At last count, we now have four separate risk retention regimes (maybe five) that we need (or will soon need) to deal with as we attempt to restructure any securitization.   They are, of course, all different. And let’s be crystal clear. This isn’t an issue for the distant future. Risk retention is here now and soon, much sooner than most think, it will become a front and center issue for all of us. We’ve written about skin in the game many times in the past (e.g., here, here and here), and I’m not going to re-litigate both the intellectual unsoundness of the notion and the negative impact on capital formation, but as we await developments, I thought it would be useful to compare and contrast the four variations on the theme and sound the heads up.  It’s time for us to focus. Continue Reading Why Does Everyone Want to Make Me Keep Thinking About Risk Retention

Two and a half years after Dodd-Frank and almost two years after the first hurriedly issued proposed rules, the six agencies (Department of Housing and Urban Development, Federal Deposit Insurance Corp., Federal Housing Finance Agency, Federal Reserve, Office of the Comptroller of the Currency, and the U.S. Securities and Exchange Commission) charged with creating risk retention architecture for commercial mortgage securitization have yet to issue a final rule, interim final rule or even a new proposed rule. Since Dodd-Frank provides a two year transition period after publication of a final Rule (or perhaps interim final rules), we might think, no Rule, no risk retention; all is good, no worries. Bad way to think about this. Something is coming out soon. It will be important. It may start affecting our business now. I don’t think we can or should be complacent. More on this later.

What we’re hearing from the panjandrums of the regulatory community is that the horrific concept known as premium capture cash reserve account (PCCRA) is finally cold and dead (although until I see sunlight shining in its grave and a stake in its heart, I won’t be sure), and that the regulation writing committee is settling on an alternative, focusing on risk retention to be satisfied through a B-piece buyer holding a horizontal 5% first-loss strip (the B piece fix was, of course, added to the statute by amendment by Senator Crapo, bless his heart). On this topic the statute said:Continue Reading It’s Time to Revisit Risk Retention

With Thanksgiving approaching and the holiday season in full swing, we here at Crunched Credit would like to present our annual “Golden Turkeys”.

The Golden Turkey for the Most Confounding Regulation: The Premium Capture Reserve Account

Back in March, the credit risk retention NPR was released. Perhaps the most unexpected (and unwelcomed) part of the rule was the Premium Capture Cash Reserve Account (PCCRA).  The PCCRA provisions actually say that issuers may not profit from securitizations or recoup costs up front. The NPR says that a securitizer who monetizes either an IO or earns a premium on the sale of P&I bonds has to put that money aside to serve as a first loss reserve for any losses on the mortgage loans for the life of the deal–on top of the 5% risk retention requirement. Neither a PCCRA nor a reasonable facsimile thereof was contemplated in the Dodd-Frank Act. Needless to say, PCCRA has generally not gone over very well: Confound it!!

The Golden Turkey for the Best Self-Inflicted Wound: The “Bad Boys”

And by “bad boys”, we mean those who have violated the “bad boy” recourse carve-outs in their loan documents. Although most commercial real estate loans are non-recourse (i.e. the lender can only look to the value of the property securing the loan to settle the borrower’s obligations if there is a default under the loan), most contain certain “bad boy” carve-outs (for example, the borrower filing for bankruptcy or misappropriating funds) from the non-recourse nature of the loan, permitting the lender, in certain circumstances, to look to the borrower (as well as the guarantor) to satisfy the borrower’s obligations. Some borrowers, victims of the great recession, have opted to file for bankruptcy in an attempt to stop the bleeding and dam the "bad boys". Oops. Lenders confronted by misbehaving borrowers have enforced the “bad boy” provisions, and, shockingly, the lenders have been successful! The New York Supreme Court has, on 2 separate occasions in March and July, upheld the “bad boy” provisions. While putting the borrower into bankruptcy may seem like a good solution, if doing so will violate the “bad boy” recourse provisions, it will make a bad situation worse.Continue Reading COMMERCIAL REAL ESTATE 2011 RECAP: AND THE (ANNUAL) GOLDEN TURKEY AWARD GOES TO….

The Chairman of the House Committee on Financial Services (“HFSC”) Spencer Bachus (R-AL) and the Chairman of the HFSC Subcommittee on Capital Markets and GSEs Scott Garrett (R-NJ) submitted a letter on August 2, 2011 to the joint regulators addressing the premium capture cash reserve account (“PCCRA”) as proposed in the risk retention NPR.  Under the proposed risk retention rules, if excess spread in a securitization is monetized, any premium received has to be put into a separate PCCRA that would absorb losses first.  So a securitizer who monetizes an IO or earns a premium on the sale of P&I bonds, has to put that money in a PCCRA to serve as a first loss reserve for any losses on the collateral– for the life of the transaction– on top of the 5% risk retention requirement. So, basically, securitizations would be done without profit.  Understandably, the PCCRA has been one of the sore spots of the risk retention NPR.  The Mortgage Bankers Association (“MBA”), among many others, extensively discussed the problems with the PCCRA in its July 11 letter to federal regulators outlining MBA’s views and recommendations from the commercial and multifamily mortgage finance perspective in response to the risk retention NPR.Continue Reading More About that Premium Capture Kerfuffle

The process of transforming 2,000 pages of Dodd-Frank into 25,000 pages of regulations is well under way. Front and center is Risk Retention. I assume you, like me, have been studying the 300 plus pages of the proposed Risk Retention rules (known to the cognoscenti as the Risk Retention “NPR”) for the past several weeks getting ready for the June 10th deadline for comments, right? Oddly, almost a full month passed before the government actually posted the NPR to the Federal Register, something which is usually done in a matter of days. (Tea leaf readers, thoughts?)

We have visited Risk Retention in this Blog before, but today we want to really focus on premium capture as it seems to capture all that is wrong with the NPR. My first reaction to reading the words on the page: Where the hell did this come from? On the fifth read, same reaction. There was nary a hint of the premium capture monstrosity in either Dodd-Frank or in the whispering about the rule-making process before the NPR came out.  Continue Reading Premium Capture Kerfuffle: The Poster Child of What’s Wrong with Risk Retention

On May 5, SIFMA hosted a Spotlight Series: Risk Retention and Qualified Residential Mortgages.  It was immediately apparent that unintended consequences of the proposed risk retention rules (pdf) abound.

The panelists acknowledged that the regulators had a very tough mandate, and that the rules are way more complicated than anticipated.  It was estimated that approximately 60% of the proposed rule will make its way to the final rule, and that while feelings of annoyance with respect to the drafting of the proposed rule may linger, it is up to the securitization market participants to help the regulators provide us with a clear, workable final rule.

Under the proposed rule, calculation of the amount of required risk retention would be based on a percentage of the par value of the ABS interests in an issuing entity.  The discussion began with a couple questions some of us have already been asking …

What do regulators mean by “par value”?  What is an “ABS interest”?Continue Reading SIFMA Spotlight Series: Risk Retention and Qualified Residential Mortgages