CMBS 3.0

November 10, 2016

Starting December 24, 2016, CMBS lenders will face a mandatory implementation of 2 regulations stemming from the Dodd/Frank Act HR4173 that was signed into law in 2010.

First, CMBS lenders will be required to supply Representations and Warranties from a warm body on all loan securitization pools that enter the bond market (Risk Retention, Section 943).   The challenge is that very few lenders take their own single loan pools to market. They typically partner with a lead lender and contribute loans into joint pools with other CMBS originators.

Under Dodd/Frank, each leading lender participant in a securitization pool will have to indemnify their partner’s pools as well as their own.   This has been implemented by lenders who have paid individuals to warranty each contributing pool.  The effect of this will likely be an increase in spreads of approximately 5-15 basis points.

Second, CMBS contributors will need to retain a 5% ownership in any securitized loan pool being sold to the bond market.  Currently there are 3 options available; however the most efficient approach has yet to be worked out.  The retention piece could be structured as a horizontal 5% strip along one bond class, a vertical strip along all bond classes (or an L shaped hybrid of the 2), or it could be sold to a 3rd party.  So far, we have only seen a vertical strip retention executed in the marketplace and it was well received.

Impact on CMBS Market

  • In addition to the pricing considerations, the coming changes will likely impact 2nd Tier CMBS lenders the most.  These lenders typically borrow from lines of credit, provided mostly by larger banks, to run their platforms instead of using a proprietary balance sheet.   Their risk lies in the possibility of credit lines being pulled in a choppy market, or the cost of borrowing increasing on short notice thus rendering them unable to honor their term sheets.
  • We’ll likely see ongoing consolidation and/or reduction of participating lenders in the CMBS space.   Thus far, at least 7 firms over the past 12 months have discontinued CMBS operations.   In the authors opinion this is healthy trend.
  • Several CMBS originators are setting up shell entities in order to arrange their own transactions and assume the entire risk themselves.
  • The winners in this race will likely be major investment banks or other well capitalized finance companies who have the ability to utilize their own balance sheets.


  • CMBS is and will continue to be an essential part of the Commercial RE finance arena.
  • Current full leverage loans are being priced in the 2.70% to 3.20% over the 10 year Treasury/Swap (taking into account a multitude of factors).  This equates to note rates that are currently in the low to mid 4% range (fixed for 10 years). Full term Interest only is generally available at 60%LTV and below
  • There will be limited volatility in the CMBS markets until the matter of Risk Retention is resolved.  Currently, liquidity is not an issue.
  • Certainty of execution will play an equal or greater role in what has been primarily a race won on pricing.


Alex Chenarides