econintersect.com
       
  

FREE NEWSLETTER: Econintersect sends a nightly newsletter highlighting news events of the day, and providing a summary of new articles posted on the website. Econintersect will not sell or pass your email address to others per our privacy policy. You can cancel this subscription at any time by selecting the unsubscribing link in the footer of each email.



posted on 28 February 2016

Dodd-Frank And CMBS - Lenders Will Soon Be Required To 'Eat Their Own Cooking'!

by Michael Haltman

What's better for a lender than underwriting a commercial mortgage loan, packaging it with other loans and then selling it to investors?

Any inherent risk of loan default, after the time it may take to sell the security off course, would be passed off to the investor that buys it.

What we saw during the financial crisis was that this business model can lead to abuses such as an underwriter potentially taking shortcuts, or overlooking some nicks or cuts that may be present in a specific loan scenario, in order to make as many securitized loans as they believe they can sell.

As of December 2016, however, all of this will change as a provision of the 2010 Dodd-Frank law that requires lenders to hold in reserves a percentage of the dollar amount of a securitized loan they originate, is scheduled to kick-in (this will be the case across all forms of securitized debt).

For lenders this increase in risk will likely reduce the amount of loans they are willing to make which in turn would reduce the liquidity available for real estate development.

But, For Every Change In A Market, Opportunity Presents Itself!

From an article at BloombergBusiness, 'Wall Street Girds for Real Estate Debt It Must Invest In'...

'Wall Street firms are readying themselves for new rules aimed at requiring them to eat what they cook.

A provision of the 2010 Dodd-Frank law that takes effect in December forces banks to keep a stake in the commercial-property loans they package into securities and sell off to investors. The rule is intended to deter the type of risky lending that helped fuel the last decade's boom and bust. Under the current business model, banks are encouraged to issue as many loans as they think they can securitize and sell, with underwriting standards sometimes falling by the wayside, said Lea Overby, a debt analyst at Nomura Holdings Inc.

"Originators know their product better than anyone, and they are less likely to underwrite really bad stuff if they have to hold it," Overby said in an interview.

The biggest players in the $550 billion market for commercial mortgage-backed securities, such as Wells Fargo & Co., Deutsche Bank AG and JPMorgan Chase & Co., are juggling multiple scenarios as they prepare for the new rule, according to bankers with knowledge of the deliberations. Banks may be required to hold as much as $50 million in capital for a $1 billion deal, a tough prospect to stomach with banks under pressure to keep their balance sheets in check. The rule also creates an opportunity for investors to team up with banks on the debt.

Turmoil in global markets is exacerbating the uncertainty surrounding how lenders will adjust to the new regulations. The CMBS market is already on shaky ground as the rout in oil prices, slowing growth in China and uncertainty over the Federal Reserve's course on interest rates spook investors in stocks and bonds around the world.

The extra yield buyers demand to own commercial-mortgage bonds relative to benchmark interest rates has surged to the highest since 2011, meaning investors view the securities as increasingly risky, according to Morgan Stanley. Since January, the spread between the benchmark and CMBS rated BBB-minus, the lowest investment-grade ranking, has jumped 240 basis points, or 2.4 percentage point, the bank's data show. Morgan Stanley analysts led by Richard Hill cut their 2016 CMBS sales forecast to $70 billion from $100 billion as lenders pull back.

Dealers are struggling to sell CMBS deals that have been in the pipeline for months, according to Leo Huang, who oversees commercial real estate debt at Ellington Management Group.

"Money is being lost in amounts that hasn't been seen in years," Huang said. "This should remind people there is substantial risk in this business."...'

Read the rest of the article at BloombergBusiness here.


Michael Haltman is President of Hallmark Abstract Service in New York. He can be reached at mhaltman@hallmarkabstractllc.com.

>>>>> Scroll down to view and make comments <<<<<<

Click here for Historical Opinion Post Listing










Make a Comment

Econintersect wants your comments, data and opinion on the articles posted.  As the internet is a "war zone" of trolls, hackers and spammers - Econintersect must balance its defences against ease of commenting.  We have joined with Livefyre to manage our comment streams.

To comment, using Livefyre just click the "Sign In" button at the top-left corner of the comment box below. You can create a commenting account using your favorite social network such as Twitter, Facebook, Google+, LinkedIn or Open ID - or open a Livefyre account using your email address.



You can also comment using Facebook directly using he comment block below.





Econintersect Opinion


search_box

Print this page or create a PDF file of this page
Print Friendly and PDF


The growing use of ad blocking software is creating a shortfall in covering our fixed expenses. Please consider a donation to Econintersect to allow continuing output of quality and balanced financial and economic news and analysis.


Take a look at what is going on inside of Econintersect.com
Main Home
Analysis Blog
Energy and Falling Productivity
Reinhard Selten: Pioneering Analyst of Rationality and Human Behaviour
News Blog
Dangerous Ultra Pure Water
Job Employment Tenure Down
Mobile Payments Promise To Improve Financial Accessibility In Mexico
Aging Populations May Mean Lower Economic Growth
Urban Rebound Causes Large Shift In Lower Credit Borrowers To Seek The Outer Suburbs
Infographic Of The Day: How Oil Is Formed
Early Headlines: Japan Needs Fed Hike, Mexico Tanker Ablaze, 1.5C Limit Within 10 Yrs, Africa's Growth Problems, Did US Destroy Syria Truce?, Merkel: No Help For DB And More
Americans Wary Of Drone Delivery
Britain's Wealthiest Households
What Next In The South China Sea
The Dollar - Gold Relationship
Almost Half Of Rape Cases End Without A Conviction
People With 'Obesity Gene' Can Still Lose Weight
Investing Blog
The Week Ahead: How Will Election News Impact The Market?
How To Protect Your Money Against Negative Interest Rates
Opinion Blog
There's No Wall Between The Fed And Banco De Mexico
The Setting Sun: Japan Faces Monetary Exhaustion
Precious Metals Blog
War On Cash Turns To $20, $50, And $100 Bills
Live Markets
23Sep2016 Market Close: US Indexes Close Lower As Crude Prices Slip, Fed Lowers Economic Growth Prospects, Indicators Melting Into Bearish Territory
Amazon Books & More






.... and keep up with economic news using our dynamic economic newspapers with the largest international coverage on the internet
Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government



Crowdfunding ....






























 navigate econintersect.com

Blogs

Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day
Weather

Newspapers

Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government
     

RSS Feeds / Social Media

Combined Econintersect Feed
Google+
Facebook
Twitter
Digg

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution

Contact

About

  Top Economics Site

Investing.com Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2016 Econintersect LLC - all rights reserved