As regular readers of CrunchedCredit will know, I recently pitched the idea of amending our hoary old REMIC statute to allow additions of collateral after the startup date window to allow modification to performing loans (and to clarify any uncertainty about eligibility of PACE, CPACE and mezz debt). This commentary follows from a note I wrote a few weeks back over our need for a general rethink of the fraught state of our business (see A Modest Proposal Concerning A Grand Bargain For Our Business). Both the notion of a general rethink and a conversation about REMIC are grounded in the commonsensical notion that all business plans need periodic course corrections. As, in large measure, the foundational infrastructure of our business has remained unchanged over the past 40 years, it’s way past due for us.
Apparently, there’s not a lot of enthusiasm out there for my ideas. Indeed, there was some actual hostility. If I was still working for a living and needed to depend on you folks for ongoing engagements, I’d have undoubtedly shut up at this point, but I’m not and so I won’t. It’s bothering that our industry apparently doesn’t even have any appetite for reflection and, particularly with respect to the REMIC rule, the moment is propitious for such reflection. With a new sheriff in town, a reasonably friendly and attentive House and Senate, this year of 2025 might be politically a moment.
When I wrote the piece about REMIC, I understood that there would be some constituencies in our business that would be reflexively hostile, with a “if it’s not broke, don’t fix it” bias, but I was a bit taken aback to hear the visceral negative reaction from others in the issuer and investor cohorts.
My understanding is that the reflexive negativity is largely birthed from a concern that any effort to modify REMIC might negatively impact the conduit business. I’ve heard two reasons for this view; one not bad and the other, not so much.
The first not bad reason is that if we open the Pandora’s box of REMIC modernization, we can’t predict what might crawl out and it might be bad. The argument goes that if there’s any material risk that reopening our foundational tax statute to new scrutiny would hurt our business, then we best not poke the bear.
This argument certainly can’t be dismissed. The old lawyer adage is never ask a question to which you don’t know the answer and certainly a similar argument could be made that one should not ask our gloriously elected representatives to modify a statute, because God knows, what they might do.
That would be a compelling argument if standing pat were risk free, if there weren’t any negative consequences to sitting on our hands…but there are. Our market, while profitable for many market participants, continues to have a scale problem. For example, if CMBS drops out of the Bloomberg index (which could happen), irrelevancy can’t be far behind. As scale diminishes, fewer participants decide to play, putting up fewer deal teams and a doom loop ensues. In short, we have considerable at stake by standing pat. We can’t rely for a simulacrum of market health on the SASB market and while I certainly hope (and believe) that the CRE CLO market is coming back, our business simply doesn’t work without a conduit market. Not to be overly dramatic here, how did your Blockbuster franchise work out when DVD was killing off Betamax and VHS? Those who didn’t move on, expired. I would not suggest that our industry undertake this exercise if it only promised incremental positive outcomes, but that’s not where we are. Risks are more existential, and therefore, this makes sense.
The second argument I don’t get at all. The loosening of the REMIC handcuffs would simply make way for new products. It certainly would not impair existing products. If investors want bilious puce widgets, we will make them bilious puce widgets. The fact that we could make red widgets or yellow widgets would hardly seem to matter to the success of the old bilious puce widget trade. This notion that a possibility of more dynamic structures will drive out static pools absent legislative guardrails is, I think, silly. Taking down those guardrails will not defenestrate our static model. What, we talking homo sapiens and neanderthals here? How very atavistic.
Modernizing REMIC will have specific positive benefits for our industry. It would certainly simplify CRE CLO execution by not requiring the kabuki dance of compliance with the REIT regime. It would create a market for the BBs and other BIG securities, for which there is a significant demand.
It could create new products that sit alongside the CRE CLO and the conduit (and indeed the SASB). Ramps could be possible allowing larger pools and less anxiety over pool accumulation before launch. The ability to modify performing loans and give borrowers some sort of an exit ramp out of long-term fixed rate conduits when circumstances change could bring more borrowers to our marketplace (and keep assets in our deal resulting in more stable cash flow over the full tenor of the investment). Such new structures can and will sit alongside our traditional static products. This is all additive, not reductive.
And there will be other positive outcomes, I can assure you. Innovation is by its very nature, something that wasn’t thought of until it occurred. I’m certain that as we move the tax prescriptive guardrails out further it will allow more creativity in the securitization space and we will indeed have more innovation.
The capital markets needs more borrower engagement. Clearly, problem number one for us. I talked about this several weeks back in my Modest Proposal blog suggesting that we rethink many of the assumed verities of our business to try to reinvigorate it and transform our conduit business that has shrunk from hundreds of billions to tens of billions before it goes away entirely.
What I’d really like to do here is consider REMIC modernization in the context of a broader discussion about potential more fundamental changes to our business model; a part of a whole-of-business white board session. We have 4.0 underway right now inside CREFC and that’s good. Let’s get it done, but I suggest it’s not enough.
If we get behind the REMIC modernization, would it make it through the political sausage-making process? I’ll take the under, but that’s not a good reason not to try. With a new sheriff in town, with a giant, zoftig Reconciliation Bill (or two on offer), this could get done. Moreover, think a bit more long term. Raising visibility around our securitization issues now can pay dividends in the future. It’s hard to get attention around completely new ideas; it’s easier to get attention to bills that were submitted and overlooked in prior sessions. It’s absolutely clear to me that if we socialize this with our gloriously elected representatives (and perhaps more importantly their staffs), we will take a step closer to keeping REMIC modernization on the menu, If not now, there may be a time and a circumstance when REMIC modernization would really work politically and then we’ll be ready.
So, at the risk of my reputation and perhaps my neck, I’m doubling down and once again suggesting (and to be absolutely clear here, this is not a CREFC initiative. I’m not speaking ex cathedra for anybody; this is just me) we give some thought to REMIC modernization now.