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Q&A With The Lead Advocates For The Bill To Save CMBS


A new congressional bill, dubbed the Preserving Access to CRE Capital Act of 2016, would ease the heavy CMBS risk retention regulations set to take effect in December 2016 under Dodd-Frank. We sat down with CRE Finance Council's VP of Government & Regulatory Affairs Martin Schuh, whose organization is leading the advocacy of the bill, for his analysis of what it could mean for CMBS.

Bisnow: What is the issue with the Dodd-Frank regulations on CMBS?

Martin Schuh: After our members supported the concept of risk retention, we at CREFC lobbied successfully to let Dodd-Frank’s “skin in the game” regulation to be satisfied by the B-piece buyer (who buys the bottom class of the bond offering). If an issuer comes to market with a billion-dollar CMBS, one of our B-piece investors would buy the unrated pieces and the subsequent risk.

Bisnow: That doesn’t sound like an issue.

Martin Schuh: Well, the legislation is followed by the rulemaking. When the rule came out—preliminarily in 2011 and then in 2014 it was finalized—it had all kinds of faulty assumptions. Our bill will correct some of the faulty assumptions.

Bisnow: What are some of those assumptions?

Martin Schuh: They give us 40 hoops to jump through for a loan to become qualified—meaning exempt from the retention requirements—and some of the hoops were just nonsensical. They had assumed that low-LTV interest-only mortgages were inherently risky. They assumed that shorter-duration loans were risky. They also assumed that longer-term amortization was risky. 

Bisnow: And that isn’t true?

Martin Schuh: We gave them the data on every CMBS loan ever made between 1997 and 2013, and we said, ‘These are the droids you’re looking for’—we presented them the safest CMBS loans. They had two common factors—cash flow and low-leverage. Total common sense. The interest-only stuff, the loan term, the amortization all didn’t matter, it was all just noise. But they were hard and fast in their decision. They made rules with the requirements of: minimum loan term of 10 years, no interest-only loans and amortization could not be more than 25 years. We actually discovered that less than 4% of CMBS would qualify.

Bisnow: How does your bill change things?

Martin Schuh: It relaxes those three things. It allows for 30-year amortization, and says the loan term doesn’t matter, and it relaxes the interest-only rule. Those three tweaks get us to about 15% of all loans historically, but it actually lowered the default rate. So our safe loans are safer than their safe loans, yet they’re more numerous.

Bisnow: What else does it do?

Martin Schuh: That’s one piece of the bill, the “qualified status” feature. A second feature is that it exempts single-asset single-borrower deals, where the default rate is less than .25%. The third feature just allows multiple B-piece buyers to hold senior and subordinate positions to one another, instead of simply side-by-side.

Bisnow: Is there anything else restricting the CMBS?

Martin Schuh: That’s a very long conversation. But I can tell you that the overriding theme driving the volatility is fear more than anything else. It isn’t just risk-retention, it’s Reg AB, it’s the Basel initiatives, construction lending is grinding to a halt. It’s a lot of headwinds, but the problem is they all hit us at the same time. Exactly the wrong time, actually, because we have this massive wall of maturities from the loans that were made in ’06 and ’07—they’re maturing this year and next year.