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Working Paper
Does Skin in the Game Align Incentives? The Case of CRE CLOs
This paper examines whether high levels of risk retention effectively align incentives in securitizations, using evidence from the $100 billion-plus commercial real estate collateralized loan obligation (CRE CLO) market. CRE CLO sponsors retain all equity and non–investment-grade tranches, far exceeding Dodd–Frank Act minimums. Despite this substantial retention, we find that security returns are driven in part by resolving distressed loans through par-value buyouts back to sponsor balance sheets, shifting losses outside the trust. Moreover, sponsors vertically integrated across servicing ...