Category: Capital and Credit

More Than 100 Members of Congress Urge Trump Administration to Aid CMBS Borrowers

Posted on by Trey Jackson

Buildings sky x475w

Commercial mortgage-backed security borrowers could face a historic wave of foreclosures starting this fall, impacting local communities and jobs across the country, without a long-term federal relief plan to combat liquidity deficiencies facing commercial real estate borrowers caused by the COVID-19 pandemic.  That is the bipartisan message sent on June 22 to the Federal Reserve and Trump Administration by more than 100 members of Congress, who are seeking support for real estate borrowers unable to keep up with payments on debt tied to CMBS.  (Wall Street Journal, June 23)

  • The bipartisan letter acknowledges the existence of the Fed’s lending facilities, yet warns about “the looming crisis in commercial real estate adversely impacted by the COVID-19 pandemic, including the $540 billion Commercial Mortgage-Backed Security (CMBS) market that, if left unchecked, may lead to a wave of foreclosures, exacerbating the current downturn in the U.S. economy and ultimately result in permanent job loss in multiple industries and communities across the country.”   (Congressional letter, June 22)
  • The congressional letter also requests the Fed to “devise a relief plan for these borrowers, who through no fault of their own, have experienced a significant drop in revenue on account of the COVID-19 pandemic and related governmental orders.”
  • Rep. Van Taylor (R-TX) is leading the effort to show policymakers the troubles faced by many hotels, shopping malls and office buildings that borrow money in the CMBS market – with some  owners expressing concerns their properties could go to foreclosure.  (Wall Street Journal, June 4)
  • A June 26 letter from four national hotel trade associations to Treasury and the Fed emphasizes the unique pressures they face when pursuing loans using the Fed’s Main Street Lending Program (MSLP), which utilizes strict criteria based on Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA).  
  • The hoteliers detail multiple unnecessary obstacles in accessing desperately needed liquidity and how the industry’s asset-heavy business model shut them out from utilizing the MSLP because of the rigid EBITDA leverage test. “Most hotels are financed via mortgage debt, which means that their total outstanding debt is generally already above the maximum six-times EBITDA threshold established in the Main Street Lending Facility,” the letter notes.
  • The hotel coalition letter also details specific “actions that would allow this critical industry access to liquidity to keep workers employed and help survive the crisis.”
  • The Real Estate Roundtable and Nareit on April 22 wrote to Treasury Secretary Steven Mnuchin and Federal Reserve Chairman Jerome Powell urging that additional measures be adopted to expand the scope of the MSLP to forestall further disruption and economic dislocations in the commercial real estate sector during the pandemic.  (MSLP comment letter, April 22)
  • Previous industry letters to the Fed on March 24 and April 14 addressed the need to broaden the range of a separate credit facility – the Term Asset Backed Securities Facility (TALF).  Those letters requested that TALF eligible collateral include both outstanding (legacy) CMBS, commercial mortgage loans and newly issued collateralized loan obligations.  On April 9, the Fed confirmed that the TALF would be expanded to include triple-A rated legacy non-agency CMBS and loans.

     

  • The Federal Reserve Bank of New York reported this week that the TALF had done $145,213,948 of “commercial mortgage” collateralized financing – legacy CMBS – out of a total of $252,155,890 of total volume, or 57.59%.

  • Overall, the CMBS market over the next two years could see 13,000 loans totaling $148 billion go into default, according to a recent analysis by CoStar Risk Analytics.  (CoStar News, April 30)
  • Additionally Fitch reports that $21 billion of CMBS loans are now in Special Servicing due to the coronavirus pandemic’s impact on tenants and borrowers.  This total is more than double the amount of CMBS loans that went into special servicing all of last year.  (GlobeSt, June 23 and The Real Deal, June 22 and Fitch, June 17)
  • Real Capital Analytics reports that the volume of deals for U.S. commercial properties including, offices and hotels, plummeted 79% in May compared with a year earlier. Deals to purchase hotels plunged 95% in May, the largest drop of any property type. Retail property transactions were down 83%.  (BGov, June 25)

The June 22 congressional letter led by Rep.Taylor requests that Treasury and the Fed urgently consider targeted economic support to bridge the temporary liquidity deficiencies facing all commercial real estate borrowers.  The letter concludes, “We believe an opportunity exists for responsible federal government investment in the commercial real estate market to provide a pathway to stabilize affected properties, the local jobs and businesses they enable, and the neighborhoods they serve.”

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Fed Chairman Testifies Congressional Stimulus Measures Should Continue as Main Street Lending Program Launches; Regulators Support Financing to Non-Bank Lenders

Posted on by Trey Jackson

Federal Reserve Chairman Jerome Powell told House and Senate policymakers this week that economic support for workers and businesses adversely affected by COVID-19 should continue, adding that until COVID-19 is fully contained, “a full recovery is unlikely.” 

  • Powell testified remotely on June 16 before the Senate Banking Committee and on June 17 before the House Financial Services Committee to deliver his Semiannual Monetary Policy Report to Congress.
  • “It would be wise to look at ways to continue to support people who are out of work and also smaller businesses that may not have vast resources for a period of time…so that we can get through this critical phase,” Powell said. “That support would be well placed at this time.” (Wall Street Journal, June 17 and 18)
  • The Fed Chairman acknowledged some economic indicators have suggested “a modest rebound.” He also cautioned, “That said, the levels of output and employment remain far below their pre-pandemic levels, and significant uncertainty remains about the timing and strength of the recovery.”  (BGov, June 17 and Marketwatch, June 18)
  • During his two days of congressional testimony, Powell defended the Fed’s aggressive purchases of assets and corporate bonds.  “I don’t see us as wanting to run through the bond market like an elephant, doing things and snuffing out price signals,” he said. “We just want to be there if things turn bad in the economy.”  (Bloomberg, June 16)
  • Powell delivered his remarks to Congress after stating last week that the central bank will continue buying large quantities of bonds and leave interest rates near zero through at least 2022.”  (USA Today, June 10)
  • The Fed Chairman also warned that the economic downturn could widen inequalities between rich and poor.  “Low-income households have experienced, by far, the sharpest drop in employment, while job losses of African-Americans, Hispanics and women have been greater than that of other groups,” Mr. Powell said. “If not contained and reversed, the downturn could further widen gaps in economic well-being that the long expansion had made some progress in closing.”  (New York Times, June 16)

Former Federal Reserve Chairs Ben Bernanke and Janet Yellen signed a June 16 letter to congressional leaders, endorsed by more than 150 economic scholars, stating, “Congress must pass another economic recovery package before most of the support in the CARES Act expires this summer.  Congress should address this risk, and the already occurring economic damage, by passing, as soon as possible, a multifaceted relief bill of a magnitude commensurate with the challenges our economy faces.” (Washington Center for Equitable Growth, June 16 statement)

Main Street Lending Program Launches

The Real Estate Roundtable and Nareit on April 22 wrote to Treasury Secretary Steven Mnuchin and Federal Reserve Chairman Jerome Powell urging that additional measures be adopted to expand the scope of the Main Street Lending Programs (MSLP) to forestall further disruption and economic dislocations in the commercial real estate sector during the pandemic.  (MSLP letter, April 22)

  • On June 8, The Federal Reserve Board expanded its MSLP to allow more small and medium-sized businesses to be able to receive support. (Roundtable Weekly, June 12)
  • This week, the Federal Reserve’s MSLP opened for lender registration.  The Federal Reserve Bank of Boston announced on June 15 that lenders can find the necessary registration documents and are encouraged to begin making Main Street program loans immediately.  (News Release)
  • The program offers five-year loans with floating rates, with principal payments deferred for two years and interest payments deferred for one year. The loans range in size from $250,000 to $300 million to support a broad set of businesses.

The MSLP intends to purchase 95% of each eligible loan that is submitted to the program after meeting all requirements. The Program will also accept loans that were originated under the previously announced terms, if funded before June 10, 2020. 

Regulators Support Financing to Non-Bank Lenders

Federal banking regulators responded favorably this month to a request from a business coalition, including The Real Estate Roundtable, that requested clarifications about financial institutions working with borrowers impacted by COVID-19. (Regulators April 7 guidance—Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus.)

  • The coalition on May 15 wrote to the regulators requesting clarification that – in addition to traditional loan products – lending and financing arrangements, such as warehouse lines and repurchase agreements secured by multifamily and commercial real estate loans and commercial mortgage-related securities, are within the scope of the guidance.  (Coalition May 15 letter)
  • The coalition’s focus was the debt financing extended by commercial banking institutions to non-bank lenders (NBLs) who, in turn, provide mortgage loan funding to commercial and multifamily property owners of all types.  The coalition received two affirmative replies, from Acting Comptroller of the Currency (OCC) Brian P. Brooks on June 4 – and on June 18 from Federal Deposit Insurance Corporation (FDIC) Chairman Jelena McWilliams.

The Roundtable’s Real Estate Capital Policy Advisory Committee (RECPAC) continues to work to address the current crisis, pursuing measures that will enhance liquidity and capital formation, and to help develop an effective insurance program that provides the economy with the coverage it needs to address future pandemics. 

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The Fed Expands Main Street Loan Program to Reach More Businesses; Fed Chair Powell Urges Lawmakers to Take Further Fiscal Measures

Posted on by Trey Jackson

Fed Chair Jay Powell

The Federal Reserve yesterday announced an expansion of its $600 billion Main Street Lending Program (MSLP) to help credit flow to small and medium-sized businesses that were in sound financial condition before the pandemic.  (Fed news release and Wall Street Journal, April 30)

  • As part of its broad effort to support the economy, the Fed’s action will assist businesses that were either unable to access the Small Business Administration’s (SBA) Paycheck Protection Program (PPP) or that require additional financial support after receiving a PPP loan. It is important to note that MSLP loans (as opposed to PPP loans) are not forgivable.
  • Three separate facilities make up the MSLP: (1) the Main Street New Loan Facility (MSNLF); (2) the Main Street Priority Loan Facility (MSPLF); and (3) the Main Street Expanded Loan Facility (MSELF). (Steptoe, comparison chart, May 1)

The changes include:

• Creating a third loan option, with increased risk sharing by lenders for borrowers with greater leverage;

• Lowering the minimum loan size for certain loans to $500,000 from $1 million; and

• Expanding the pool of businesses eligible to borrow for businesses that may already have significant debt. 

  • Businesses with up to 15,000 employees or up to $5 billion in annual revenue are now eligible, compared to the initial terms, which were for companies with up to 10,000 employees and $2.5 billion in revenue.
  • According to Steptoe, each MSLP facility uses the same borrower eligibility criteria and have similar commercial components – including the same term (four years), interest rate (LIBOR plus 3%), deferral of principal and interest for one year, and permit prepayment without penalty.  For lenders, the risk retention requirement varies: 5% for the MSNLF and MSELF, and 15% for the MSPLF.
  • The Roundtable and Nariet on April 22 wrote to Treasury Secretary Steven Mnuchin and Fed Chairman Jay Powell to request specific changes that would enable CRE borrowers to more efficiently access the Main Street New Loan Facility (MSNLF) and Main Street Expanded Loan Facility (MSELF).  (Joint letter, April 22)
  • The joint industry letter addresses (1) Underwriting/ Leverage Limitations/ Loan Size, (2) Distributions/ REITs (3) Loan Terms (4) Applicable Interest Rate Index and (5) Program Timing.

The Fed states that a start date will be announced soon for the MSLP. (Main Street Lending Program FAQs, April 30)

Fed Chairman Powell Recommends More Fiscal Response

Federal Reserve Chair Jay Powell on Wednesday said concerns about the rising national debt should not limit the federal government’s efforts to counter the coronavirus pandemic’s economic impact.

  • After announcing the Fed would leave interest rates near zero, Powell included a rare commentary on fiscal policy, urging lawmakers to pursue do more to support the economy. (Bloomberg, April 29)
  • “This is the time to use the great fiscal power of the United States to do what we can to support the economy,” Powell said.  “The time will come again and reasonably soon I think where we can think about a long-term way to get the fiscal house in order, and we absolutely need to do that … But in my personal view, this is not the time to let that concern … get in the way of us winning this battle,” he stated.  (Video and statements of The Fed’s news conference)
  • Powell added, “I would say that it may well be the case that the economy will need more support from all of us if the recovery is to be a robust one.”  He also noted that “our credit facilities are wide open. We can do more on that front.” (MarketWatch, April 29)
  • The Fed Chairman issued a somber warning of the long-term consequences of the coronavirus economic crisis.  “These thousands of great medium- and small-size businesses are worth so much more to the economy than the sum of their net assets,” Powell said.  (Wall Street Journal, April 29)
  • He added, “It is heartbreaking, frankly, to see that all threatened now.  Everyone is suffering here, but those who are least able to bear it are the ones who are losing their jobs and losing their incomes and have little cushion to protect them.”

Powell added, that the Fed will use its powers “forcefully, proactively, and aggressively until we’re confident that we’re solidly on the road to recovery.”  (Video and statements of The Fed’s news conference)

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The Roundtable and Nareit Request Expansion of The Fed’s “Main Street” Lending Programs to Prevent Further Disruption to CRE Markets

Posted on by Trey Jackson
Facade on the Federal Reserve Building in Washington DC

The scope of the Federal Reserve’s “Main Street” Lending Programs should be expanded to forestall further disruption and economic dislocations in commercial real estate, according to an April 22 letter sent to Treasury Secretary Steven Mnuchin and Fed Chairman Jay Powell from The Real Estate Roundtable and Nareit. 

  • This week’s letter requests specific changes to the Fed’s Main Street New Loan Facility (MSNLF) and Main Street Expanded Loan Facility (MSELF), both established on April 9.
  • The April 22 letter emphasizes that real estate borrowers, owners and managers now face existential challenges.  The letter states, “At a time when Main Street needs credit, it cannot get it because the secondary markets that provide liquidity to Main Street lenders are clogged.”
     
  • The Roundtable and Nareit urge specific changes to enable CRE borrowers to access the Main Street New Loan Facility (MSNLF) and Main Street Expanded Loan Facility (MSELF).  The joint letter addresses (1) Underwriting/ Leverage Limitations/ Loan Size, (2) Distributions/ REITs (3) Loan Terms (4) Applicable Interest Rate Index and (5) Program Timing.
  • Previous industry letters to the Fed on March 24 and April 14 addressed the need to broaden the range of a separate credit facility – the Term Asset Backed Securities Facility (TALF).  Those letters requested that TALF eligible collateral include both outstanding (legacy) CMBS, commercial mortgage loans and newly issued collateralized loan obligations.  On April 9, the Fed confirmed that the TALF would be expanded to include triple-A rated legacy non-agency CMBS and loans.
  • Since then, as rental income has diminished, conditions in the commercial real estate sector have deteriorated further, causing real estate credit and capital markets to stall.  Therefore, it is important for the Main Street credit facilities to help bring renewed liquidity to commercial and multifamily real estate. 
  • The CARES Act permits financially stressed tenants in properties financed by federally backed loans to postpone rent payments, while several states and municipalities are currently considering additional measures to afford tenants rent forbearance. 

As the Treasury and Fed continue to take positive actions benefiting liquidity for the nation’s economy, the Main Street Lending Programs can be enhanced to support commercial real estate. 

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Industry Requests TALF Expansion to Include a Broader Range of Commercial Real Estate Assets, CMBS; Congressional Efforts Seek to Address Pandemic Business Interruption Insurance Policies

Posted on by Trey Jackson

U.S. Capitol Dome with flag

Six real estate industry organizations, including The Real Estate Roundtable, wrote to federal regulators on April 14 to communicate the urgent and growing need to include a wider range of investment grade commercial real estate debt instruments in the Fed’s Term Asset-Backed Securities Loan Facility (TALF) credit facility. Currently, TALF eligible collateral is limited to triple-A rated tranches of outstanding (legacy) commercial mortgage backed securities (CMBS), commercial mortgage loans and newly issued collateralized loan obligations.  (TALF letter, April 14)

  • The TALF, previously used during the 2008 financial crisis, was relaunched on March 23 in response to the Covid-19 crisis to “enable the issuance of asset-backed securities (ABS) backed by student loans, auto loans, credit card loans, loans guaranteed by the Small Business Administration (SBA), and certain other assets.”  (Fed news release, March 23)
  • Immediately after the TALF was relaunched, an industry coalition on March 24 urged the Federal Reserve, Treasury, and Federal Housing Finance Agency to expand the TALF to include non-agency CMBS – including legacy private-label conduit and single-asset single borrower (SASB) assets. The coalition, which includes The Roundtable, stated the inclusion of private-label assets would stabilize asset prices and shore up the balance sheets of market participants.  (Joint Industry letter, March 24)
  • On April 9, the Federal Reserve announced that it would broaden the range of TALF eligible collateral to include triple-A rated tranches of both outstanding (legacy) CMBS, commercial mortgage loans and newly issued collateralized loan obligations. However, the updated term sheet excludes single-asset single borrower (SASB) CMBS and commercial real estate collateralized loan obligations (CRE CLOs).
  • According to the April 14 letter, “Commercial and multifamily real estate assets that were perfectly healthy just weeks ago now face massive stress and a wave of payment and covenant defaults. As the economy shuts down and American workers face massive layoffs, it is now clear that many tenants will not be able to meet their debt obligations. This will soon cascade through the over $4 trillion commercial real estate debt market and exponentially increase the pressure on the financial system.”

To bolster the health of the CMBS market, the industry coalition recommends the following investment grade instruments be added as eligible TALF assets:

  • Legacy and new issuance, investment grade, non-agency CMBS;
  • Investment grade Agency Credit Risk Transfer (CRT) securities;
  • Legacy and new issuance Single-Asset, Single-Borrower (SASB) CMBS;
  • Commercial real estate (CRE) collateralized loan obligations (CLOs); and
  • U.S. commercial real estate (CRE) first mortgage loans (which have capital charges equivalent to investment grade/NAIC CM 1 and 2 and loans in good standing, or can obtain a rating agency letter confirming that the pledged loan is rated at least single-A).

The coalition letter explains that a broader, deeper, and more effective TALF would complement and minimize the direct lending that will be required of the Federal Reserve’s other credit facilities, which are supported by the $454 billion provided under the CARES Act.

The coalition also notes that expansion of the TALF’s scope and the Fed’s further support of the highly illiquid non-bank financial sector would forestall further disruption and economic dislocations in the commercial real estate sector.

Pandemic Risk Insurance Coverage

Two preliminary legislative proposals in Congress seek to address increasing requests for the property and casualty industry to extend business interruption (BI) insurance policies to cover pandemic risk related claims – and the general lack of pandemic risk commercial insurance availability.

  • A recent effort in the House led by Rep. Carolyn Maloney (D-NY) seeks to develop the Pandemic Risk Insurance Act of 2020 (PRIA), which would create the Pandemic Risk Reinsurance Program. PRIA would seek to create “a system of shared public and private compensation for business interruption losses resulting from future pandemics or public health emergencies.”  (Rep. Maloney Dear Colleague letter, April 10 Roundtable Weekly)
  • Rep. Maloney’s pandemic program would be prospective – not retrospective.  “Like the Terrorism Risk Insurance Act (TRIA), the federal government would serve as a backstop to maintain marketplace stability and to share the burden alongside private industry,” according to Maloney.
  • In the Senate, Sen. Steve Daines (R-MT) is working on a broader concept that is both retrospective and prospective.  Known as the  Workplace Recovery Act, the measure would provide direct retrospective reimbursement through a Federal Automated Security Trust program to every business for operating losses, limited to 90% of past revenues.
  • The Senate proposal would also establish a new government-funded business interruption insurance add-on for every privately administered commercial insurance plan to protect against future national pandemics.
  • The National Association of Insurance Commissioners issued a statement recently warning that such efforts “would create substantial solvency risks for the sector, significantly undermine the ability of insurers to pay other types of claims, and potentially exacerbate the negative financial and economic impacts the country is currently experiencing.” (NAIC statement, March 25)

As with terrorism risk insurance, The Roundtable is working with policymakers and stakeholders to help develop an effective risk insurance program that addresses the economic impact of the current pandemic crisis and provides the economy with the coverage it needs to deal with future pandemic risks. 

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Federal Reserve Launches $2.3 Trillion in New Credit Facilities, Expands TALF to Existing AAA CMBS and Commercial Mortgage Loans

Posted on by Trey Jackson

Federal Reserve Building DC

The Federal Reserve yesterday announced the establishment of $2.3 trillion in new credit lending facilities in an effort to restore liquidity and steady economic shocks from the Covid-19 pandemic. These actions include the expansion of its Term Asset Lending Facility (TALF) to include AAA-rated commercial mortgage-backed securities (CMBS) and commercial mortgages as eligible collateral.  (Fed news release and TALF term sheet, April 9)

  • The Fed’s Term Asset Lending Facility – previously used during the 2008 financial crisis and relaunched on March 23 – will now accommodate non-agency CMBS issued before March 23, 2020; any issuance after that date is ineligible.  All collateral must also be AAA-rated and located in the U.S or its territories. The TALF will support up to $100 billion in credit, which is backed by $10 billion in credit protection from the Treasury Department. (TALF term sheet)
  • Under the TALF, static collateralized loan obligations (CLOs) are also eligible collateral, yet CMBS securities related to single-asset single-borrower (SASB) and commercial real estate collateralized loan obligations (CRE CLOs) are not eligible at this time.
  • The terms and conditions for commercial mortgages to be included as eligible collateral in the TALF have yet to be announced. (TALF term sheet, April 9)
  • While the Fed’s recent actions are welcome, an industry coalition, including The Roundtable, continues to advocate for the inclusion of CRE collateralized loan obligations (CLOs) and Single Asset, Single Borrower (SASB) CMBS in the TALF. (Joint Industry letter, March 24)
  • The Federal Reserve also announced $600 billion for purchasing loans in two new “Main Street” facilities. The Main Street New Loan Facility (MSNLF) and the Main Street Expanded Loan Facility (MSELF), which will purchase 95% participations in new 4-year loans to businesses that have up to 10,000 employees or up $2.5 billion in 2019 annual revenue. Borrowers with more than 10,000 employees but less than $2.5 billion in 2019 revenue may potentially qualify.
  • The Fed’s new credit facilities also include $500 billion for short-term municipal bonds and additional funding for the central bank’s purchases of larger investment grade businesses and capital markets securities.
  • Fed Chair Jay Powell commented on yesterday’s actions during a webinar.  “Many of the programs we are undertaking to support the flow of credit rely on emergency lending powers that are available only in very unusual circumstances—such as those we find ourselves in today—and only with the consent of the Secretary of the Treasury.”  He added, “I would stress that these are lending powers, not spending powers.  We will continue to use these powers forcefully, proactively, and aggressively until we are confident that we are solidly on the road to recovery.”
  • During Q&A after his remarks, Chairman Powell acknowledged severe liquidity concerns faced by mortgage servicers as the pandemic has resulted in widespread forbearance on mortgage payments.  Powell referred to the mortgage market as “at the very center of our economy” and stated, “We’re watching carefully the situation with the mortgage servicers and I will just tell you that we certainly have our eyes on that as a key market.”  (S&P Global, April 9)
  • On April 4, a broad coalition financial industry and affordable housing advocates, including The Roundtable, urged government regulators to provide a source of liquidity to mortgage servicers in need of additional capacity to support homeowners and renters impacted by COVID-19. (Coalition mortgage servicers letter)
  • While this week’s actions could provide up to $2.3 trillion in loans to support the economy, the Treasury and the Fed have not yet committed the full $454 billion allocated for credit support to lending facilities under the recently-enacted Coronavirus Aid, Relief, and Economic Security Act (CARES).  Therefore, more loan programs or an expansion of these now existing loan programs could be forthcoming. (Roundtable Weekly, March 27).
  • This week’s massive Fed intervention also includes the creation a Paycheck Protection Program Lending Facility (PPPLF) to support the Small Business Administration’s Paycheck Protection Program (PPP) – established under the CARES Act.  This facility will extend credit to eligible financial institutions that originate PPP loans to small businesses, taking the loans as collateral at face value.  (See story below on The Roundtable’s 8-point reform plan for the PPP).
  • Yesterday’s actions by the Fed recognize that businesses vary widely in their financing needs – and input from lenders, borrowers, and other stakeholders until April 16 is welcome through a Federal Reserve feedback form.

The Fed’s response to the pandemic is the focus of an April 8 Chicago Economic Club discussion moderated by Roundtable Chair Debra Cafaro (Chairman and Chief Executive Officer, Ventas, Inc.) with Charles Evans, President and CEO of the Federal Reserve Bank of Chicago. (Watch interview on Youtube)

As part of the rapidly evolving developments related to the COVID-19 pandemic, The Real Estate Roundtable continues to be proactive on all policy fronts in Washington to provide insight and recommendations to lawmakers and regulators.  The Roundtable depends on the input and expertise of its dedicated members, including those serving – now remotely – on the organization’s Real Estate Capital Policy Advisory Committee (RECPAC).

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Roundtable Requests Industry Regulators to Suspend Mark-To-Market Accounting Rules and Suspend New CECL Accounting Standard to Prevent Exacerbating Economic Crisis

Posted on by Trey Jackson

FASB logo

The Real Estate Roundtable this week submitted two requests to the Financial Accounting Standards Board (FASB) and securities regulators to prevent exacerbating the destructive economic repercussions of the coronavirus crisis. The first letter urges the immediate suspension of “mark-to-market” accounting rules (FAS 157).  The second letter encourages the expansion a provision in the CARES Act that suspends the new Current Expected Credit Losses (CECL) for banks – by including non-banking financial institutions and insurance companies. (Mark-to-Market letter, March 31 and CECL letter, April 1)

  • On March 31, The Roundtable addressed the mark-to-market – or “fair value” – rules in a comment letter to regulators.  Measuring an asset at fair value records it at a price it would obtain in an orderly market instead of the asset’s original purchase cost.  During unfavorable or volatile markets, the method does not accurately represent an asset’s true value.  (BGov, March 31)
  • When the market-based measurement no longer accurately represents the underlying asset’s true value, a company should not be forced to calculate the selling price of these assets or liabilities during unfavorable or volatile times, such as today’s COVID-19 crisis.
  • The Roundtable letter explains that the mark-to-market rules will further exacerbate the growing financial crisis. As many tenants will not be able to meet their debt obligations, liquidity in credit and capital markets has frozen, and the value of asset-backed securities collateral (including commercial mortgage-backed securities, or CMBS) is now set to decline.
  • “In light of these events, it is important for the Financial Accounting Standards Board (FASB) to take action to immediately suspend mark-to-market accounting. It is simply not possible to properly value assets in illiquid and non-functioning markets,” the letter states.
  • During the financial crisis of 2008-2009, the FASB voted on and approved new guidelines that  allowed for asset valuation to be based on a price that would be received in an orderly market rather than a forced liquidation.  The Roundtable letter encourages the FASB to take similar action now.
  • On April 1, The Roundtable wrote to the FASB and the Securities and Exchange Commission (SEC) urging the regulators to expand the suspension of  the new Current Expected Credit Losses (CECL) accounting standard during the current COVID-19 crisis beyond banks – to include all companies, including non-bank financial companies and insurance companies. (Roundtable CECL letter, April 1)
  • The CARES Act allows federally insured financial institutions to delay the implementation of the CECL standard.  Additionally, federal banking regulators recently issued an interim final rule allowing lenders to delay the estimated impact on regulatory capital. 
  • The new CECL standard changes the way banks calculate reserves on assets, requiring banks and nonbanking finance companies to estimate the expected loss over the life of a loan. For real estate, there is concern that this new standard will exacerbate the current liquidity crisis.
  • While CECL is expected to have the greatest impact on banks (which typically have extensive financial instrument portfolios), even non-banking entities are very likely to hold financial instruments within the scope of CECL.
  • U.S. commercial and multifamily real estate encompasses approximately $16 trillion in income-producing assets, supported by over $4 trillion in debt – mostly provided by commercial banks, life companies and commercial mortgage backed securities (CMBS).
  • Therefore, it is important to apply this CECL suspension to non-bank finance companies, including life companies who also play a significant role in providing essential liquidity to the commercial real estate industry. The Roundtable letter encourages the FASB to suspend application of the new CECL standard for all companies.  

The Roundtable’s Real Estate Capital and Credit Policy Advisory Committee (RECPAC) will continue to provide expertise and insight into policy steps that will help support the restoration of necessary market liquidity resulting from the COVID19 crisis. 

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Federal Reserve Expands Emergency Capital Liquidity Facilities; Industry Coalitions Urge Inclusion of Non-Agency CMBS & Relief for COVID-19 Loan Modifications

Posted on by Trey Jackson

Fed Reserve WikiCommons x475

The Federal Reserve took unprecedented actions this week to aggressively support markets in an attempt to contain the economic damage of the coronavirus pandemic – announcing it is “committed to using its full range of tools to support households, businesses and the U.S. economy overall in this challenging time.”  (New York Times, March 23)

  • After the Fed last week cut the federal fund rate to zero and re-started its Quantitative Easing program, it established several new credit facilities this week aimed at injecting a massive liquidity flow to various sectors of the economy.  (Roundtable Weekly, March 20)
  • According to a March 23 Fed statement, the Federal Open Market Committee (FOMC) “will purchase Treasury securities and agency mortgage-backed securities in the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions and the economy.  In addition, the FOMC will include purchases of agency commercial mortgage-backed securities in its agency mortgage-backed security purchases.”
  • Loans, loan guarantees, and other investments will be made available by the Fed through its recently established credit facilities:
  1. Commercial Paper Funding Facility (CPFF)
  2. Primary Dealer Credit Facility(PDCF)
  3. Money Market Mutual Fund Liquidity Facility(MMLF)
  4. Primary Market Corporate Credit Facility(PMCCF)
  5. Secondary Market Corporate Credit Facility(SMCCF)
  6. Term Asset-Backed Securities Loan Facility(TALF) 
  7. Main Street Business Lending Program (pending establishment)

The Fed’s new credit facilities will be backed by the Treasury Department’s Exchange Stabilization Fund, which was allocated $454 billion in the congressional coronavirus economic rescue package signed by President Trump today.

TALF, Private-Label CMBS, and Mortgage Servicers Task Force

The Fed’s Term Asset-Backed Securities Loan Facility (TALF) credit facility, previously used during the 2008 financial crisis, was relaunched on March 23 to “enable the issuance of asset-backed securities (ABS) backed by student loans, auto loans, credit card loans, loans guaranteed by the Small Business Administration (SBA), and certain other assets.”  (Fed news release, March 23)

  • This week also saw two key actions affecting Agency commercial mortgage-backed securities (CMBS) by the Fed, Treasury and the Federal Housing Finance Agency (FHFA), which regulates Fannie and Freddie.  Agency CMBS are securities backed by mortgages on commercial and multifamily properties guaranteed by Ginnie Mae, Fannie Mae or Freddie Mac.
  • First, the Fed announced it extended its support of financial markets to include agency CMBS, retaining BlackRock Financial Markets Advisory to begin purchasing securities today.
  • Second, FHFA authorized Fannie Mae and Freddie Mac to provide agency CMBS investors with short-term financing of their positions, providing liquidity to these investors.
  • While the TALF now includes Agency CMBS, non-agency CMBS and other certain other commercial assets are currently excluded.  (GlobeSt. Fed Announces Unlimited Bond Purchases, Will Buy Apartment CMBS, March 23)
  • An industry coalition, including The Real Estate Roundtable, on March 24 urged the Federal Reserve, Treasury, and Federal Housing Finance Agency to expand the TALF to include non-agency CMBS – including legacy private-label conduit and single-asset single borrower (SASB) assets. The coalition states the inclusion of private-label assets would stabilize asset prices and shore up the balance sheets of market participants.  (Joint Industry letter, March 24)

  • The letter notes, “CMBS is a visible proxy for real estate loans, where banks, life companies, and other lenders have significant exposure.”  The coalition letter also explains that investors in both Agency and private-label CMBS include public pension funds for many employees at the frontlines of the crisis (hospitals, firefighters, police, and teachers).
  • Separately, Treasury Secretary Steven Mnuchin on March 26 said he has formed a task force of U.S. financial regulators on how to respond to a severe liquidity shortfall facing mortgage service firms, who collect monthly payments from borrowers and facilitate payments to mortgage bond investors.  (GlobeSt, March 27)
  • Most mortgage servicers are nonbank firms that do not currently have access to emergency lending from the Federal Reserve.  Despite an anticipated wave of forbearance requests from borrowers, mortgage servicers remain obligated to advance funds to investors – the owners of most of the nation’s $11 trillion residential mortgages. The Mortgage Bankers Association estimates that if 25% of borrowers ask to postpone their payments for six months, the cost could exceed $75 billion.  (Bloomberg Law, March 26) 

Secretary Mnuchin has asked the task force of the Financial Stability Oversight Council, which also includes the heads of the Federal Reserve and Securities and Exchange Commission, for recommendations by March 30. (Wall Street Journal, March 26)

Relief from Troubled Debt Restructuring (TDR) Label

The Fed joined the Federal Deposit Insurance Corporation (FDIC) and other banking regulators in a March 22 Interagency Statement that encourages banks to avoid automatically categorizing short-term loan modifications linked to the COVID-19 crisis as a Troubled Debt Restructuring (TDR).  The joint statement also encourages borrowers experiencing cash flow problems due to the pandemic to reach out to any FDIC-insured lenders about modifying their loans, without adverse consequences to the bank or the borrower that traditionally come with the TDR label.

  • According to the Statement, “Short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs.  This includes short-term — for example, six months — modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant.”
  • A separate coalition that also includes The Real Estate Roundtable wrote to the National Association of Insurance Commissioners on March 25 to request clarifying guidance that would relieve mortgage loan modifications linked to COVID-19 from the classification as a TDR.

  • The letter informed NAIC, “Servicers for mortgages held by life insurance companies are fielding pressing calls from borrowers seeking temporary relief due to the impact of COVID-19.” 
  • The coalition emphasizes that clarifying guidance from NAIC will “better enable life insurance companies to work prudently and swiftly with borrowers; mitigate COVID-19 impacts on borrowers, life insurance companies and the nation’s economy; and ultimately lead to improved loan performance and reduced credit risk.” (View Letter)
  • Language that supports the efforts of regulators and lenders to work on loan modifications with borrowers affected by the pandemic is also included in the $2 trillion dollar coronavirus response legislation.
  • Real Estate Roundtable Jeffrey DeBoer commented on how lenders may react to in an article yesterday in GlobeSt entitled, “Where CRE Liquidity Stands Today.”  
  • “Congress can’t tell them what to do, but the FDIC has issued a statement giving banks more leeway in modifying loans without having to label the loan as a TDR. There are efforts underway to get the NAIC to issue a similar statement for life companies. All of this is positive,” DeBoer said. “And in turn, we are trying to make sure when property owners try to meet their obligation their lenders will allow flexibility.”
  • On March 24, The Real Estate Roundtable called on all owners and operators of business and residential rental real estate to voluntarily, proactively work in a positive and constructive manner with their COVID-19 impacted tenants respecting current rent obligations.  (Roundtable news release, March 24)

As fast-moving coronavirus developments continue to roil markets, The Roundtable’s Real Estate Capital and Credit Policy Advisory Committee (RECPAC) will continue to provide constructive recommendations as The Roundtable continues to communicate the industry’s ongoing concerns about the crisis to policymakers and regulators.

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Central Banks Expand Liquidity As Coronovirus Economic Toll Expands; Trump Meets With Hotel CEOs

Posted on by Trey Jackson

Fed Reserve WikiCommons x475

The Federal Reserve and central banks around the world conducted urgent large-scale interventions in capital markets this week to ease strains on economies and investors as the economic toll of the coronavirus expanded dramatically in the U.S.

  • The Fed, the Bank of England, the European Central Bank and central banks in Asia pumped large amounts of liquidity into markets, cut benchmark interest rates and engaged in new bond-buying programs to help arrest the sudden drop in business activity and increase in unemployment rates.  (Wall Street Journal, March 20 and Fed news releases)
  • Fed Chairman Jay Powell said on Sunday, “We are prepared to use our full range of tools to support the flow of credit to households and businesses.”  (Reuters, March 15 and Washington Post, March 20)
  • Additionally, the central bank announced an effort to improve the liquidity of U.S. dollar swaps by increasing the frequency of 7-day maturity operations from weekly to daily – done in coordination with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank (Fed Press release)
  • The Fed also announced the creation of numerous lending facilities to backstop the credit market, including the:
    • Money Market Mutual Fund Liquidity Facility (Fed Press release) 
  • To support the issuance of more debt by states and cities in the coming weeks and months, the Fed today announced an expansion of its asset purchases to include municipal bonds – through the Money Market Mutual Fund Liquidity Facility. (Fed Press release).
  • Market interventions by other nations this week included The European Central Bank (ECB), which on March 18 launched an €750 billion ($820 billion) emergency private and public bond program.  Today, Christine Lagarde, President of the ECB, addressed the program’s specifics and other actions the ECB will take.  “We are fully prepared to increase the size of our asset purchase programmes and adjust their composition, by as much as necessary and for as long as needed. We will explore all options and all contingencies to support the economy through this shock,” Lagarde said.  (ECB Blog, March 20)

Hotels and Malls Hit By Coronavirus Economic Shocks

The economic shockwaves of the coronavirus pandemic are quickly affecting operations of major U.S. hotel chains and other aspects of the commercial real estate industry.

  • CEOs of Marriott, Hilton, Hyatt and other chains met Tuesday with President Donald Trump to describe the virus’ impact.
  • Former Roundtable Chairman and Hilton Worldwide CEO Chris Nassetta told the president that Hilton plans to temporarily suspend operations at most of its hotels located in major U.S. cities – and that he expects global occupancy rates to fall to as low as 10%.   (View meeting of Hotel CEOs and President Trump, with transcript, on C-Span)
  • Nassetta added that in Hilton’s 100-year history, it has never closed a hotel except for remodeling or demolition.  “I’ve been doing this for 35 years. Never seen anything like it,” Nassetta told Trump.
  • At the meeting’s conclusion, United States Travel Association President Roger Dow told President Trump, “I would like to put together what everyone has said here.  The numbers are $355 billion is what we’re going to lose, 4.6 million employees will be out of work, and we’re predicting unemployment will go to 6.3 percent.  So, it’s now — it’s serious.” (C-Span video and transcript)
  • Another CRE sector deeply affected by the outbreak is retail.  On March 18, Simon Property Group announced it would temporarily close all of its retail properties, including Malls, Premium Outlets and Mills in the U.S until March 28 to address the spread of COVID-19.  (Simon statement)

The Roundtable is in contact with its membership to assess the widespread repercussions of the crisis and will report its findings to policymakers to help formulate targeted policies to combat the pandemic.

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Central Banks Around the World Move to Combat Economic Fallout of Coronavirus

Posted on by Trey Jackson

WHO world map coronavirus

Central banks around the world took dramatic action this week to mitigate the economic fallout of the coronavirus pandemic. 

  • The Federal Reserve Bank of New York announced a bold move yesterday to pump a series of cash injections totaling more than $1.5 trillion of temporary market liquidity into markets and begin buying longer-term bonds.  
  • This week’s actions are designed to mitigate investor fears as the Dow Jones industrial average plummeted more than 2,300 points yesterday – a 10 percent drop that is the worst one-day decline since the 1987 crash.  (Wall Street Journal and Federal Reserve Bank of New York, March 12)
  • “These changes are being made to address highly unusual disruptions in Treasury financing markets associated with the coronavirus outbreak,” the New York Fed said in its March 12 announcement.  The short-term funding move was directed by Fed Chairman Jerome Powell, in consultation with the rate-setting Federal Open Market Committee. (Los Angeles Times, March 12)
  • The Fed’s substantial intervention opens the door to a resumption of bond-buying stimulus known as quantitative easing used during the financial crisis of 2008.
  • U.S. central bankers meet are scheduled to meet next week in Washington, when they could move to slash rates again after implementing an emergency half-percentage-point cut last week.
  • Economists widely expect another quarter-point rate cut at the Fed’s March 18 meeting, if not more, from the current range of 1% to 1.25% (Roundtable Weekly, March 6 and BGov, March 12)

European Central Bank and Individual Nations Respond

After the US Federal Reserve and Bank of England announced aggressive rate cuts in recent days to stimulate their respective economies, the European Central Bank (ECB) left its key interest rate unchanged at minus 0.5%. 

  • Instead, ECB President Christine Lagarde said the central bank would move forward with its $2.9 trillion (2.6 trillion euro) bond purchase program, while making bank loans available at rates as low as minus 0.75%.  (ECB press release, March 12)
  • In her March 12 statement, Lagarde noted the ECU will “add a temporary envelope of additional net asset purchases of 120 billion euros ($135.28 billion) until the end of the year, ensuring a strong contribution from the private sector purchase programmes.”  She also stated, “We welcome the commitment of the euro area governments and the European Institutions to act now, strongly, and together in response to the repercussions of the further spread of the coronavirus.” (Video of ECU press conference, March 12)
  • After Lagarde’s announcement, the spread between German and Italian government bonds increased to more than 2.5 percent as Italy battles a widespread outbreak.
  • Today, the ECB’s chief economist Phillip Lane sought to further reassure European markets.  In a blog post, Lane wrote, “We clearly stand ready to do more and adjust all of our instruments, if needed to ensure that the elevated spreads that we see in response to the acceleration of the spreading of the coronavirus do not undermine transmission [of monetary policy].”
  • British regulators temporarily banned short selling on Italian and Spanish after regulators in Italy and Spain did the same to stem the market slide.  (Financial Conduct Authority  and Reuters, March 13)
  • Germany’s state development bank KfW announced today it will provide a massive expansion of loans to companies in need and defer billions of euros in tax payments.  Olaf Scholz, the German finance minister, told reporters in Berlin, “This is the bazooka, and we will use it to do whatever it takes.”  He added there was “no upper limit on the amount of loans KfW can issue.” (rfi and Financial Times, March 13)
  • German Chancellor Angela Merkel stated yesterday, “We are in a situation that is unusual in every respect and I would say more unusual than at the time of the banking crisis because we are dealing with a health problem, a health challenge for which scientists and medicine does not yet have an answer,” Merkel said. (Reuters, March 12)
  • Central banks in Australia, Japan, South Korea, Indonesia, Norway and Sweden also announced stimulus measures today to relieve the strain on their banking systems. 
  • In China, The People’s Bank on Friday said it will release nearly $80 billion in liquidity into its financial system to assist loans to small businesses and low-wage individuals as the country continues to contend with the coronavirus.  (Wall Street Journal, March 13)
  • The US Federal Reserve’s first emergency move on March 3 to contain the coronavirus economic fallout was to cut interest rates half a point. The move came shortly finance ministers and central bankers from the Group of 7, which includes Britain, Canada, France, Germany, Italy and Japan, held a conference call.

On March 5, Federal Reserve Bank of New York President John C. Williams confirmed that the international community of central bankers are working together to stem the economic shock of the coronavirus. “… policy actions by central banks are clear indications of the close alignment at the international level,” Mr. Williams said.  (NYTimes, March 5)

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