The repeal of Rule 436(g) sent the securitisation industry into a tizzy in the summer of 2010.
Now a component of last week’s proposed risk retention rules for Mortgage-Backed Securities (MBS) is sparking comparisons from some analysts, in relation to the commercial MBS market. The troublesome bit is called “premium capture” — and it’s pretty much the only thing that came as a surprise to the securitisaton industry in the 233-page proposal published by US regulators last week.
To quote Commercial Mortgage Alert, “the provision would effectively prevent CMBS lenders from capturing profits up front on transactions via the issuance of interest-only strips, which are funded with excess interest payments from the collateral pool.” So those extra interest payments would be redirected from the issuers’ pocket to help boost credit enhancement and cover collateral losses. Which means the excess interest isn’t disbursed until all the bonds are paid off, so issuers can’t take profits up-front, as they do now by transferring the excess interest into an interest-only class sold at issuance.
Cue the industry whining.
Here, for instance, are Citi’s securitised products strategists:
We would not be surprised to see the premium capture requirement revised in the final rules. We view this as yet another example of a seemingly innocuous regulatory requirement — that actually appears to have been crafted to mostly target RMBS issuance practices, especially Alt-A — but one that could have completely unintended consequences. This brings to mind the unintended market freeze following the repeal of rule 436(g), which required immediate regulatory intervention.
Now, the CMBS market is a bit different to its residential counterpart. Issuers are generally required to keep a 5 per cent stake in assets they securitise, but CMBS deals can avoid the rule if the B-piece holder fulfills the retention requirement. The B-piece is the most subordinate bit of a CMBS transaction.
Back to Citi:
What is less clear is why the premium capture requirement also applies to the CMBS B-piece retention option. In this case, the rules stipulate that the account would capture the difference between the gross proceeds and 100% of the ABS par value. The calculation uses 100% of the proceeds rather than 95% because under the B-piece holder option, the sponsor is not required to retain any risk. But as there is no sponsor retention under this option, monetization of excess spread up front would not reduce any retention. Retention is zero to begin with.
We hope the regulators would be receptive to this line of reasoning. We recognize the need to prevent effective circumvention of the sponsor retention requirement. But, especially when there is no such requirement (because an exemption had been used), the rationale for the premium capture requirement is much less clear. Speakers during the CREFC briefing indeed noted that regulators appeared to be circumspect in their approach to the premium capture requirement. The regulators’ request for comment on this particular topic indicates that they are open to other suggestions to achieve their goal of assuring the risk retention levels, as required by law, are maintained.
Comments on the proposal are open until June 10, so there’s still plenty of time to
water them down – change them.
Choose your own risk retention – FT Alphaville
The RMBS risk retention exemption, qualified – FT Alphaville
B-piece buyers in gatekeeper role key to reviving CMBS – Structured Finance News