President Donald Trump recently announced that he intended to “do a big number” on the Wall Street reform package called Dodd-Frank, a warning that something might (or might not) happen to key regulations on risk retention that deeply affect the commercial real estate industry.
Regulation, Risk and Reminders
President Trump severely criticized the Dodd-Frank law, calling it a “disaster” and promising to “do a big number” on the law soon. If the President does actually follow through with gutting Dodd-Frank, what could change for commercial real estate? Whatever changes that stick will affect at least one of these areas:
- The Credit Risk Retention Rule – Forces issuers of bonds comprised of performing commercial real estate properties to hold a percentage of the offering. Affects CMBS marketplace significantly, as written about here.
- Credit Rating Agency Reform – Rules that prevent the complicity of risk ratings agencies (Moody’s, Fitch, S&P) in mislabeling bond offerings to obscure systemic risk. Affects CMBS and REIT share markets as well as the wider debt market transparency.
- Legislative proposals to wind down the Government Sponsored Entities such as Freddie Mac that originate a great deal of capital for apartment building projects
- The Volker Rule – Prevents banks from engaging in trading in certain kinds of investments. Affects: proprietary trading, disallows banks from owning or investing in hedge funds or private equity funds. If struck down, may increase availability of capital from banks to exotic or alternative financing vehicles serving the CRE industry.
Guessing at impact is tough, because Dodd-Frank rules are a moving target — rules are still being designed and implemented with a time schedule that reaches into 2019 and beyond. While the President signed an executive order in mid-January compelling the elimination of two regulations for every one invoked, a move that tends to support speculation that the President sees regulations as intrinsically bad things, nobody should claim to know exactly what’s on the President’s mind before a) he announces it himself and b) we wait a little bit for the dust to settle.