Category: Capital and Credit

Banking Regulators Invite Comments on Proposed Rule for High Volatility Commercial Real Estate (HVCRE) Loans

Posted on by Trey Jackson

Three federal banking agencies on Tuesday invited public comment on a proposal to modify capital rules for high volatility commercial real estate (HVCRE) exposures – as required by Sec. 214 of the bipartisan Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155).  (Roundtable Weekly, May 25)

Three federal banking agencies on Sept. 18, 2018 invited public comment on a proposal to modify capital rules for high volatility commercial real estate (HVCRE) exposures.

  • Following the enactment of S. 2155 on May 24, federal regulatory agencies were tasked with developing a rule to clarify the treatment of High Volatility Commercial Real Estate acquisition, development, or construction (HVCRE ADC) loans in accordance with the new statute. 
  • The law’s changes to the HVCRE capital rules are aimed at clarifying and promoting sustainable acquisition, development and construction and lending by addressing key deficiencies in the agencies’ prior regulations governing the criteria for HVCRE or HVADC loans. (Roundtable HVCRE Comment Letter, March 2) 
  • The proposal by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation also asks for comment on certain terms contained in the revised definition of high volatility commercial real estate.
  • The changes, when finalized, would apply to all banking organizations subject to the agencies’ capital rules. Comments will be accepted for 60 days after publication in the Federal Register.  

Since 2015, The Roundtable’s HVCRE Working Group and industry coalition partners have played a key role in advancing specific reforms to the HVCRE Rule and will develop a comment letter to the agencies in response to the current proposal.

 

Top Republican Unveils Bipartisan Housing Finance Reform Bill

Posted on by Trey Jackson

House Financial Services Committee Chairman Jeb Hensarling (R-TX) on Sept. 6 unveiled a sweeping proposal to overhaul the housing finance system in the United States during a hearing entitled, “A Failure to Act: How a Decade without GSE Reform Has Once Again Put Taxpayers at Risk.”

House Financial Services Committee Chairman Jeb Hensarling (R-TX) on Sept. 6 unveiled a sweeping proposal to overhaul the housing finance system in the United States during a hearing entitled, “A Failure to Act: How a Decade without GSE Reform Has Once Again Put Taxpayers at Risk.” 

(Hensarling statement on YouTube). 
  • This fall marks ten years since the height of the financial crisis, when the Government-Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac were placed into government conservatorship on September 6, 2008.  According to a committee summary of yesterday’s  hearing, “The subsequent financial bailout of Fannie Mae and Freddie Mac has required over $190 billion in taxpayers contributions to date, and taxpayers remain explicitly obliged to provide over $254 billion should future losses materialize.  Never intended as a permanent solution, the conservatorship continues ten years later.” 
  • The discussion draft of the “Bipartisan Housing Finance Reform Act of 2018” proposes to “repeal the GSEs’ charters, permanently ending their monopoly, and transition to a system that allows qualified mortgages backed by an approved private credit enhancer with regulated, diversified capital resources to access the explicit, full government securitization guarantee provided by Ginnie Mae,” according to Chairman Hensarling’s opening committee statement.  The bill is co-sponsored by Jim Hines (D-CT) and John Delaney (D-MD). 
  • In a Wall Street Journal Op-Ed, Hensarling further explained the proposal – “Loan originators would have to acquire coverage from an approved ‘credit enhancer,’ or private mortgage credit guarantor, to use the Ginnie Mae system. That would function as a private capital buffer on the loan, which could then be securitized by any of Ginnie Mae’s more than 400 approved issuers with an explicit, full government guarantee of mortgage-backed securities.” (Wall Street Journal Op-Ed, Sept. 6) 
  • The day before the hearing, a coalition of the housing industry’s largest trade groups and affordable housing advocates wrote to the Trump Administration and Congress to enact permanent reforms to the government-sponsored enterprises.  ( Coalition letter and HousingWire, Sept 5) 
  • A private sector solution to GSE reform was offered in a Sept. 4 Op-Ed in The Hill by Roundtable member Willy Walker, Chairman and CEO of Walker & Dunlop, one of the largest commercial real estate finance companies in the United States.
  • In his Op-Ed, Mr. Walker writes, “The GSEs’ multifamily lending businesses, where they back loans to owners of apartment buildings across the country, is the model that should be applied to all lending done by the GSEs. It’s the same role they play in financing single-family homes, but with a fundamental difference: In the multifamily business, private capital is required to take risk on every loan the GSEs guarantee, protecting the GSEs and taxpayers in the process.” (A fix for Fannie Mae and Freddie Mac already exists, Sept. 4) 
  • The proposed legislation has slim chances of advancing during an election year, yet Reps. Hensarling and Delaney said it could serve as a road map that lawmakers in the next Congress could use to push for GSE reform.  Hensarling is not running for re-election. (Bloomberg, Sept 6) 

Hensarling concluded his committee statement, “If the political will to enact such reform stalls in this Congress or the next, the Administration can and should effectuate change. The President will appoint a new Federal Housing Finance Agency Director in January. With apologies to The Rolling Stones, ‘you can’t always get what you want, but if you try some time, you just might find, you get what you need’ to avert the next housing crisis.”  (Hensarling statement on YouTube)

 

House Follows Senate in Passing Bills Addressing Foreign Investment Risk; Includes Language Affecting Real Estate

Posted on by Trey Jackson

The House of Representatives on June 26 voted 400-2 to pass legislation (H.R. 5841) that overhauls federal review of transactions involving foreign companies or countries, including certain real estate transactions. The Senate on June 18 passed its version of the legislation (S. 2098).  (Dechert, June 2018) 

Both the House and Senate FIRRMA bills would expand the list of covered transactions to include some foreign purchases and leases of real estate near military and other strategic facilities.

  • The bills would update the review authority of the Committee on Foreign Investment in the U.S. (CFIUS) to review national security implications of transactions that could result in control of a U.S. business by a foreign person – and to block transactions or impose measures to mitigate any threats to U.S. security.
  • Both the House and Senate bills would expand the list of covered transactions to include some foreign purchases and leases of real estate near military and other strategic facilities.  Responding to concerns raised by The Roundtable and other industry groups, each bill includes similar language designed to exempt real estate located in ‘urbanized areas’ from the criteria of a covered transaction.  [See Title II, Sec. 201in the House’s Foreign Investment Risk Review Modernization Act of 2018 (FIRMMA) and for S. 2098, see  pages 7 through 9].  The Census defines an urbanized area as one comprising more than 50,000 people.

While the House and Senate bills are similar, the definition of “critical technology” differs and will require reconciliation before a final vote in each chamber. The Trump Administration has shown support for reforming FIRRMA to strengthen CFIUS’ oversight.

Five Regulatory Agencies Clear Path for Volcker Rule Changes

Posted on by Trey Jackson

The Securities and Exchange Commission (SEC) this week became the fifth and final regulatory agency to advance possible reforms to the Volcker Rule, which aims to restrict proprietary trading practices at banks. The Federal Reserve became the first agency to move a proposal to simplify and ease the Volcker Rule forward last week, followed by the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency and the Commodity Futures Trading Commission.  If adopted, this proposed revision is expected to enhance liquidity to commercial mortgage-backed securities (CMBS) markets.  (Roundtable Weekly, June 1)

SEC Chairman Jay Clayton

  • SEC Chairman Jay Clayton said, “The proposal seeks to simplify and tailor the 2013 final rule. I strongly encourage all interested parties to comment on the many questions proposed in the release and I look forward to commentator input about implementing the Volcker Rule in a more effective way.”
  • In a memorandum to the Fed’s Board of Governors, Fed Vice Chairman for Supervision Randall Quarles details the changes in the proposal.
  • U.S. Treasury Secretary Steven Mnuchin on June 5 commended the efforts of the Agencies.  Mnuchin stated, “The Treasury Department strongly supports changes aimed at better tailoring the application of the rule, preserving liquidity during periods of stress, decreasing unintended compliance burdens, and encouraging capital formation.  The five agencies responsible for regulation of the Volcker Rule coming together on this notice is an important first step. These efforts are building on the relief for Main Street borrowers and lenders included in the Economic Growth, Regulatory Relief, and Consumer Protection Act recently signed into law by President Trump.”
  • In a January 2012 comment letter to the Federal Reserve and other financial regulatory agencies, The Roundtable raised concerns about the unintended consequences of the Volcker Rule that could “negatively impact liquidity and capital formation in commercial real estate.”

The Volcker rule reform proposal will be a topic of discussion at next week’s Real Estate Capital Policy Advisory Committee (RECPAC) held in conjunction with The Roundtable’s Annual Meeting in Washington. The Roundtable plans to submit comments to the Agencies before a final rule is expected to be in effect by January 1, 2019.

The Fed and FCIC Vote to Simplify and Ease Volcker Rule

Posted on by Trey Jackson

A proposal to simplify and ease the Volcker Rule, which restricts proprietary trading practices at banks and is enforced by five separate federal agencies, was unanimously approved this week by both the Federal Reserve and Federal Deposit Insurance Corp. (FDIC). (Roundtable Weekly, May 25)

The Fed’s proposal is part of a broader regulatory rollback.  (“ The Volcker Rule’s Proposed Revision Could Add Liquidity To CMBS ” – GlobeSt, May 31)

  • The nearly 400-page proposal, known as Volcker 2.0, would seek to simplify regulatory requirements by giving banks new quantitative “bright-line rules” to provide more clarity on what activities are prohibited and permitted. The Fed proposal is part of a broader regulatory rollback, which includes the recently enacted Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155) that included Roundtable-supported revisions to the Basel III High Volatility Commerical Real Estate (HVCRE) Rule. 
  • For CRE, the Volcker Rule has put a damper on secondary market trading of commercial mortgage backed securities (CMBS) by limiting the ability of banks to hold inventories of secondary market securities, thereby diminishing market liquidity.  In addition to restricting banks from buying certain securities for their own accounts (so-called proprietary trading), it also has prohibited them from investing in hedge or private-equity funds – including real estate.  (“ The Volcker Rule’s Proposed Revision Could Add Liquidity To CMBS ”  – GlobeSt , May 31)
  • Real Estate Roundtable President and CEO Jeffrey DeBoer commented on the Volker Rule proposal. “This positive action will benefit liquidity and the commercial mortgage backed securities market, potentially increasing investment in job-creating construction activities,” DeBoer said.
  • One of the most significant changes in the Volcker 2.0 proposal would give banks more latitude by making it easier for them to show they are trading to help clients — a permitted activity known as market making  — rather than proprietary trading .
  • In a memorandum to the Fed’s Board of Governors, Fed Vice Chairman for Supervision Randall Quarles details the changes in the proposal .
  • In a January 2012 comment letter  to the Federal Reserve and other financial regulatory agencies, the Roundtable raised concerns about the unintended consequences of the Volcker Rule that could “negatively impact liquidity and capital formation in commercial real estate.”

The Fed and its regulatory partners are seeking public comment on its Volcker rule reform proposals. The Roundtable plans to work with its Real Estate Capital Policy Advisory Committee (RECPAC) to submit comments before a final rule is expected to be in effect by January 1, 2019.

Senate and House Committees Approve Bills Addressing Foreign Investment Risk; Includes Language Affecting Real Estate

Posted on by Trey Jackson

Separate bills that would overhaul the process for reviewing foreign investment risk – including a purchase or lease by a foreign party of domestic properties located close to sensitive U.S. facilities – received unanimous approval Wednesday by the Senate Banking and House Financial Services Committees.  (Lexology, May 23)

Real estate provisions in  S. 2098  appear on pages 7 through 9.

  • The committees’ revised versions of the Foreign Investment Risk Review Modernization Act (FIRRMA) – S. 2098 and HR 5841 – seek to modernize and strengthen how the Committee on Foreign Investment in the United States (CFIUS) reviews acquisitions, mergers, and other foreign investments in the United States for national security risks.  Both bills would expand the list of covered transactions to include some foreign purchases and leases of real estate near military and other strategic facilities. (Real estate provisions in S. 2098 appear on pages 7 through 9.)
  • As a result of industry discussions with Senate and Treasury staff, the new legislative drafts include the addition of language designed to exempt real estate in ‘urbanized areas’ from the criteria of a covered transaction.  The Census defines an urbanized area as one comprising more than 50,000 people. 

FIRRMA may be ready for floor consideration in the House and Senate before the August congressional recess. The Trump Administration has shown support for reforming FIRRMA to strengthen CFIUS’ oversight. 

President Trump Signs Dodd-Frank Reform Bill With HVCRE Revisions

Posted on by Trey Jackson

Revisions to the 2010 Dodd-Frank Act – including significant Roundtable-supported reforms to the Basel III High Volatility Commercial Real Estate (HVCRE) Rule – were signed into law by President Trump yesterday, two days after the House passed The Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155). 

Revisions to the 2010 Dodd-Frank Act – including significant Roundtable-supported reforms to the Basel III High Volatility Commercial Real Estate (HVCRE) Rule – were signed into law by President Trump yesterday, two days after the House passed The Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155).

  • S. 2155 previously passed the Senate in March with the same clarifications and reforms as the House bill.  The HVCRE Rule created needless confusion and increased borrowing costs in the industry for CRE Acquisition, Development and Construction (ADC) lending.
  • Senate Banking Committee Chairman Mike Crapo (R-ID) commented, “This step toward right-sizing regulation will allow local banks and credit unions to focus more on lending, in turn propelling economic growth and creating jobs on Main Street and in our communities.” (Sen. Mike Crapo News Release, May 22)
  • Details of the new measure addresses key deficiencies in current and proposed regulations.  Real Estate Roundtable HVCRE Working Group Co-Chair Joseph Forte (Sullivan and Worcester) noted, “This legislative action is a welcome solution to a poorly designed regulatory capital scheme that has not matched with risk. This caused an unnecessary cost burden to all commercial banks and their real estate development customers.  In addition, it restores to borrowers the ability to offer appreciated land value as equity to banks, when validated through appraisal practices established in earlier statutes.”  (Passage of Dodd-Frank Reform Encourages Investment, Economic Growth in Local Communities –Roundtable News Release, May 22) 
  • The Roundtable and twelve other real estate organizations detailed the industry’s HVCRE policy positions and urged inclusion of the language in broader Dodd-Frank reform legislation (S. 2155). (Roundtable HVCRE Comment Letter, March 2)
  • “The Reform Bill, in provisions that are now effective, overrides certain highly conservative provisions in both the federal banking agencies’ (Banking Agencies) Basel III capital rule and their interpretations of it.” ( Dodd Frank 2.0: Reforming U.S. HVCRE Capital Treatment, Gibson Dunn, May 24)

Since 2015, The Roundtable’s HVCRE Working Group and industry coalition partners have played a key role in advancing specific reforms to the HVCRE Rule.  During next month’s Real Estate Roundtable Annual Meeting, HVCRE will be a focus of discussion, with more specific details offered during the Real Estate Capital Policy Advisory Committee (RECPAC) meeting on June 14.

Passage of Dodd-Frank Reform Encourages Investment, Economic Growth in Local Communities

Posted on by Trey Jackson

Roundtable-Supported Measure Will Promote Job-Creating Projects by Clarifying CRE Acquisition, Development and Construction (ADC) Regulations

(WASHINGTON, D.C.) — Financial deregulation legislation (S. 2155 ) passed today by the House of Representatives (258-159) includes significant reforms to the Basel III High Volatility Commercial Real Estate (HVCRE) Rule that will lower financing barriers for job-creating projects that bring positive investment to local communities throughout the country.

Today’s Dodd-Frank reform legislation, previously passed by the Senate in March, is expected to be signed by President Trump this week. Real Estate Roundtable President and CEO Jeffrey DeBoer noted the years of legislative effort to pass the Economic Growth, Regulatory Relief, and Consumer Protection Act.  “The HVCRE reforms included in this bill will help ensure that important real estate construction activities are funded, which is positive for local job creation and economic growth,” DeBoer said.

He added, “The Roundtable recognizes the diligent efforts of policymakers who worked to eliminate the needless regulatory confusion and increased borrowing costs that impeded Acquisition, Development and Construction (ADC) lending. We recognize the dedication of congressional leadership in the Senate and House, including Senate Banking Committee Chairman Mike Crapo (R-ID) and House Financial Services Committee Chairman Jeb Hensarling (R-TX), for their work to pass S. 2155 – and we look forward to President Trump’s signature on this important legislation,” DeBoer said.

The bipartisan HVCRE measure originally was co-sponsored by House Financial Services Committee members Robert Pittenger (R-NC) and David Scott (D-GA) as the Clarifying Commercial Real Estate Loans bill (H.R. 2148) – and passed the House by voice vote in November of last year.  The Senate Banking Committee then took up an identical HVCRE bill (S. 2405) co-sponsored by Senators Tom Cotton (R-AR) and Doug Jones (D-AL), which passed in March as part of the Senate’s broader Dodd-Frank reform legislation (S. 2155).   Today’s passage by the House of S. 2155 / H.R. ?? includes the same language and clarifications to the Basel III High Volatility Commercial Real Estate (HVCRE) Rule.

The new measure addresses key deficiencies in the agencies’ current and proposed regulations by providing the following modifications and clarifications to either an HVCRE or High Volatility Acquisition, Development or Construction (HVADC) loan:

  • Commercial borrowers will be able to satisfy the 15% equity requirement through the appreciated value of contributed land/property – versus the cost basis under the current rule.  
  • A new exemption would be added to the HVCRE rule covering acquisition/refinancing loans for performing income producing properties.   It clarifies that loans made to acquire existing property with rental income and/or do cosmetic upgrades and other improvements don’t trigger the capital penalty.
  • Allows borrowers to use internally generated capital in the project and, once the development/construction risk period has passed, outside the project, rather than forcing them to refinance the loan (possibly away from the original lender).
  • All ADC loans made prior to January 2015 would be grandfathered and do not have to satisfy current HVCRE exemption criteria.
  • Banks would able to withdraw HVCRE status prior to the end of an ADC loan’s term.

The Real Estate Roundtable’s HVCRE Working Group, co-chaired by Sullivan and Worcester Partner Joseph Forte, and PNC Real Estate Senior Vice President William Lashbrook, played a key role in advancing these reforms since 2015. 

Forte said, “This legislative action is a welcome solution to a poorly designed regulatory capital scheme that was not matched with risk. This caused an unnecessary cost burden to all commercial banks and their real estate development customers.  In addition, it restores to borrowers the ability to offer appreciated land value as equity to banks, when validated through appraisal practices established in earlier statutes.  In clearly defining HVCRE exposures, this legislative solution halts the regulatory experimentation in creating pools of commercial real estate development risk, including last year’s HVADC trial balloon of a use of proceeds test on unsecured transactions, requiring capital support where it did not exist. ”  

The Roundtable and twelve other real estate organizations on March 2, 2018 sent a comment letter detailing the industry’s HVCRE policy positions and urging inclusion of the HVCRE reforms in a broader Dodd-Frank reform package (S. 2155).

House Expected to Vote May 22 on Dodd-Frank Reform Bill That Include HVCRE Revisions

Posted on by Trey Jackson

The House of Representatives is expected next week to pass a bipartisan package of revisions to the Dodd-Frank Act of 2010 and send it to President Trump for his signature. The House bill (S. 2155), which passed the Senate (67-31) in March, includes significant Roundtable-supported clarifications to the Basel III High Volatility Commercial Real Estate (HVCRE) Rule – a top industry priority that will benefit CRE acquisition, development and construction (ADC) lending and promote economic growth.

The House is expected to vote on S. 2155 – the Economic Growth, Regulatory Relief, and Consumer Protection Act – as early as Tuesday, May 22 – separate financial deregulation legislation championed by House Financial Services Chairman Jeb Hensarling (R-TX) is expected to soon follow.

What it Means for CRE 
 
The HVCRE measure contains important clarifications and reforms to the Basel III High Volatility Commercial Real Estate (HVCRE) Rule, which has created needless confusion and increased borrowing costs in the industry. 

  • Under the new measure, commercial borrowers will be able to satisfy the 15% equity requirement through the appreciated value of contributed land/property – versus the cost basis under the current rule. The measure also clarifies that loans made to acquire existing property with rental income and/or do cosmetic upgrades and other improvements don’t trigger the HVCRE capital penalty. (Roundtable Weekly, May 4 and May 11)
  • The Roundtable and twelve other real estate organizations on March 2, 2018 sent a comment letter detailing the industry’s policy positions and urging inclusion of the HVCRE measure within the broader Dodd-Frank reform package (S. 2155).

HVCRE reform has been a top policy priority of The Real Estate Roundtable and its industry coalition partners, who have submitted numerous policy comment letters to policymakers since 2015. The Roundtable’s HVCRE Working Group has also played a key role in advancing these welcome reforms.

House Will Vote on Dodd-Frank Reform and HVCRE Before Memorial Day

Posted on by Trey Jackson

House Majority Leader Kevin McCarthy (R-CA) yesterday said the House will vote on the Senate’s Dodd-Frank reform bill (S. 2155),  before Memorial Day.  S. 2155 includes a measure to reform the Basel III High Volatility Commercial Real Estate (HVCRE) Rule – a top Roundtable priority.  (Roundtable Weekly, May 4)

House Majority Leader Kevin McCarthy (R-CA) said the House will vote on the Senate’s Dodd-Frank reform bill (  S. 2155  ),  before Memorial Day.

  • Ryan: GOP has deal on bill easing Dodd-Frank, The Hill (May 8) – House Speaker Paul Ryan (Wisconsin) on Tuesday said the House will hold a vote on the Senate Dodd-Frank reform bill in exchange for the Senate taking up a separate set of financial reform bills  supported by House Financial Services Committee Chairman Jeb Hensarling (R-TX) Texas).
  • House Speaker Ryan, American Banker (May 8) – “I had a good meeting with [Senate Majority Mitch McConnell] over the break on this and so we’ve got an agreement to be moving different pieces of legislation.” 
  • Bill to Roll Back Post-Financial-Crisis Banking Rules Gets Clear Path to Passage, Washington Post, May 8 –- As the sponsor of more ambitious Dodd-Frank reforms approved by the House last year, Hensarling said he was confident that the new approach to separate the legislative effort into two bills would “create regulatory policy that will help us achieve sustained 3% economic growth.”

    The Roundtable and 12 other real estate organizations on March 2, 2018 sent a  comment letter  urging all members of the Senate Banking Committee to enact the HVCRE measure by including the measure in the broader Dodd-Frank reform package (S. 2155).

HVCRE Reform Measure Included  

  • (Roundtable Weekly, Jan. 12) – The Senate bill would clarify which types of loans should be classified as High Volatility Commercial Real Estate Loans (HVCRE) to ensure they do not impede credit capacity or economic activity, while still promoting economically responsible commercial real estate lending.  
  • GlobeSt.com, (March 19) – “The HVCRE rule, promulgated by Basel III, went into effect in 2016. It established a new risk-weight category requiring banks to hold more capital – 150% or one and half times as much – for such loans. The result has been a pull back on construction lending among other types of bank finance.” 
  • Real Estate Industry Comment Letter, (March 2) – The Roundtable and twelve other real estate organizations on March 2, 2018 sent a comment letter urging all members of the Senate Banking Committee to enact the HVCRE measure by including it in the broader Dodd-Frank reform package (S. 2155).

Since 2015, The Roundtable’s HVCRE Working Group and industry coalition partners have played a key role in advancing specific reforms to the HVCRE Rule.  During next month’s Real Estate Roundtable Annual Meeting, HVCRE will be a focus of discussion, with more specific details offered during the Real Estate Capital Policy Advisory Committee (RECPAC) meeting on June 14.