Lawmakers Urge Treasury to Support The CRE Market

 

WASHINGTON - This week, Congressman Paul E. Kanjorski (D-PA), Chairman of the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, and Congressman Ken Calvert (R-CA), sent a bipartisan letter to Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke about the growing concerns that deteriorating conditions in the commercial real estate (CRE) market may threaten an economic recovery.

"The growing bubble in the commercial real estate industry has the potential to infect our economy and slow a recovery," said Chairman Kanjorski.  "In order to safeguard the businesses operating on Main Street and protect the millions of jobs depending on commercial real estate, the Treasury and the Federal Reserve now must take needed and urgent action to stave off a potentially devastating wave of commercial real estate foreclosures and bank losses." 

"I am deeply concerned about the health of our commercial real estate market and the stability of thousands of small businesses across the country," said Congressman Calvert.  "We must take the appropriate steps to ensure that our commercial real estate market does not experience a liquidity crisis that would further exacerbate our struggling economic situation." 

"A liquidity crisis in the commercial real estate market is hurting small business owners across the entire nation," said National Association of REALTORS President Vicki Cox Golder, owner of the commercial real estate company Cox & Associates in Tucson, Arizona.  "I join with all commercial property owners who applaud the efforts of Reps. Calvert and Kanjorski to resolve this problem and put small business owners back in business." 

Specifically, the letter asks regulators to take the following steps:

• Establish a clear method for measuring and evaluating the effectiveness of recent CRE loan modification guidance issued by the regulators.

• Institute metrics to more clearly differentiate performing versus non-performing loans as well as any other steps that provide lending institutions with more confidence in assessing CRE loans.

• Make clear public statements encouraging lenders to continue to make credit available for performing assets as a means of restoring confidence and long-term value in the CRE market.

The $6.7 trillion CRE sector supports 9 million American jobs.  If the conditions in the CRE market deteriorate further the negative effects will be significant and widespread, rippling not only through the CRE sector but also the broader economy.  More than $1.4 trillion in commercial mortgages will come due by 2013, and as much as 65% of those deals will have trouble getting refinanced according to recent analysis conducted by Deutsche Bank.  While the Federal Reserve and Treasury Department have acknowledged the ongoing CRE challenges, their actions have so far failed to ease growing concerns among economists and market participants. 

The text of Congressmen Kanjorski and Calvert's letter which is signed by an additional 77 Members of Congress to Secretary Geithner and Chairman Bernanke from February 1 follows: 

Dear Secretary Geithner and Chairman Bernanke:
As you know, the financial crisis continues to have a dampening effect throughout the credit markets.  The commercial real estate (CRE) market, in particular, continues to experience difficult credit accessibility conditions.  Moreover, the scarcity of credit in the $6.7 trillion CRE sector poses a dangerous threat to our financial system just as our economy has begun to show signs of recovery. 

Earlier this month real estate data provider Trepp announced that the delinquency rate for loans underlying commercial mortgage-backed securities (CMBS) ballooned 500 percent in 2009, surpassing 6 percent in December for the first time.  Additionally, the CMBS market has all but shut down over the past year making it more difficult for CRE owners to sell or refinance. 

We appreciate the acknowledgement by federal regulators of this situation in October, when the Board of Governors of the Federal Reserve System, along with the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the National Credit Union Administration, and the Office of Thrift Supervision, issued a policy statement advising financial institutions to extend and/or restructure loans backed by income-producing and/or development properties whenever possible in order to minimize losses as well as to stabilize overall asset values in the communities they serve. 

While the regulatory guidance is a relatively recent occurrence, we remain concerned by early indications that it may not yet be having the desired impact in stabilizing the CRE market. While some properties are in desperate need of modification due to the economic downturn, we are not convinced these loans are being serviced properly or in an efficient manner.  Of even more concern, anecdotal evidence suggests that regulators continue to encourage lenders to write down the value of performing loans, whose payments may well be current and, in some instance, even call the loan.  This further exacerbates the crisis by creating defaults in properties that were able to meet their debt servicing. 

To ensure the recent CRE loan modification guidance will have a positive and stabilizing effect, and to protect the broader economy from further disruptions, we urge you to establish a clear method for measuring and evaluating its effectiveness.  Furthermore, we encourage you to institute metrics to more clearly differentiate performing versus non-performing loans as well as any other steps that provide lending institutions with more confidence in assessing CRE loans.  We also call upon you to make clear public statements encouraging lenders to continue to make credit available for performing assets as a means of restoring confidence and long-term value in the CRE market. 

In sum, we strongly believe that regulators must take continued steps to mitigate ongoing turmoil in the CRE sector before it becomes a full-fledged crisis, forestalls our economic recovery, and possibly requires additional taxpayer-funded capital injections.  Consistent with all applicable law and regulation, thank you for the consideration of our views and your attention to these matters.

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source http://kanjorski.house.gov/

Mortgage Trade Group Reports Increased Commercial Delinquencies

Commercial real estate loans showed continued increases in the rates of delinquencies, the  Mortgage Bankers Association (MBA) reported in a recent survey.

MBA's Commercial/Multifamily Delinquency Report keeps records on delinquencies of commercial real estate loans.


Last quarter borrowers of commercial mortgage backed securities (CMBS) loans topped 4 percent during the quarter.  They also reported that life insurance companies who own commercial loans had loans that fell behind at an increase by a 1/4 of a percent and the 60+ day rate on multifamily loans in Fannie Mae's portfolio increased by 0.11 percentage points to 0.62 percent. 

The increase in delinquency rates is expected to continue throughout 2010 and peaking in 2011.  There is about $300 billion in negative equity overhang that needs be refinanced in 2010 and 2011.  Much of these loans will end up in foreclosure or sold as short sales or modified to either extend the loan maturity or reduce the principal balance.

The government recently announced guidance for prudent commercial loan work outs.  This policy change, while beneficial for some borrowers only serves to extend the problem as banks are unwilling to write down loan balances when their government handlers and owners let them keep the loans on the books at full value in the absence of mark-to-market accounting.

Government Gives The Green Light To Pretend and Extend

Last week government bank regulators officially put their blessing on the practice of "pretending and extending" by issuing guidance to banks that allow them to modify commercial loans without being viewed unfavorably by their regulators. It has become clear to Washington that the next banking crisis and government bailout is right around the corner. They have taken this step to ease the pain that is sure to come.

Analyst estimate that there is about $270 billion in negative equity that has to be resolved in the next few years. This comes from about 1.5 trillion in debt that is maturing on CRE loans. This property can not be refinanced because of the negative equity. If the banks were to foreclose and not modify the loans, they would be forced to show the real value of the property on their books, wiping out the profits they reported earlier this year and causing a liquidity crisis in an already overstressed banking system.

By allowing the banks to modify these loans, the bankers and property owners are allowed to "kick-the-can" down the road some more years.

Prior to this change in guidance, if a bank were to modify a loan, and the loan amount was greater than the market value, the loan would have been considered "adversely credit classified". Such a loan modification wold not have been considered prudent based on sound banking principles. This new guidance allows them to modify the loans even if the loan amount exceeds the market value.

Property owners ought to contact their bank or a professional that specializes in commercial loan modification.

Interagency Bank Regulators Prepare Commercial Modification Guidance

Washington bank regulators are putting the final touches on administrative guidance to banks on commercial loan work outs. The guidance will be designed to allow banks to modify the terms of loans that are maturing or going into default within the framework of the regulatory agencies.

In testimony last week Federal Reserve Gov. Tarullo said the following in a prepared statement.

We are currently in the final stages of developing interagency guidance on CRE loan restructurings and workouts. This guidance supports balanced and prudent decision making with respect to loan restructuring, accurate and timely recognition of losses and appropriate loan classification. The guidance will reiterate that classification of a loan should not be based solely on a decline in collateral value, in the absence of other adverse factors, and that loan restructurings are often in the best interest of both the financial institution and the borrower. The expectation is that banks should restructure CRE loans in a prudent manner, recognizing the associated credit risk, and not simply renew a loan in an effort to delay loss recognition.

Chairman Bair from the FDIC added the following.

In addition, the federal banking agencies will soon issue guidance on CRE loan workouts. The agencies recognize that lenders and borrowers face challenging credit conditions due to the economic downturn, and are frequently dealing with diminished cash flows and depreciating collateral values. Prudent loan workouts are often in the best interest of financial institutions and borrowers, particularly during difficult economic circumstances and constrained credit availability. This guidance reflects that reality, and supports prudent and pragmatic credit and business decision-making within the framework of financial accuracy, transparency, and timely loss recognition.

This guidance is expected soon and it will be posted on this blog as soon as it is available to the public.
Register at www.commercialmodification.com if you are a commercial property owner and would like to have a consultation with an experienced commercial mortgage negotiator.