Tag: The Fed

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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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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White House Prods Agencies to Tighten Regulations for Mid-Sized Banks

Posted on by Trey Jackson

Banking regulators testify before the House Financial Services Committee

The White House proposed tighter regulations yesterday for regional banks with between $100 billion to $250 billion in assets—after bank regulators testified this week before congressional committees that they are considering similar measures. (White House Fact Sheet and Reuters, March 30 | AP and American Banker, March 28)

Regulatory Changes

  • Fed Vice Chair for Supervision Michael Barr, Federal Deposit Insurance Corp. Chairman Martin Gruenberg and Treasury Undersecretary for Domestic Finance Nellie Liang, above, testified on the need to strengthen capital standards for mid-sized banks in the wake of this month’s bank failures. (BGov, March 28)
  • The Biden administration stated that federal regulators could expand long-term debt requirements and reinstate banking rules that were rolled back in the previous administration. (White House Fact Sheet and CNBC, March 30)
  • Reuters reported that according to a senior White House official, “These are all actions that can be taken under existing law and as a result, there’s no need for congressional action in order to authorize the agencies to take any of these steps.”
  • The Fed’s Michael Barr is conducting a review of federal oversight of SVB, 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)
  • Bank Policy Institute head Greg Baer issued a statement emphasizing how imposing more regulation on all banks would drive costs higher in the economy. “It would be unfortunate if the response to bad management and delinquent supervision at SVB were additional regulation on all banks. The Fed has barely begun its promised review. This has a strong feeling of ready, fire, aim,” he stated. (Reuters, March 30)

Roundtable Recommendations

RER PC logo x500w white background

  • The Roundtable recently 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. (Roundtable letter to regulators, March 17)
  • The March 17 letter from Real Estate Roundtable President and CEO Jeffrey DeBoer to federal banking regulators recommended the reestablishing a troubled debt restructuring (TDR) program for commercial real estate that would give financial institutions increased flexibility to refinance loans with borrowers and lenders.
  • The Roundtable urged regulatory bank 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.

Agency Actions

  • The Roundtable letter also notes that regulators have taken significant action four times since 2009 to assist commercial real estate loan modifications during periods of economic instability. DeBoer added, “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.” (Roundtable letter to regulators, March 17)

This month’s Roundtable letter urged 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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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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Commercial Real Estate a Focus of Fed Loan Officer Survey and Bank Stress Test Plans

Posted on by Trey Jackson

Federal Reserve sunsetThis week, commercial real estate was a prominent focus of the Federal Reserve’s quarterly senior loan officer opinion survey and announcement about the hypothetical scenarios that 23 banks will be stress-tested against in 2023. (Fed Survey, Feb. 6 and Stress Test, Feb. 9)

2022 Survey & 2023 Stress Test

  • On Monday, the Fed released its January 2023 Senior Loan Officer Opinion Survey on Bank Lending Practices, which reported tighter standards and weaker demand for all commercial real estate loan categories for the fourth quarter of 2022. The survey also reported that for 2023, banks expect lending standards will tighten, demand will weaken, and loan quality will deteriorate across all loan types. (Reuters, Feb. 6 | American Banker, Feb. 7 | GlobeSt, Feb. 9)
  • On Thursday, the Fed released the hypothetical scenarios for its 2023 annual stress test, which measures and evaluates the ability of large banks to continue lending to businesses and households during a recession or weakened financial conditions.
  • The scenarios will include a severe global recession, heightened stress in both commercial and residential real estate markets, and a new, unspecified “exploratory market shock.” The new component will not count against capital requirements affected by the tests, the Fed said. (BGov, Feb. 10)
  • The Fed detailed additional key features of the “severely adverse scenario” by instructing banks, “Declines in commercial real estate 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. Declines in U.S. house prices and U.S. commercial real estate prices should also be assumed to be representative of … those that experienced rapid price gains before the pandemic and were significantly affected by the event.” (pdf of instructions for 2023 Federal Reserve Stress Test Scenarios)

Delinquency Rate & CRE Outlook

Cutting-Through-Uncertainty-2023-webcast-image

  • Trepp’s CMBS Research reported this week that that the overall US CMBS special servicing rate dropped in January 2023 six basis points to 5.11%—down for the second month in a row after four consecutive increases from August to November. By comparison, the rate one year ago was 6.33% and six months registered at 4.79%. (Trepp, Feb. 8)
  • The office sector saw a 16-basis point increase in the special servicing rate in January, and it led all new special servicing transfers.
  • An industry panel discussion on Feb. 6 focused on Cutting Through Uncertainty: 2023 Economic & CRE Outlook. The on-demand webinar is moderated by Roundtable Member Hessam Nadji (President & CEO, Marcus & Millichap), who leads a discussion with Moody’s Analytics Chief Economist Mark Zandy, along with Roundtable Members Wendy Mann (CEO, CREW Network), Tom McGee (President and CEO, ICSC) and Marc Selvitelli (President & CEO, NAIOP).

This month, The Real Estate Roundtable will release its Q1 Economic Sentiment Survey, which will report on how leading CRE executives view current market conditions and their expectations for the year.

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Fed Adopts SOFR as Fallback Benchmark Rate to Replace LIBOR on Certain Legacy Contracts

Posted on by Trey Jackson

Federal ReserveThe Federal Reserve Board on Dec. 16 adopted SOFR (Secured Overnight Financing Rate) as the fallback benchmark rate to replace LIBOR (London Interbank Offered Rate) in certain financial contracts after the use of LIBOR expires on June 30, 2023. (Federal Register notice and Bloomberg Law, Dec. 16)

LIBOR to SOFR

  • LIBOR was the dominant reference rate used in recent decades for financial contracts—including commercial real estate debt, mortgages, student loans and derivatives—worth an estimated $223 trillion. (Roundtable Weekly, Dec. 10, 2021.)
  • The Fed’s action this month implements a final rule from the Adjustable Interest Rate (LIBOR) Act (H.R. 4616)—passed by Congress in March to provide a uniform, nationwide solution for so-called tough legacy contracts that do not have clear and practicable provisions for replacing LIBOR. (Roundtable Weekly, March 11, 2022)
  • The Real Estate Roundtable and 17 national trade groups submitted letters in 2021 on April 14 and July 27 to policymakers in support of measures to address “tough legacy” LIBOR-based contract issues. (Roundtable Weekly, Dec. 10, 2021)

Final LIBOR Rule

Libor transition to SOFR image

  • The final rule identifies replacement benchmark rates based on SOFR to replace overnight, one-month, three-month, six-month, and 12-month LIBOR in contracts subject to the LIBOR Act. These contracts include U.S. contracts that do not mature before LIBOR ends and that lack adequate “fallback” provisions that would replace LIBOR with a practicable replacement benchmark rate. (Fed Reserve Board’s memo, Dec. 2 and Fed news release, Dec. 16)
  • The final rule also restates safe harbor protections contained in the LIBOR Act for market participants who need to switch existing LIBOR-referencing financial contracts to a replacement benchmark for debt instruments before the replacement date on June 30, 2023. (Federal Register notice on LIBOR)

The LIBOR transition will be among the issues discussed during The Roundtable’s Real Estate Capital Policy Advisory Committee’s (RECPAC) next meeting on Jan. 24 in Washington, DC during The Roundtable’s State of the Industry Meeting.

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Fed Reports U.S. Financial Stability Risks Include Inflation, Asset Valuation Pressures, and Cyber Attacks

Posted on by Trey Jackson

The Federal Reserve in Washington, DC

Near-term risks to the U.S. economy and financial system include inflation, asset valuation pressures and cyber attacks, according to the Federal Reserve’s semiannual Financial Stability Report released this month. (Wall Street Journal, Nov. 4)

Stability Threats

Fed Report Risks Nov 2022

  • “Higher-than-expected interest rates could lead to increased volatility in financial markets, stresses to market liquidity, and declines in asset prices, including prices of both commercial and residential real estate properties,” the central bank states in its report.
  • The report warns that such effects could cause losses at a range of financial intermediaries, reducing their access to capital and raising their funding costs—and pose adverse consequences for asset prices, credit availability, and the economy.
  • Federal Reserve Vice Chair Lael Brainard stated the American financial system has held up through the turbulent developments of the past year. She said, “Household and business indebtedness has remained generally stable, and on aggregate households and businesses have maintained the ability to cover debt servicing, despite rising interest rates.”

Cybersecurity Concerns

Financial Risks Chart - Federal Reserve

  • Respondents to the central bank’s survey on stability threats also noted continuing concerns about the Russian invasion of Ukraine, high oil prices and a potential conflict between China and Taiwan. Cyber attacks pose an additional risk that “could come as retaliation for sanctions imposed on Russia,” according to the Fed’s report.
  • The Roundtable’s Homeland Security Task Force will hold a conference call on Monday, November 28 that will focus on a new Cyber Risk Summary briefing on Commercial Facilities—includes Commercial Real Estate—from the Cybersecurity and Infrastructure Security Agency (CISA). [To register, contact Andy Jabbour of the Real Estate Information and Sharing Network (RE-ISAC)]
  • U.S. financial institutions processed approximately $1.2 billion in ransomware-related payments last year, a nearly 200 percent increase compared to 2020, according to the Treasury Department’s Financial Crimes Enforcement Network. (FinCEN report, Nov. 1)

Cybersecurity issues and CRE will be discussed during the next HSTF meeting on Jan. 25, 2023—held in conjunction with The Roundtable’s State of the Industry meeting. (Roundtable Weekly, Oct. 7)

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Fed Seeks Comment on CRE Loan Accommodations and Workouts Policy Statement

Posted on by Trey Jackson

Federal Reserve Building

Federal regulators are inviting comment on an updated policy statement that addresses: (1) short-term commercial real estate loan accommodations; (2) revisions and additions to examples of CRE loan workouts; and (3) accounting developments for estimating loan losses. (Federal Register, Sept. 15 and GlobeSt, Sept. 19)

Why It Matters

  • The Fed’s proposal would build on existing guidance around the need for financial institutions to work prudently and constructively with creditworthy borrowers during times of financial stress.

  • The “Policy Statement on Prudent Commercial Real Estate Loan Accommodations and Workouts” was developed jointly by the Federal Reserve’s Board of Governors, the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), and the National Credit Union Administration (NCUA) in consultation with state bank and credit union regulators.
  • The Fed Board aims to update and expand the 2009 federal regulators’ statement on prudent commercial real estate loan workouts for CRE borrowers experiencing diminished operating cash flows, depreciated collateral values, or prolonged delays in selling or renting commercial properties. (FFIEC news release, Oct. 30)

Update & Expand

Federal Reserve

  • This month’s proposed Fed policy reaffirms two key principles from the 2009 statement:
    • Financial institutions that implement prudent CRE loan accommodation and workout arrangements—after performing a comprehensive review of a borrower’s financial condition—will not be subject to criticism for engaging in these efforts, even if these arrangements result in modified loans that have weaknesses that result in adverse credit classification.
    • Modified loans to borrowers—who have the ability to repay their debts according to reasonable terms—will not be subject to adverse classification solely because the value of the underlying collateral has declined to an amount that is less than the loan balance.
  • If finalized, the proposed statement would supersede the 2009 statement for all supervised financial institutions. The proposal would also revise language to incorporate current industry terminology and include updated references to other federal supervisory guidance.

The Roundtable’s Real Estate Capital Policy Advisory Committee (RECPAC) plans to work on comments, which are due by November 14, 2022.

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Increased Pace of Fed’s Quantitative Tightening Raises Concerns About Liquidity Stress in Banking System

Posted on by Trey Jackson

The Federal Reserve

As the Federal Reserve accelerates the unwinding of its nearly $9 trillion balance sheet this month, there is growing concern about the impact that quantitative tightening (QT) may have on credit market liquidity and the overall economy. (Financial Times, Sept 14 and Reuters, Sept. 15)

QT & Liquidity

  • The Fed launched its QT initiative on June 1 with initial caps set for $30 billion in U.S. Treasuries and $17.5 billion in agency mortgage-backed securities—but scheduled the caps to increase this week to $60 billion and $35 billion, respectively. (Federal Reserve, Plans for Reducing the Size of the Federal Reserve’s Balance Sheet, May 4)
  • The increased QT pace of up to $95 billion per month has sparked concerns about how contracting liquidity conditions could impact the overall economy and whether the Fed may seek an early exit from QT. (Financial Review, Sept. 14 and BGov, Sept. 12)
  • The QT increase prompted a Bank of America warning to clients this month that strain on bond market liquidity is “one of the greatest threats to global financial stability today, potentially worse than the housing bubble of 2004-2007.” (MarketWatch, Sept 15 and New York Times, Sept. 11)
  • The Fed’s expected policy interest rate increase by 75 to 100 basis points next week would keep borrowing costs elevated as the central bank’s scheduled QT effort increases.

Soft Landing Challenge

Roundtable Board Member Barry Sternlicht

  • The challenge for the Fed is whether it can achieve a “soft landing”—reducing the inflation rate while avoiding a recession—while the U.S. economy faces volatile inflationary factors from the war in Ukraine, high energy costs, and supply chain disruptions.
  • Rising interest rates and various market conditions around the world could lead to a global recession next year, resulting in “lasting harm” to emerging and developing economies, according to an analysis released today by the World Bank. (Financial Times and UPI, Sept. 16)
  • “Recent tightening of monetary and fiscal policies will likely prove helpful in reducing inflation,” said Ayhan Kose, the World Bank’s Acting Vice President for Equitable Growth, Finance, and Institutions. “But because they are highly synchronous across countries, they could be mutually compounding in tightening financial conditions and steepening the global growth slowdown.” (World Bank news release and analysis, Sept. 16)
  • Roundtable Board Member Barry Sternlicht (Chairman and CEO, Starwood Capital Group), above, appeared on CNBC’s Squawk Box yesterday to discuss the Fed, inflation, and the U.S. economy. Sternlicht stated the economy is “braking hard” and that prices will begin to decrease after recent Fed measures.

The Roundtable’s Fall Meeting next week in Washington will include a discussion on the Fed’s actions and economic conditions with Dr. Austan Goolsbee, former White House Chairman of the Council of Economic Advisers from 2010-2011 and a member of President Barack Obama’s cabinet.

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Roundtable-Supported Fed Liquidity Facility Bolstered CRE Finance During Pandemic

Posted on by Trey Jackson

Fed Building DC

A report published this week by the Dallas Fed concludes that the Federal Reserve’s Term Asset-Backed Loan Facility (TALF) played a key role in bolstering commercial real estate finance during the pandemic. The Federal Reserve added outstanding CMBS as eligible collateral for lending through the TALF in 2020 after urgent requests from business coalitions that included The Real Estate Roundtable. (Roundtable Weekly, April 17, 2020 and Joint Trades letter, March 24, 2020) 

TALF & CRE

  • The report by three authors with the Federal Reserve Bank of Dallas’ Research Department states the value of CRE assets at the onset of the pandemic in Feb. 2020 – particularly office towers, retail centers and hotels – suddenly became uncertain. The TALF’s subsequent support of asset-backed securities successfully anchored CMBS prices and helped to steady CRE finance during a tumultuous economic environment.
  • The TALF, previously used during the 2008 financial crisis, was relaunched by the Fed on March 23, 2020 in response to the Covid-19 crisis.
  • A business coalition that included The Roundtable on March 24, 2020 urged the Federal Reserve, Treasury, and Federal Housing Finance Agency to immediately expand the TALF to include non-agency CMBS – including legacy private-label conduit and single-asset single borrower (SASB) assets. The coalition stated the inclusion of private-label assets would stabilize asset prices and shore up the balance sheets of market participants. (Joint Industry letter)
  • On April 9, the Federal Reserve announced the range of TALF-eligible collateral would expand 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 excluded single-asset single borrower (SASB) CMBS and commercial real estate collateralized loan obligations (CRE CLOs). (Federal Reserve news release and Term Sheet)
  • Six real estate industry organizations, including The Roundtable, wrote again to federal regulators on April 14, 2020 about the urgent need to include a wider range of investment grade commercial real estate debt instruments in the Fed’s TALF.
  • The 2020 letter stated, “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.”

  • The Fed on May 12, 2020 broadened the range of leveraged loans that could be used as collateral for the TALF to include new Triple-A rated collateralized loan obligations (CLOs) with leveraged loans. (Fed news release and Term Sheet)

TALF Lessons 

Federal Reserve Building up close

The report published this week concludes the TALF proved especially important in supporting commercial real estate finance. “The TALF program structure provided needed liquidity to investors at the height of the pandemic, but it incentivized borrowers to exit as normal market conditions returned, allowing the program to quickly unwind,” the article states. 

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