may hamper the refinancing of loans as the crest of the CMBS maturity wave looms in 2017,” Morningstar said, noting that $88.92 billion of non-defeased CMBS loans is scheduled to mature next year.

“The potential liquidity contraction will add to the refinancing challenge of 2007-vintage loans, many of which are of lower credit quality, underwritten with overly optimistic cash flow assumptions during the market’s peak of 2006-2007,” Morningstar said.

But so far, the successful refinancing rate out of maturing CMBS continues to confound analysts, noted Brian Olasov, Executive Director of Financial Services Consulting with Carlton Fields, New York. “We’re currently running a success rate of around 85 to 90 percent of maturing loans,” he said. “If this continues to be the case, the servicing community can easily handle the transfers.”

Olasov said much of the recent refinancing success can be attributed to community and regional banks, which he called the new lender of last resort. “If they continue to be the volume leader in taking out maturing CMBS loans, we’ll continue to see high success rates on maturing loans,” he said. “But some evidence is mounting that regulatory pressures on these bank lenders is starting to bite.” 

Olasov predicted that CMBS issuance will not grind to a halt in early 2017 due to risk retention. “Active sponsors have already met with great success with their pilot deals that are compliant with risk retention requirements and new capital has moved into the B-piece investor community,” he said. “This structuring technology and investor acceptance will bridge into 2017.”