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
Many (But Not All) Dynamics Improving But Federal Tax Receipts Are Down
The Economic Future of The Berkshires - A Reconsideration
News Blog
The World's Staggering Wealth Divide
FIFA World Cup Brand Worth More Than Ever
What Is Heart Failure? It's Not As Common A Cause Of Death As Reports Would Have Us Believe
Economic Growth, More Debt And More Employment
What We Read Today 16 January 2017
Why Doesn't Capital Always Flow To High-Growth Areas?
Trends In Arbitrage-Based Measures Of Bond Liquidity
Is The Next Recession Around The Corner? Probably Not
Investor Alert: Excessive Trading At Investors' Expense
Infographic Of The Day: Chart: How Every Commodity Performed In 2016
Early Headlines: Asia Stocks Mostly Down, Oil And Gold Up, Dollar Down, Obama On 60 Minutes, Brexit Is Getting Harder, Boeing's Big India Order, Shanghai Breaks Support And More
Most Read Articles Last Week Ending 14 January
Technical Update 15 January 2017
Investing Blog
Market And Sector Analysis 16 January 2017
The Investment Potfolio
Opinion Blog
Be Prepared For A Violent Fed Reversal
Nature Of Debt Differs Between China, Japan And The U.S.
Precious Metals Blog
Gold's 2016 Gain Indicates A 19% Surge In 2017
Live Markets
16Jan2017 Pre-Market Commentary: Wall Street Closed For MLK Holiday, European Markets Lower, Crude Prices Slip, Investors Await Serious Market Correction As Some Bearish Analysts Claim The Sky Is About To Fall
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





























 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 - 2017 Econintersect LLC - all rights reserved