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CRE Finance World, Summer 2013

A publication of Summer issue 2013 sponsored by CRE Finance World Summer 2013 7 Risk Retention Still Uncertain — Resi Provisions Likely Culprit Since before the passage of Dodd/Frank, CREFC has championed optionality for structured finance. Namely, we were successful in adopting a statutory provision that acknowledged the unique qualities of CMBS versus other asset classes. However, the regulators have been less inclined to recognize the heterogeneity of ABS and we remain mired in a policy conflict that pits simplicity against elegance on this important rule making. Rulemaking Progress: The risk retention rulemaking is the subject of much speculation. We hear many rumors and opinions and we continue to weigh them and pass along as we believe credible. Recently, we’ve heard that the rule could again be released for comment before summer. This would provide another opportunity to CREFC to file (additional) comments and have its voice heard on the new proposal, to the extent it has changed from the prior version. While this is speculative, it would seem plausible given the lack of agreement among the regulatory bodies. We also continue to hear that PCCRA could be eliminated from the next round, but its affects may well survive with the 5% retention requirement applying to net proceeds at issue rather than aggregate credit risk. (Bond sold at a premium would, thus, increase the amount of retained escrow.) We still have no greater clarity on the single borrower exception from retained risk or the time requirement for the B-piece investors holding an original tranche. While the transferability is of profound importance to investors, we believe the agencies have yet to find common ground on a requirement. We have heard that their proposal requiring original B-piece investors to hold for at least 5 years is still on the table. We continue to engage with the rulemakers on all of the above topics. Perhaps a bright spot was observed earlier this year when OCC’s Commissioner Thomas Curry addressed a convention where he said the following: In regard to key issues such as the securitization risk retention rule, our determination to avoid the “one-size-fits-all” approach has resulted in a matrix of retention solutions that has unavoidably added substantial complexity. However, I certainly don’t have to tell the ASF that securitization of different asset classes is not a “one-size-fits-all” approach either, and we believe the work we are doing to recognize those differences is essential to the vitality of the securitization market. CREFC continues to view the OCC as a key ally in our quest for a workable model for risk retention that will ensure liquidity and preserve competition among lenders — whether on balance sheet or securitized. Accounting Gets Scary FASB and its international affiliate, IASB, have been active in past 6 months, dropping exposure drafts on a host of issues related to how American companies present their balance sheets (and income statements) to investors. Topics such as investment classification and measurement, impairment and fair value have all been scrutinized. It seems that no one has found a friendly ruling of late. However, a bit of good news is the recently-announced ascension of Russ Golden to the chairmanship of the regulator. We believe that Russ will not sacrifice sound policies at the altar of international convergence. Additionally, an important initiative has moved forward, with FASB agreeing to release in the coming months its next exposure draft on lease accounting. CREFC members will appreciate the economics of shifting the accounting treatment of operating leases into full balance sheet assets and liabilities for renters. This policy will no doubt be hotly debated amongst a very large swath of stakeholders. CREFC will provide full notice when these important drafts are released, but members are also encouraged to take advantage of our Accounting Policy committee who tracks and responds to these proposals. GSEs Reform — Both Likely and Improbable One of the signature issues for incoming House Financial Services Committee Chairman Jeb Hensarling (R-TX) has been the GSEs and the federal role in housing finance since the crisis. He has vowed to move legislation to address the lop-sided capital flows that now disadvantage private mortgage finance. Already this year, his committee has held a half-dozen hearings on housing finance. He has previously introduced legislation to unwind Fannie Mae and Freddie Mac, and more recently held hearings on the financial health of FHA. We anticipate a dual track approach to kickstart private mortgage capital and a statutory reduction in GSE and FHA lending ability. While this legislation should be passable in the House where a simple majority rules, over in the Senate the Hensarling approach could be a bit more critically received by members of his own party. CREFC Regulatory Update: Meandering Through the Post-Dodd/Frank Landscape


CRE Finance World, Summer 2013
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