Exploring Climate Risk, Risk Retention, and CMBS: Understanding their Interplay

Yildiray Yildirim and Bing Zhu

ERES from European Real Estate Society (ERES)

Abstract: In this study, we investigate the impact of climate hazards on Commercial Mortgage-Backed Securities (CMBS), particularly in the context of the 'originate-to-distribute' model and the 2017 risk retention rule. Our findings reveal a significant behavioral shift in CMBS deal originators due to climate shocks. We observe that when faced with climate events, loan originators expedite the sale of loans impacted by these events before they are bundled into securities. However, this trend changes under the risk retention rule, where underwriters exhibit a reluctance to originate and include climate-impacted loans in retention deals. This behavior indicates a more cautious approach towards loan origination in the face of climate risks. Moreover, our study highlights that underwriters, under the risk retention rule, tend to have a reduced exposure to climate hazards in their loan portfolios. Consequently, risk retention deals show a price advantage with a lower premium for climate risk. This can be explained by a notable decrease in the default risk associated with climate hazards post implementation of the retention rule.

Keywords: Climate Hazards; Commercial Mortgage Backed Security; Default risk; Risk Retention Rule (search for similar items in EconPapers)
JEL-codes: R3 (search for similar items in EconPapers)
Date: 2024-01-01
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