While “substantially more lenient” than the first draft released in mid-2011, according to a Barclays' report, the new regulations may lead to at least a slight increase in primary loan coupons that “could raise the hurdle for loans looking to refinance and be somewhat of a drag on long-term issuance volumes.”
This prospect may have a negative impact going forward because CMBS spreads remain “flat to slightly wider on low volumes,” analysts wrote, even though the government-sponsored enterprises continue to focus on selling CMBS including most recently a $500 million A1A bid list form Fannie Mae and four new conduit deals are lined up for September.
Rules proposed by the six regulators as qualified commercial real estate loans loosened a bit the risk retention criteria by exempting securitizers from the 5% risk retention requirement only if all loans in the deal qualify at the time of origination.
Anticipation of regulatory risk is one of the factors that will slow down issuance in the fourth quarter.
The expectation is to see “spread volatility to persist” heading up to the September Federal Open Market Committee of the Federal Reserve Board meeting, keeping investors inactive unless “investors willing to stomach some mark-to-market pressures” are interested in medium-term investment deals.
For example, analysts anticipate 7% to 8% credit enhanced bonds that could be protected from losses “even in fairly stressful credit and rate environments,” since long BBB assets perform better than “short A curve flatteners in the CMBX.6 space“ and would partially hedge near-term risk driven by broader market volatility.