Tag: Capital and Credit

Fed Outlines Tighter Bank Capital Requirements Amid Congressional Concerns About Market Liquidity

Posted on by Trey Jackson

The Federal Reserve in Washington, DC

Federal Reserve Vice Chair for Supervision Michael Barr this week said higher capital requirements for banks with $100 billion or more in assets are likely to be one of several regulatory proposals expected soon from federal banking regulators. The Roundtable has warned that such a policy “would have the unintended consequence of further diminishing liquidity and creating additional downward pressure on (commercial real estate) asset values.” (Barr’s speech, July 10 and Roundtable letter to federal regulators, March 17)

Fed Proposals

  • Barr added that the rules would be the equivalent of requiring the largest banks to hold an additional $2 of capital for every $100 of their risk-weighted assets. He also commented that the changes—including long-term bank debt requirements and adjustments to how banks measure their financial market risks—“would not be fully effective for some years” because of the formal rulemaking comment process and a lengthy transition period for implementation. (Barr’s speech, The Wall Street Journal and Axios, July 10)
  • Roundtable President and CEO Jeffrey DeBoer noted during an April 6 Walker Webcast that “The concept of additional regulations and expanding liquidity are kind of counter to each other. [The financial turmoil] has to be allowed to settle through and transition. We ought to be working together and the federal government ought to be helping people transition to that new world.” (Roundtable Weekly, April 7)
  • The Roundtable’s June 13 Annual Meeting featured a joint RECPAC and Research Committee meeting discussion with Senate Banking Committee Member Bill Hagerty (R-TN) on liquidity concerns and possible new regulations, along with a presentation by CBRE industry experts on  CRE conditions.

Bipartisan Congressional Concerns

Sen. Mark Warner (D-VA)

  • During a June 21 Senate Banking Committee hearing on President Biden’s three nominations for the Federal Reserve Board, Sen. Mark Warner (D-VA), above, shared concerns raised by his Republican colleagues Bill Hagerty (TN), Tim Scott (SC), and Thom Tillis (NC) on Barr’s agenda to increase capital requirements for banks.
  • Sen. Warner stated, “I do worry, when we’ve got as aggressive a monetary policy as we have … that if there’s not a phase-in on some of these new capital standards, we could have the perfect storm of these two entities intersecting, and dramatically decreasing access to credit, at a moment when we’ve got large segments of our economy, commercial real estate in particular, could really be hit hard.”
  • House Financial Services Committee Chairman Patrick McHenry (R-NC) said during a June 21 hearing featuring Fed Chairman Jerome Powell that “… a massive increase in capital standards for medium and large institutions… would limit banks’ ability to lend money, exacerbating the looming credit crunch, and starving families and small businesses of the capital they need.” (Roundtable Weekly, June 23)
  • The top members of the House subcommittee focused on bank regulation—Reps. Andy Barr (R-KY) and Bill Foster (D-IL)—wrote to Barr on July 7, urging him to “minimize negative impacts as we enter a phase of potential credit tightening. We must strike the right balance between safeguarding our financial system and ensuring banks of all sizes can support communities’ access to credit.” The bipartisan letter also requested a “cost-benefit analysis, including supporting data, for any rulemaking you intend to propose.” (Letter to Barr and Politico Pro, July 7)

What’s Next

Former Federal Reserve Vice Chair for Supervision Randal Quarles

  • Barr added in his speech this week, “I will be pursuing further changes to regulation and supervision in response to the recent banking stress, including how we regulate and supervise liquidity. I expect to have more to say on these topics in the coming months.”
  • Former Fed Vice Chair for Supervision Randal Quarles, above, on July 12 criticized the Fed’s bank capital requirements proposal. Quarles said, “It’s a mistake. It will restrict the ability of the financial system to provide support for the real economy.” (Bloomberg, July 12). Prior to Barr, Quarles contributed to the Fed’s report on the failure of Silicon Valley Bank that concluded the central bank’s supervisory approach was partially to blame for the banking crisis. (Associated Press, April 28)
  • Fed Governor Michelle Bowman spoke out against tougher baking regulations on June 25, stating, “Increasing capital requirements simply does not get at this underlying concern about the effectiveness of supervision.” She added, “It is abundantly clear that regulatory and supervisory reform is on the way.” (Bowman speech and Bloomberg, June 25) 

RECPAC will continue to work on Roundtable responses to potential federal regulatory proposals affecting bank liquidity and CRE. 

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Federal Agencies Encourage Commercial Real Estate Loan Accommodations and Workouts in Major Step Forward for CRE

Posted on by Trey Jackson
Jeffrey DeBoer - Real Estate Roundtable President and CEO

In a positive development for the commercial real estate industry, federal regulatory agencies issued a joint policy statement yesterday on CRE loan accommodations and workouts that calls for “financial institutions to work prudently and constructively with creditworthy borrowers during times of financial stress.” (Agencies’ joint statement, June 29) 

Real Estate Roundtable President and CEO Jeffrey DeBoer, above, said, “We enthusiastically welcome and applaud the action of federal regulators to accommodate commercial real estate borrowers and lenders as the industry endures a time of historic, post-pandemic transition. Maturing office loans in particular face a new environment of higher operating and financing costs, much tighter bank lending requirements, and uncertainty in business space needs. This major step forward by federal regulators provides the flexibility that The Roundtable has consistently encouraged, and the relief many in the industry need, as the economy and communities struggle to move beyond the repercussions of the global pandemic.”

CRE Relief 

Vacant office space NYC view
  • This significant action fulfills recent Real Estate Roundtable requests for regulators to provide more supervisory flexibility that would allow for the responsible restructuring of maturing CRE loans. The guidance is expected to encourage debt restructuring for certain office assets under pressure from remote work, high interest rates, and post-pandemic demand. (Roundtable Weekly, May 11 | Roundtable letter to regulators, March 17)

  • The June 29 joint agency statement was issued by the Office of the Board of Governors of the Federal Reserve System (the Fed), the Comptroller of the Currency (OCC), Federal Deposit Insurance Corporation (FDIC), and National Credit Union Administration (NCUA).

  • The agencies noted that their policy statement builds on existing supervisory guidance issued in 2009, updates existing interagency supervisory guidance on commercial real estate loan workouts, and adds a section on short-term loan accommodations.

  • The new section on accommodations includes an agreement to defer one or more payments, make a partial payment, or provide other assistance or relief to a borrower who is experiencing a financial challenge. The statement also addresses recent accounting changes for estimating loan losses and provides examples of how to classify and account for loans affected by workout activity. (See 90-page policy statement on “Prudent Commercial Real Estate Loan Accommodations and Workouts”)

  • Approximately $1.5 trillion in CRE mortgages will mature in the next three years were originally financed when base rates were near zero. Refinancing this wave of maturing loans is complicated by the current debt environment, characterized by much higher interest rates, uncertain asset values, and illiquid capital markets. 

CRE Part of Fed Stress Test 

2023 Federal Reserve Stress Test results
  • This week, the Federal Reserve also released the results of its annual bank stress tests, which included a severe hypothetical scenario of global recession, a 40% decline in commercial real estate prices, a substantial increase in office vacancies, and a 38% decline in house prices. The Fed noted the stress test focus on CRE illustrates that 23 large banks would be able to continue lending in the hypothetical scenario, despite heavy losses. (2023 Fed stress test results and CNBC, June 28)

  • “Today’s results confirm that the banking system remains strong and resilient,” Vice Chair for Supervision Michael S. Barr said. “At the same time, this stress test is only one way to measure that strength. We should remain humble about how risks can arise and continue our work to ensure that banks are resilient to a range of economic scenarios, market shocks, and other stresses.” (Fed news release, June 28)

  • The 2023 adverse test scenario model stated that declines in CRE prices should be assumed to be concentrated in properties most at risk of a sustained drop in income and asset values—offices that may be affected by remote work or hospitality sectors that continue to be affected by reduced business travel.

  • The Fed’s stress test report added, “The May 2023 Financial Stability Report highlighted elevated prices on CRE and the possibility of a large correction in property values that could lead to substantial losses for banks. The demand for offices, downtown retail, and hotels has seen dramatic and countervailing changes over the past several years due largely to the pandemic and resulting changes. While many bank CRE loans are held by smaller banks not subject to the supervisory stress test, the banks subject to the stress test hold approximately 20% of office and downtown retail CRE loans.”

  • Regulators have also recently signaled they are likely to adopt increased capital requirements for the nation’s biggest banks, while Fed governor Michelle Bowman this week spoke out against tougher regulations. (Axios, June 21 and June 26) 

“We need to consider whether examiners have the appropriate tools and support to identify important issues and demand prompt remediation,” Bowman stated. “Increasing capital requirements simply does not get at this underlying concern about the effectiveness of supervision.” She added, “It is abundantly clear that regulatory and supervisory reform is on the way.” (Bowman speech and Bloomberg, June 25) 

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Fed Chairman Addresses CRE as Leading Economic Concern During Congressional Hearings

Posted on by Trey Jackson

Federal Reserve Chairman Jerome Powell

Federal Reserve Chairman Jerome Powell testified this week before congressional committees on the state of the economy, identifying commercial real estate as an area the central bank is “very focused on” as the office sector faces significant pressures from declining demand and remote work issues. 

Banks & CRE 

  • During Powell’s appearances before the House Financial Services Committee on Wednesday and the Senate Banking, Housing, and Urban Affairs Committee on Thursday, policymakers noted in their Q&A that an estimated $1.5 trillion of CRE loans will mature in the next three years. Powell responded that the Fed is applying a “supervisory toolkit” to banks it has identified with high concentrations of commercial real estate loans.

Sen. Bob Menendez (D-NJ)

  • During the Senate hearing, committee member Bob Menendez (D-NJ) said he was concerned CRE mortgages could be “a ticking time bomb” for many banks as office property values decline and interest rates increase. Powell noted, “We’re being pretty proactive about reaching out to these institutions and trying to help them get through these significant issues.” Click on video clip above to watch the Menendez-Powell exchange or scroll to :31:33 in the full Senate hearing.
  • In his opening remarks, House Financial Services Committee Chairman Patrick McHenry (R-NC) stated, “Now we are told these (bank) runs represent a systemic threat to the stability of our financial system. Add in the commercial real estate exposure facing financial institutions and it becomes very easy to understand the mounting anxiety of consumers and job creators. I share in that anxiety.” (Scroll to 1:44 in the House hearing)

House Financial Services Committee Chairman Patrick McHenry (R-NC)

  • McHenry, above, also warned, “… a massive increase in capital standards for medium and large institutions… would limit banks’ ability to lend money, exacerbating the looming credit crunch, and starving families and small businesses of the capital they need.”  (The Roundtable wrote to federal regulators on March 17 about the importance of not engaging in pro-cyclical policies such as requiring financial institutions to increase capital.)
  • Rep. Young Kim (R-CA) asked Powell during the House hearing if the Fed is thinking about policies that could provide time for refinancing commercial real estate loans—a position strongly advocated by The Real Estate Roundtable. Powell answered, “There’s a playbook for working your way out of these loans. And it’s particularly in the office sector where work from home is still a material factor in some areas.” (Scroll to 1:26:04 in the House hearing for Kim-Powell exchange)
  • On June 16, a statement from the Financial Stability Oversight Council—which includes the heads of the Federal Reserve, the Treasury Department, and the Securities and Exchange Commission—addressed the results of their recent meeting where potential risks in the CRE market were on the agenda. The group commented, “Regulators are taking steps to emphasize risk management and examine exposures to CRE loans at their regulated institutions.”  

Roundtable Response 

Real Estate Roundtable Board Members Scott Rechler on CNBC's Last Call

  • On June 21, CNBC’s Last Call interviewed Roundtable Board Member Scott Rechler, above right, (Chief Executive Officer and Chairman, RXR) on how a rise in office vacancies could have sweeping implications for the economy. Roundtable Board Member Barry Sternlicht (Chairman and CEO, Starwood Capital Group) joined CNBC’s Squawk Box on June 22 for a discussion about the Fed’s inflation fight and commercial real estate.
  • The dropping value of various investments, including offices that provide crucial property taxes to fund municipalities, were the focus of a June 20 Wall Street Journal report “Wall Street Sours on America’s Downtowns.” 
  • Real Estate Roundtable President and CEO Jeffrey DeBoer recently remarked on The Roundtable’s Q2 Sentiment Index findings and the role federal regulators can play as CRE faces these significant market developments. “Federal financial institution regulators must act quickly to provide greater supervisory flexibility—as they did in 2009, 2020, and 2022—to allow lenders and borrowers to responsibly restructure the large amount of maturing commercial real estate loans,” DeBoer said. (Roundtable Weekly, June 9)

“Businesses and individuals need more time to transition their space needs to the post-pandemic economy. Greater certainty in demand will allow commercial real estate markets, particularly the office sector, to stabilize and revert to its dominant position as the source for local budget revenue. In addition to regulatory flexibility, positive public and private action to encourage in-person, return-to-work policies is needed, where appropriate. As some buildings will need to be reimagined entirely, policy reforms are needed to encourage those buildings to convert to other uses such as housing,” DeBoer added.

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Economic Pressures on CRE a Top Concern of Federal Regulators

Posted on by Trey Jackson

Fed Chair Powell on CRE

Federal Reserve Chairman Jerome Powell, above, commented on Wednesday about the economic pressures on banks that hold a significant concentration of commercial real estate loans. Powell said, “We of course, we’re watching that situation very carefully. There’s a substantial amount of commercial real estate in the banking system. A large part of it is in smaller banks.” He added, “those banks will experience larger losses” but since the loans are “well distributed,” the issue is not likely to “suddenly hit and work its way into systemic risk” to the overall economy. (Fed news conference transcript, page 24 and Fortune, June 14)

Market Conditions

  • The Fed Chairman spoke after the Federal Open Market Committee declined to raise interest rates this week for the first time in 15 months, after the Fed funds rate jumped from zero to more than 5% in less than a year and a half—the sharpest spike in rate increases in nearly 40 years. (Axios, June 15)
  • Real Estate Roundtable President and CEO Jeffrey DeBoer stated during an April 7 Walker Webcast, “I don’t think anybody assumed a 12-year period of basically zero interest rates, followed by a steep 500bps increase in financing costs, immediately following a once-every-hundred-years pandemic that shut everything down and changed a lot of the ways the built environment would be used. I think all of this has to be allowed to settle through.” (Walker Webcast video and Connect CRE, April 5)
  • The Real Estate Roundtable continues to emphasize the need for federal regulators to allow more flexibility for lenders and borrowers to restructure commercial real estate loans facing potential default—as the Federal Reserve reported recently that CRE poses a potential risk to financial stability. (Fed’s Financial Stability Report, May 2023)
  • Today, Treasury Secretary Janet Yellen presided over a meeting of the multi-agency Financial Stability Oversight Council, which will address financial stability vulnerabilities, developments in the commercial real estate market, and receive an update on the banking sector.

Maturing CRE Loans

Willy Walker on CNBC

The Roundtable’s joint RECPAC and Research Committee meeting this week included a real estate capital market panel with CRE leaders and a presentation by CBRE industry experts on the economy and CRE conditions. The session also included a discussion with Sen. Bill Hagerty (R-TN), a member of the Senate Banking Committee.

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Roundtable Leaders Emphasize Need for Regulators to Allow More Flexibility for Restructuring CRE Loans

Posted on by Trey Jackson

Roundtable Chair John Fish

This week, Real Estate Roundtable leaders emphasized the need for federal regulators to allow more flexibility for lenders and borrowers to restructure commercial real estate loans facing potential default—as the Federal Reserve reported that CRE poses a potential risk to financial stability. (Fed’s Financial Stability Report, May 2023) 

Request for Time 

  • Real Estate Roundtable Chair John Fish, above, (Chairman and CEO, SUFFOLK) summarized the industry’s views in a May 9 MarketWatch article, noting that the Fed and regulatory agencies should grant more flexibility for borrowers, including corporate real estate developers, to restructure CRE loans.
  • Fish explained how an impending wave of $1.5 trillion in CRE loans—combined with tight lending conditions and higher, unsustainable interest rates—could stifle construction and development in major cities struggling to bounce back from the pandemic. (MarketWatch article pdf)
  • Post-pandemic CRE values have dropped $453 billion, according to the U.S. National Bureau of Economic Research, especially in cities with high vacancy rates due to ongoing work-from-home policies. Prior to the pandemic, 95% of U.S. offices were occupied. Today, that number is closer to 47%. Collapsing property values are threatening the fiscal health of cities across the nation. (GlobeSt, March 3)
  • Defaults on CRE loans hit a 14-year high in February. Fish emphasized that further economic damage can be avoided if federal regulators grant additional time for markets to stabilize, as they have done in the past. (See regulatory notices from 2009, 2020, and 2022)

Roundtable Board Member Bill Rudin, left

  • Real Estate Roundtable Chairman Emeritus Bill Rudin, above left, (Co-Chairman and CEO, Rudin Management Co.) discussed similar topics today on CNBC’s Squawk on the Street.
  • “We are going to have to figure out a plan with the federal government to allow banks to have some time to work through some of these loans. It has been done before, so you can restructure, and get more equity into the deal, so that we don’t see this cascade of defaults that we’ve already started seeing happening. There has to be some thought to give banks, owners, and developers time to restructure loans,” Rudin said.

 Fed Reports 

Most cited potential risks -- CRE is # 4

  • A pair of recent Federal Reserve surveys show the state of CRE conditions and the potential risks the sector poses to the financial system.  (Enlarged graphic, above | Axios, May 9 and New York Times, May 8)
  • On Monday, the Fed released its bi-annual Financial Stability Report—a survey of market experts, economists, and academics that assesses concerns about the nation’s financial and economic health. The report, which includes a special section on commercial real estate-related risks, identifies CRE as the fourth-largest financial stability concern. (Commercial Observer, May 10 and ConnectCRE, May11)
  • Many survey respondents noted CRE as a “possible trigger for systemic risk,” listing concerns about higher interest rates, valuations, and shifts in end-user demand. “With CRE valuations remaining elevated … the magnitude of a correction in property values could be sizable and therefore could lead to credit losses by holders of CRE debt,” according to the May report. (GlobeSt, May 10)
  • Additionally, the Fed’s April 2023 Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS) addressed changes in the demand, standards and terms for bank loans over the past three months. The survey notes, “Banks reported having tightened all the terms surveyed on all categories of CRE loans.”

  • Over the first quarter of this year, the SLOOS shows a majority of banks reported concerns about an uncertain economic outlook, reduced tolerance for risk, worsening of industry-specific problems, and deterioration in their current or expected liquidity position. Mid-sized banks generally reported tightening both price and non-price terms more frequently than the largest banks and other banks, according to the loan officer survey. 

The Roundtable continues to urge federal regulators to issue guidance that would give financial institutions increased flexibility to refinance loans with borrowers and lenders. The various market pressures facing CRE will be discussed during The Roundtable’s all-member Annual Meeting on June 13-14 in Washington. 

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Real Estate Coalition Backs Bill to Support Multifamily Housing Construction

Posted on by Trey Jackson

Multifamily construction

The Real Estate Roundtable and 11 other national industry organizations on May 2 expressed their support for legislation that would bolster the Federal Housing Administration’s (FHA) ability to finance multifamily housing construction throughout the country.  The joint letter backed a discussion draft released on April 26 by Sen. Bob Menendez (D-NJ) before a Senate Banking, Housing, and Urban Affairs Committee hearing, “Building Consensus to Address Housing Challenges.”  (Coalition letter)

Housing Supply Constraints

  • The industry coalition letter noted how FHA’s base statutory limits define the number and size of multifamily mortgages that the Department of Housing and Urban Development (HUD) can insure nationwide. The letter also emphasized how FHA’s multifamily insurance programs need to capture the true cost of current apartment construction using a more accurate price index.
  • Menendez, a senior member of the Banking Committee, stated during the hearing that his measure would increase FHA’s multifamily lending authority throughout the country for the first time in 20 years, enable the agency to better support apartment construction, and ultimately bring down rental costs. (Hearing video clip and Menendez news release, April 26)
  • FHA’s statutory limits are now significantly below current multifamily construction costs, which poses an unintentional regulatory barrier to middle-income housing.
  • The joint letter also recommended that FHA track residential construction costs more accurately by changing the index used for future annual inflationary adjustments—from the Consumer Price Index (CPI) to the Census Bureau’s Price Deflator Index of Multifamily Residential Units Under Construction.
  • FHA’s base limits for 2022 would be 26% higher than their current estimates by using the Price Deflator index instead of CPI.
  • FHA’s current limits and inaccurate price index now consider communities throughout the nation—from Columbia, South Carolina to Cleveland, Ohio—as “high-cost areas,” thereby constraining urgently needed workforce housing projects across the country.

Other Legislation

Senator Tim Scott interview on Opportunity Zones

  • Other housing issues discussed during the hearing included zoning and land use regulation, limiting regulation, and the Low-Income Housing Tax Credit (LIHTC).
  • Senate Banking Committee Ranking Member Tim Scott (R-SC), above, discussed his newly proposed discussion draft of the Renewing Opportunity in the American Dream (ROAD) to Housing Act, which seeks to reform housing programs and prioritize HUD grants to recipients located in communities designated as Opportunity Zones.
  • The National Multifamily Housing Council (NMHC) and National Apartment Association (NAA) submitted testimony for the April 26 committee hearing. (NMHC news release summary, May 1)

As Congress aims to advance bipartisan housing bills in the coming months, The Roundtable will continue to support innovative policy solutions and development incentives to develop increase the supply of affordable housing.

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Banking Crisis Impact on CRE

Posted on by Trey Jackson

Buildings sky

A recent Moody’s Analytics report compares the amount of commercial real estate loans held by small and regional banks today to CRE asset exposures during the Global Financial Crisis of 2008, concluding that credit positives in the current environment present a more manageable downcycle for CRE and its lenders than 15 years ago. The Roundtable continues to urge federal regulators to issue guidance as soon as possible that would give greater flexibility to lenders for restructuring commercial real estate loans with borrowers.

CRE Exposure

  • Nearly $1.5 trillion in CRE loans will mature over the next three years, over half of which is held by commercial banks, according to a separate Morgan Stanley analysis. (Bloomberg, April 8)
  • The report from Moody’s acknowledges that higher interest rates currently threaten CRE loans, especially for maturing loans backed by struggling assets. Yet the banking sector has seen recent positive signs, including controlled and strategic borrowing, along with stable deposit levels among small banks.
  • The Moody’s analysis also notes that CRE loans today have less leverage, asset pricing has more cushion, and borrowers have a more diverse set of debt sources, which puts the CRE debt market in a relatively better position when compared to a 2008-style bank liquidity crunch. (Axios, April 12 and CNBC, April 9).

Moodys CRE Lending

  • In the chart above, the Moody’s report clarifies that 13.8% of debt on income-producing properties is held by 135 US regional banks, generally considered as those with about $10 billion to $160 billion in assets. The top 25 banks considered large by the Federal Reserve hold 12.1%. Additionally, 829 community banks (with $1 billion to $10 billion of assets) hold 9.6%, and the remaining 3.2% is spread among 3,726 very small local banks with less than $1 billion in assets. (GlobeSt and Commercial Observer, April 7)
  • Kevin Fagan, director of commercial real estate analysis at Moody’s Analytics told CNBC, “There’s a lot of headaches about calamity in commercial real estate. There likely will be issues but it’s more of a typical down cycle.” Fagan also told Axios, “there’s definitely been an overreaction in the market about the relationship between banks and CRE.”

Roundtable Request to Regulators

Federal Reserve sunset

  • A March 17 Roundtable letter to federal regulators cited market uncertainty from regional bank turmoil—along with a steady increase in looming debt maturities, rising interest rates, and remote work’s negative influence on office space demand—as coalescing factors that have put pressure on liquidity and decreased refinancing options for CRE assets.
  • The Roundtable continues to urge federal regulators to issue guidance that would give financial institutions increased flexibility to refinance loans with borrowers and lenders—similar to other initiatives in 2009, 2010, 2020, and as proposed in 2022. (Roundtable letter to regulators, March 17)
  • The Roundtable also urged bank regulatory Agencies to avoid any pro-cyclical policies, such as requiring financial institutions to increase capital and liquidity levels to reflect current mark to market models. “These policies would have the unintended consequence of further diminishing liquidity and creating additional downward pressure on asset values,” the letter states.
  • Last week, Roundtable President and CEO Jeffrey DeBoer discussed capital concerns affecting commercial markets on the Walker Webcast with National Multifamily Housing Council President Sharon Wilson Géno and Roundtable Member Willy Walker (Chairman & CEO, Walker & Dunlop). (Roundtable Weekly, April 7)

DeBoer noted during the webcast that “The concept of additional regulations and expanding liquidity are kind of counter to each other. [The banking crisis] has to be allowed to settle through and transition. We ought to be working together and the federal government ought to be helping people transition to that new world.” (Walker Webcast, April 6)

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Senators Urge Regulators to Assess Risks to U.S. Financial System; Roundtable Leaders Voice Concerns

Posted on by Trey Jackson

Sen. Crapo at RER Meeting

Senate Banking Committee Chairman Sherrod Brown (D-OH), above, and 11 other committee members urged Treasury Secretary Janet Yellen, who oversees the Financial Stability Oversight Council (FSOC), to identify risks and vulnerabilities brought to light during the recent banking crisis and provide regulatory, legislative, or other recommendations. (March 31 Letter and Politico Pro)

Regulatory Action

  • The committee letter called upon the Oversight Council’s members to conduct a thorough assessment that should include “traditional, quantifiable risks within prudential regulation, such as liquidity and interest rate risk management of less durable funding sources like non-core or uninsured deposits, and concentrations in asset classes like commercial real estate & long duration bonds.” (March 31 Letter) 
  • The Federal Reserve is conducting a separate review of federal banking oversight, with a report expected by May 1 that will recommend regulatory and supervisory actions. Fed Chair Jerome Powell has stated he will support the report’s regulatory recommendations. (Barr congressional testimony, March 30 and The Hill, March 28)
     
  • A recent House Financial Services Committee (HFSC) hearing—“The Federal Regulators’ Response to Recent Bank Failures”—featured testimony from Federal Reserve Vice Chair for Supervision Michael Barr, Federal Deposit Insurance Corp. Chairman Martin Gruenberg and Treasury Undersecretary for Domestic Finance Nellie Liang.
     
  • HFSC Chairman Patrick McHenry (R-NC) on March 31 stated, “As we heard from [President] Biden’s own regulators at this week’s hearing, supervisory incompetence was the leading cause of the failures. There is no evidence that the original Dodd-Frank would have prevented these bank runs. Additionally, no recent stress test has considered the current economic conditions—most notably the Fed’s rapid rate increases to combat Democrat-induced inflation—that contributed to the fall of these institutions.”

Roundtable Leaders Respond

Walker Webcast April 5, 2023 with Jeff DeBoer

  • Capital concerns affecting commercial and multifamily markets were a focus this week of the Walker Webcast, which featured Roundtable President and CEO Jeffrey DeBoer and National Multifamily Housing Council President Sharon Wilson Géno. Roundtable Member Willy Walker (Chairman & CEO, Walker & Dunlop) led the wide-ranging discussion on April 5, which addressed the federal response to the bank failures, the debt ceiling, and affordable housing. 

  • DeBoer said, “I don’t think anybody assumed a 12-year period of basically zero interest rates, followed by a steep 500bps increase in financing costs, immediately following a once-every-hundred-years pandemic that shut everything down and changed a lot of the ways  . . . (in which) . . . the built environment would be used,” DeBoer said. “I think all of this has to be allowed to settle through.” (Walker Webcast video and Connect CRE, April 5)
     
  • Similar observations were offered this week by the head of the International Monetary Fund, who cautioned that a more volatile global economy would bring slower growth and greater financial fragility. “There is simply no way that interest rates would go up so much after being low for so long and there would be no vulnerabilities. Something is going to go boom,” IMF Managing Director Kristalina Georgieva said. (PoliticoPro, April 6)
     
  • DeBoer also noted The Roundtable’s recent letter urging federal regulators “to take action immediately to provide increased latitude for financing institutions to work constructively with borrowers. Such action will avert what we believe would be an unnecessary crisis.” (Roundtable Weekly, March 17)

Bill Rudin on Squawk Box April 2023

The challenges facing the industry due to recent interest rate hikes, bank failures, and continued widespread remote work will be a top focus of The Roundtable’s Spring Meeting on April 24-25 in Washington, DC (Roundtable-level members only). 

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Bank Failures Increase Pressure on CRE Capital Markets

Posted on by Trey Jackson

Scott Rechler on CNBC's Squawkbox

The failures of Silicon Valley Bank and Signature Bank this month have raised concerns about the financial health of small and regional banks that hold a large amount of commercial real estate debt—particularly loans backed by office buildings already under pressure from decreased valuations, rising interest rates, and looming debt maturities. (New York Times, March 22 and Wall Street Journal, March 21) 

Call for Regulatory Flexibility 

  • Roundtable Board Member Scott Rechler, above, (chairman and CEO of RXR) appeared on CNBC’s Squawk Box Wednesday morning to discuss liquidity pressures on CRE. During the interview, he endorsed a recent Roundtable request that banking regulators grant increased flexibility immediately to financial institutions for refinancing loans with borrowers and lenders, allowing time for capital markets to stabilize and the private sector to develop solutions. (Commercial Observer, March 22)
  • Rechler added that if no relief is provided, increased pressures on CRE may threaten the tax base of municipalities, the viability of small businesses that rely on regional banks, and the supply of housing. (Squawk Box, March 20)
  • Last week’s Roundtable letter from President and CEO Jeffrey DeBoer informed federal bank regulators about the immediate need for reestablishing a troubled debt restructuring (TDR) program for CRE, similar to initiatives established in 2009 during the global financial crisis and in 2020 during the height of the COVID-19 pandemic. (BisNow and GlobeSt, March 21)
  • DeBoer’s letter also cited the lingering effects of the global pandemic, including remote work’s negative influence on office space demand, as pressure points on liquidity and refinancing options for CRE assets. (Roundtable Weekly, March 17) 

CRE Loan Concentrations 

Federal Reserve sunset

  • A March 16 report from Goldman Sachs Research showed that small- and medium-size banks with less than $250 billion in assets account for approximately 80% of commercial real estate lending and 60% of residential real estate lending.
  • The Wall Street Journal reported this week that smaller banks hold around $2.3 trillion in commercial real estate debt and that about $270 billion in commercial mortgages held by banks are set to expire this year, according to data firm Trepp Inc.
  • Additionally, sales of commercial mortgage-backed securities (CMBS) were down 85% last month compared with the same time in 2022 due to rising interest rates and defaults. (Bloomberg, Feb. 17, 2023)
  • Treasury Secretary Janet Yellen testified yesterday before a House Appropriations Committee panel that the federal government is prepared to protect depositors in banks “of any size” who may face the possibility of collapse. “These are tools we could use again for an institution of any size if we judge that its failure would pose a contagion risk,” Yellen said. (Reuters, March 23)
  • The Fed is reviewing tougher capital and liquidity requirements for midsize banks, along with more stringent annual stress tests to assess their ability to weather recessionary pressures. New rules may target mid-sized banks with assets totaling between $100 billion to $250 billion. (Wall Street Journal | Financial Times | Reuters, March 14) 

The Roundtable’s March 17 letter to federal regulators states, “to avoid increasing unnecessary risk, we respectfully request that the Agencies reaffirm that financial institutions have flexibility to use reasonable and prudent judgment to give borrowers and lenders more time to see properties and loans through this current evolving environment.” 

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Roundtable Urges Federal Bank Regulators to Reestablish CRE Troubled Debt Restructuring Program

Posted on by Trey Jackson

Real Estate Roundable President and CEO Jeffrey DeBoer

The Real Estate Roundtable today requested federal bank regulators to reestablish immediately a troubled debt restructuring (TDR) program for commercial real estate that would give financial institutions increased flexibility to refinance loans with borrowers and lenders. (Roundtable letter to regulators, March 17) 

Roundtable Liquidity Concerns 

  • The letter from Real Estate Roundtable President and CEO Jeffrey DeBoer, above, cites rising interest rates, a steady increase in looming debt maturities, remote work’s negative influence on office space demand, and heightened uncertainty from this week’s bank turmoil as contributing factors that have exerted pressure on liquidity and decreased refinancing options for CRE assets.
  • DeBoer added, “Regulators have taken significant action four times since 2009 to assist commercial real estate loan modifications during periods of economic instability—and now is the time to take action again. Our request is for immediate action, given increasing credit and liquidity constraints. Time will allow markets still struggling with post pandemic uncertainties to stabilize.”
  • Minutes from last month’s Fed Open Market Committee meeting confirmed economic pressures on CRE assets. The FOMC minutes state, “In particular, the staff noted that measures of valuations in both residential and commercial property markets remained high, and that the potential for large declines in property prices remained greater than usual.” 

Fed Intervention The Federal Reserve in Washington, DC

  • The Fed is reviewing tougher capital and liquidity requirements for midsize banks, along with more stringent annual stress tests to assess their ability to weather recessionary pressures. New rules may target mid-sized banks with assets totaling between $100 billion to $250 billion. (Wall Street Journal | Financial Times | Reuters, March 14)
  • The Fed this week acted to quell turmoil caused by the collapse of three mid-sized banks, including expanding its balance sheet to nearly $300 billion after months of shrinking it through a quantitative easing program. (Axios, March 17)
  • The Fed announced on Sunday night, March 12, the creation of a new Bank Term Funding Program (BTFP), offering loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions that pledge U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. The BTFP is backstopped up to $25 billion from the Exchange Stabilization Fund. (Fed announcement, March 12)
  • Additionally, a Fed report released yesterday showed a huge outflow of $153 billion in loans at the Fed’s “discount window,” a funding resource that helps depository institutions manage their liquidity risks. The previous record for discount window borrowing was $111 billion during the 2008 financial crisis.  

Remote Work 

empty office remote work

  • DeBoer’s letter to the Agencies also emphasized the lingering effect of the global pandemic on hospitality, senior housing, retail (including the enclosed shopping center market), office and other property sectors.
  • The ongoing pressure of remote work arrangements has altered the current demand for office space nationwide, created significant concerns about the future of office use, and the cast doubt on the future of American cities that heavily depend on property tax revenue to fund needed community services. (Roundtable letter, March 17)
  • The wide adoption of remote work may have been a factor in Silicon Valley Bank’s collapse, according to the bank’s 2023 annual report filed in February. SVB acknowledged in a filing with the Securities and Exchange Commission that it faced “risks from a prolonged work-from-home arrangement as well as our implementation of a broader plan to return to the office.” (Fortune, March 16 and Axios, March 17) 

The Roundtable’s letter concludes by urging the federal regulators to “take action immediately to provide increased latitude for financing institutions to work constructively with borrowers. Such action will avert what we believe would be an unnecessary crisis.” 

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