Issuers of Texas Commercial Mortgage Backed Securities (CMBS) this year have faced Dodd-Frank risk-retention standards for the first time. What has the impact been so far this year and what might these regulations mean for the Texas Commercial Mortgage market in the future?

Regulations came into effect at the end of 2016 requiring the issuers of CMBS bonds to retain a five percent stake in every deal, sell off their stake to a third party or both. The regulations create an additional cost for CMBS lenders. Some feared these regulations would make CMBS backed mortgages more expensive for borrowers, but so far this hasn’t been the case. Instead the CMBS market has apparently become more concentrated, with only the largest financial institutions seemingly able to adapt to the new regulations.

The risk-retention regulations are clearly a boon to larger banks. Smaller CMBS issuers are apparently being pushed out of the market. In 2015 the top five CMBS issuers were responsible for 43 percent of the 93 billion dollars in CMBS loans issued. In 2017 these big players are responsible for 61 percent of all CMBS financing. The total number of players in the industry is down as well. In 2015 38 lenders were active in the CMBS market. This year only 21 institutions are issuing these types of mortgages. These numbers indicate a less competitive industry. It is possible that less competition will help improve underwriting standards, as CMBS issuers won’t be competing to take advantage of lending opportunities. But securitized commercial mortgages could also become more expensive.

The CMBS market seems to have adjusted to the new requirements, but

in the long run the expense of the new regulations could have change the lending landscape.

CMBS issuances are up 22 percent compared to last year. Even though it seems the industry has adjusted to the risk retention requirements, in the end the regulations make CMBS lending more expensive. Simply put, banks might want to keep more mortgages on their balance sheets rather than selling them off as securities. This makes commercial mortgages less lucrative and potentially riskier for banks. The blanket requirement of a 5 percent stake means that no matter the size of the loan, banks will still have to hold onto or sell-off five percent of it. In effect the smaller the mortgage issued, the less expensive it is for CMBS lenders. This could translate into smaller mortgages being issued by CMBS originators or the need for greater recourse on the part of borrowers.

While the CMBS market has adjusted to the new risk retention requirements. The regulations likely will compel borrowers to look elsewhere for financing.

Alternative lenders, private equity firms and Real estate Investment Trusts (REIT’s) are not subject to the new risk retention requirements . In the future these sources of financing will undoubtedly become strong competitors to CMBS issuers. These groups will inevitably be able to offer more favorable terms and more money to potential borrowers. Considering these trends it seems the risk-retention requirements have only shifted the risk into more unregulated areas of the Texas Commercial Mortgage market.