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Does Skin in the Game Align Incentives? The Case of CRE CLOs

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  • Daniel Broxterman

  • Lawrence R. Cordell
  • Casey Dougal

  • Xingliang Ma

Abstract

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 functions manage distressed loans in ways that reduce the likelihood of failing note protection tests that would divert cash flows away from retained interests. Although these actions bolster reported performance, they raise concerns about resilience if market stress deepens.

Suggested Citation

  • Daniel Broxterman & Lawrence R. Cordell & Casey Dougal & Xingliang Ma, 2025. "Does Skin in the Game Align Incentives? The Case of CRE CLOs," Working Papers 25-43, Federal Reserve Bank of Philadelphia.
    • Handle: RePEc:fip:fedpwp:102289
    DOI: 10.21799/frbp.wp.2025.43
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