* Push back on loan quality sparks changes
* Regulations put market back to basics
By Joy Wiltermuth
NEW YORK, April 1 (IFR) - Deutsche Bank and JP Morgan stripped out non-bank collateral on their latest commercial mortgage bond before it was sold to investors, winning favor with the simpler structure in a market scarred by volatility and regulatory pressures.
The two banks dropped collateral from at least one non-bank lender by the time the US$818m deal was offered to investors earlier this week, two sources with direct knowledge of the trade told IFR.
It was rebranded as a bank-only deal comprised exclusively of loans originated by the two banks, after the final line up of loans were signed off and headed for securitization, sources said.
"It was not bank-only from the get-go," said one of the sources.
The move marked a U-turn for an industry that until recently relied heavily on a swell of smaller, non-bank lenders to pad out their bond deals.
Behind the scenes battles have been brewing in the US$600bn CMBS market for months as high volatility and new reforms have put pressure on existing lending alliances between banks and non-banks.
Deutsche Bank's prior deal in February, for example, included 19% loans from a single non-bank lender.
But this time around, pressure from B-piece buyers forced Deutsche Bank and JP Morgan to exclude any loans not lent by them, one of the sources said.
B-piece buyers purchase a deal's bottom speculative grade securities in a bidding round that occurs before a pool of loans are finalized and securitized.
"I would say things began to change in the fall of last year," said Warren Friend, an executive managing director at Situs, a commercial real estate loan servicer that analyzes loan pools before they are securitized.
That was when a new reform rule called Regulation AB II took hold, which has since touched off a storm for non-bank lenders whose loans have faced heightened scrutiny by CMBS issuers.
The rule, notably, for the first time put bond issuers on the hook if any information about a deal ends up being untrue.
"It made people start to think about where loans were being originated," Friend said of the reforms.
In recent months, B-piece buyers have been dramatically shaping pools by liberally kicking out loans they deem too risky.
"In a few deals our loan rejection rate was more than 30%," a B-piece buyer told IFR.
SIMPLICITY WINS
The simple structure chalked up a win for the banks involved as they were able to lower the pricing benchmark for CMBS after a painful period of relentless spread widening.