The commercial real estate industry has complained bitterly to Congress about some of the rules being promulgated under Dodd-Frank.

WASHINGTON, DC-Much has been made of the fact that one of the more onerous requirements under Dodd-Frank–at least as far as the real estate industry was concerned—has been rejiggered under a re-proposal issued by a huddle of regulators this week. The new proposal will have a huge impact on the residential mortgage industry and its related securitization activities and for that reason, the change has been both celebrated and vilified.  At the same time, a less noticed–but still huge in its impact–rule change was also proposed for the CMBS space.

The proposal was issued jointly by the Board of Governors of the Federal Reserve System, the Department of Housing and Urban Development, the Federal Deposit Insurance Corp., the Federal Housing Finance Agency, the Office of the Comptroller of the Currency, and the Securities and Exchange Commission.

The previous rule was that issuers of mortgage-backed securities had to keep some so-called skin in the game and retain 5% of the bond’s credit risk on their books.

Under the new proposed regulation, that requirement has been significantly relaxed. It applies a very broad exemption that doesn’t apply to most mortgage securities originating under the current lending standards.

For instance, loans with teaser rates that reset at higher amounts or interest only loans fall under the 5% risk retention requirement–but little else.

So. Yah for residential mortgage issuers and homebuyers (depending on your beliefs about what is good for the housing market and consumer). As a result of this re-proposal residential mortgages will be easier to obtain and their securitization more attractive investment products.

Unnoticed by many, though, was language that has the CMBS industry falling to the knees in gratitude.

The first proposal generally measured compliance with the risk retention requirements based on the par value of securities issued in a securitization transaction and included a so-called premium capture provision (emphasis mine), the agencies explained in a release. They are now proposing that risk retention generally be based on fair value measurements without a premium capture provision. (emphasis mine).

The risk retention re-proposal, in short, knocked out the Premium Capture Cash Reserve Account requirement. If it had stayed in place, it would have required all issuer profits to be placed in a first-loss position, the Mortgage Bankers Association explained when lauding the move.

The practical effect is that it would have kept CMBS lenders from claiming profits up front on such transactions until all other bonds have been paid off.

The CRE industry has made little bones about its distaste for this requirement. Last year representatives from several institutions and associations descended on Capitol Hill to voice their disapproval.

CREFC president Paul T. Vanderslice, for example, pointed to the Premium Capture Cash Reserve Accounts included in the proposed risk-retention regulations, in particular. Intended to bolster the retention regime, they could actually lead to restricted credit availability and increased borrowing costs, he said at the time. “Investors also would be affected, as they will not have sufficient CMBS product to provide the risk diversification and yield needed to meet, for example, life insurance and pension benefit payment obligations.”

Given the case against PCCRA, it is easy to overlook why rule writers included it in the regulation the first go around. CMBS all but collapsed in the Great Recession and the market is nowhere close to touching its pre-crash volumes.

The industry, in some quarters, is introspective about these issues, even as they protest what they see as ham-handed ‘solutions’ from Washington.

“The industry has made progress through internal reforms but remains hesitant to concede many structural flaws in the CMBS process,” Sam Chandan, president and chief economist of Chandan Economics, tells

“Proposals from Washington, embedded in Dodd-Frank or elsewhere, have not been well received. Whether the champions are external or internal, there is room for improvement; the 2.0 and 3.0 monikers are significant overstatements of the reforms so far.”

His conclusion: “Are the concerns motivating risk retention valid? Yes. Is the original proposal the right solution? I’d have to say no.”