Industry Leaders Hope to 'Loosen' REMIC Restrictions

The Mortgage Bankers Association and the Commercial Mortgage Securities Association are taking advantage of a "window of opportunity" to try to "loosen up some of the restrictions" on the Real Estate Mortgage Investment Conduit structure, Robert Vestewig, chief operating officer, GEMSA Loan Services, told a panel session at the MBA's commercial real estate finance/multifamily lending convention here.

The REMIC structure governs CMBS transactions. "Managing real estate is not a passive task," Mr. Vestewig said, since "markets change and tenants change," but REMIC rules "tend to limit substantial modifications" to CMBS loans.

The MBA is pursuing the changes with a letter to the chairman of the House Banking Committee, while recognizing that this is an election year and that it will be hard to have any "controversial changes" made, Mr. Vestewig said. If the changes are made, securitized commercial mortgage loans will have more flexibility and CMBS will be more competitive with whole loans, according to him.

Responding to a question about how level the field will be if the REMIC rules are altered, Mr. Vestewig noted that in a securitized pool, different levels of approval will still need to be obtained, whereas a portfolio lender can still come up with a solution in one step. He doesn't believe that altering the REMIC rules will lead to a flood of requests for changes.

Jack Cohen, CEO, Cohen Financial, and moderator of the session, noted that the change could impact "those who have been abusing the system by holding loans captive."

If "free market dynamics" come into play, "those who want to give good service will survive and those who don't will go out of business," he believes.

At a related MBA panel session on "myth-busting" that sought to address the issues related to borrowing from a conduit lender, vis--vis borrowing from a portfolio lender, Warren Friend, a Morgan Stanley managing director, explained that the REMIC structure is a tax election that allows the selling of mortgages in the securitization market.

When it was put together back in 1986, according to him, the authorities did not want to grant too much discretion in altering the terms of the transaction since the concern was that the value of a transaction might be altered without generating tax.

Mr. Cohen, who also moderated this session, noted, "A lot of borrowers still think it is 1986, saying things like I hate securitized lending, I can't talk to someone. There are reasons why portfolio lenders had more flexibility. REMIC issues don't allow us to deal with dynamic issues."

Responding to a question from Mr. Cohen about whether he feels more comfortable with an originator who has a portfolio background, Mr. Friend noted that he feels more comfortable that an originator who has a portfolio background is not manufacturing loans and has less pressure to make money and generate a return.

Larry Duggins, president, ARCap REIT, observed that "if you can own it long term, then we can own it long term. If you envision it as needing changes, don't send it."

Mr. Duggins would prefer not to buy from lenders who "view CMBS as an exit for some properties," noting that "it is important to have a strong credit process no matter where a loan goes."

"A drive-by appraisal is not as good as a full appraisal. An environmental report by computer is not as good as one done by an engineer on site. A loan approved by a child on a trading desk is not as good as one done by committee," Mr. Duggins said. He added that these factors may hurt the quality of small loans, which will continue to have a market as long as due diligence is not cut short.

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