Tag: The Fed

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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Federal Reserve’s Robert Kaplan Discusses Economic Outlook with Roundtable; Real Estate Coalition Urges State and Local Officials to Distribute Federal Pandemic Relief Funds

Posted on by Trey Jackson

Kaplan Discussion

Federal Reserve Bank of Dallas President and CEO Robert S. Kaplan, top left in photo, on April 12 discussed a wide range of monetary and fiscal policy issues with Roundtable Chairman Emeritus Robert S. Taubman (Chairman & CEO, Taubman Centers, Inc.), top right, and Roundtable President and CEO Jeffrey DeBoer, center. (Watch the Kaplan video interview on The Roundtable’s YouTube Channel)

The Fed View

  • The remote discussion focused on the overall economy, inflation trends, affordable housing, commercial real estate, the banking industry and cryptocurrency. Among Mr. Kaplan’s key points:
    • The Dallas Fed forecast for the 2021 U.S. economy’s growth rate is 6.5 percent. 

    • The distribution of COVID-19 vaccines is outpacing the spread of the virus, positively affecting economic growth.  

    • A recovering economy follows improved health conditions, with expected increases in consumer mobility and spending.

    • A significant element driving the economic recovery is “Substantial fiscal policy, much more substantial as a percentage of GDP than we had during the Great Recession.” 
  • Kaplan acknowledged the challenge of balancing central bank monetary policies with fiscal policies enacted by lawmakers. “Anytime there’s fiscal actions or other changes, you have to keep recalibrating that balance. There’s no textbook for this because we haven’t been through a period where we were shut down and we’re now reopening … and there’s no precedent in recent years of fiscal policy that’s this size of GDP,” Kaplan said.  (Video of the discussion)
  • He commented about the yield on U.S. Treasuries, which rose to 1.77% last month. “As we recover, it wouldn’t surprise me for it to drift higher, the 10 year,” Kaplan said, adding, “There’s no shortage of capital” to buy Treasuries. (BGov, April 9)
  • Kaplan also addressed the economic trends monitored by the Dallas Fed, reopening progress and CRE debt exposure to banks.  

Pandemic Relief Funds & Distribution 

treasury-department-building_x475w

  • Significant fiscal policy enacted by Washington lawmakers last month authorized hundreds of billions in pandemic relief under the American Rescue Plan Act of 2021 to households, small businesses, and the hospitality industry suffering from the economic impact of COVID-19. (Roundtable Weekly, March 12, 2021)
     
  • The Wall Street Journal reported on April 13 that state and local authorities are overwhelmed with “how to allocate $25 billion in federal rental relief, leaving many tenants and landlords waiting weeks or months for their share.”
     
  • The Roundtable is part of a broad real estate coalition that wrote on April 15 to state, county and municipal officials, urging them to distribute the allocated federal funds as soon as possible. (Coalition letter)
     
  • The coalition letter emphasized the need for elected state and local leaders “to quickly and fully allocate available American Rescue Plan federal funds to provide assistance to renters, consumer-facing small businesses, and impacted industries such as retail, tourism, travel, and hospitality that are having trouble paying rents, mortgages or remaining viable enterprises due to the COVID-19 pandemic.”
     
  • The letter adds, “Such assistance would make a big difference in the lives of thousands upon thousands of COVID-19 affected renters and businesses in their cities, counties, and states – and would also provide stability to the buildings and communities in which they live.” 

The Treasury Department continues to implement pandemic recovery programs, including the State and Local Fiscal Recovery Fund, State Small Business Credit Initiative, and renter and homeowner assistance. Treasury Secretary Yellen  and White House Rescue Plan Coordinator Gene Sperling met yesterday with members of the National Governor’s Association Executive Committee to determine the most efficient and effective way to get federal resources to states. (Treasury Dept readout, April 15) 

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Treasury Requests Cessation of Several Fed Emergency Lending Programs and Return of Unused Funds; Senate Republicans Want Funds Repurposed for Pandemic Relief

Posted on by Trey Jackson

Treasury Secretary Steven Mnuchin sent a letter to Federal Reserve Chairman Jay Powell yesterday requesting that five emergency lending facilities, including the Main Street Lending Program (MSLP), should not be extended past their scheduled expiration on December 31, 2020. Mnuchin also requested the Fed to return unused Treasury loan funds from the programs for Congress to re-appropriate. (Treasury letter and The Wall Street Journal, Nov. 19)

  • The MSLP has the capacity to issue up to $600 billion in loans, yet has only completed approximately 400 loans totaling $3.7 billion. (Washington Post, Oct, 30)
  • The programs were created as part of the CARES Act coronavirus aid package passed in March, which included funding for all the Fed’s emergency lending facilities. (The Hill, Nov. 19)
  • Mnuchin’s Nov. 19 letter stated, “I am requesting that the Federal Reserve return the unused funds to the Treasury. This will allow Congress to re-appropriate $455 billion, consisting of $429 billion in excess Treasury funds for the Federal Reserve facilities and $26 billion in unused Treasury direct loan funds.”
  • The decision to end the lending facilities operations cannot be done unilaterally by Treasury; it would require cooperation by the Fed.
  • Chairman Powell issued a statement after markets closed yesterday that signaled disagreement. “The Federal Reserve would prefer that the full suite of emergency facilities established during the coronavirus pandemic continue to serve their important role as a backstop for our still-strained and vulnerable economy.” (Wall Street Journal, and CNBC interview with Mnuchin, Nov. 20)
  • Powell also said on Nov. 17 that “I don’t think it is time yet, or very soon” to close down the programs and that the Fed was “using all of our tools to support the recovery for as long as it takes until the job is well and truly done.” (Reuters, Nov. 17)
  • If the Trump administration decides not to extend the Fed programs, the new administration’s Treasury Department could reestablish them after Biden is inaugurated on Jan. 20. (Wall Street Journal, Nov. 10)

Pandemic Relief Package

Capitol side with sun and clouds

The request for the Fed to return unused funds from the lending programs comes as Congress remains at an impasse over costs for a pandemic relief package – the Trump administration offered a ceiling of $1.8 trillion, House Democrats passed a $2.2 trillion bill, and Senate Republicans favored a $500 billion measure. (Roundtable Weekly, Nov. 6)

  • Mnuchin and Senate Majority Leader Mitch McConnell (R-KY) today discussed a strategy for reviving talks between Republicans and Democrats over the stalled pandemic stimulus package. McConnell commented after the meeting about utilizing the unused Fed funds for a relief package, stating, “Congress should repurpose this money toward the kinds of urgent, important, and targeted relief measures that Republicans have been trying to pass for months, but which Democrats have repeatedly blocked with all-or-nothing demands.” (AP, Nov. 20)
  • President-elect Joe Biden on Monday urged Congress to advance the $2.2 trillion HEROES Act (H.R. 925) passed by the House. “Right now, Congress should come together and pass a COVID relief package like the HEROES Act that the House passed six months ago. Once we shut down the virus and deliver economic relief to workers and businesses, then we can start to build back better than before,” Biden said. (BGov, Nov. 16)
  • A report issued Wednesday by The Century Foundation shows that approximately 12 million Americans will lose unemployment insurance by the end of the year due to deadlines set by Congress early in the pandemic. (Washington Post and GlobeSt, “12M Workers Set to Lose Unemployment Benefits,” Nov. 19)

Lawmakers also face the added pressure of passing a government funding bill to avoid a Dec. 11 partial shutdown. Congress may choose to merge some COVID-19 aid measures into a sweeping multi-trillion-dollar omnibus funding bill during the lame-duck session to address both issues – or attempt to pass separate bills.

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Fed Announces Limited Adjustments to Main Street Lending Program Terms

Posted on by Trey Jackson

The Federal Reserve in Washington, DC

The Federal Reserve on Oct. 30 announced limited adjustments to the terms of its Main Street Lending Program (MSLP) facility in an attempt to support small and medium-sized businesses affected by the COVID-19 outbreak. (Fed news release) 

  • The MSLP has the capacity to issue up to $600 billion in loans, yet has only completed approximately 400 loans totaling $3.7 billion. (Washington Post, Oct, 30) 
  • With congressional negotiations over a pandemic relief package at an impasse, The Fed reduced the minimum loan size for three Main Street facilities from $250,000 to $100,000 and reduced fees to lenders who facilitate the loans. (Wall Street Journal and Roundtable Weekly, Oct. 30)
  • The Fed also issued a set of frequently asked questions to clarify that Paycheck Protection Program loans of up to $2 million may be excluded when determining the maximum MSLP loan size. (MSLP FAQs, Oct. 30)
  • Real Estate Roundtable and President Jeffrey DeBoer yesterday commented to CoStar, “The Main Street Lending Program won’t be energized by modest revisions. Banks need greater incentives to focus on the program, the borrower eligibility rules must be rethought, and the loan underwriting rules should better reflect the needs of troubled businesses. Without far deeper reforms to the program, its full potential assistance will continue to be untapped,” DeBoer stated. (CoStar, Nov. 5, “Modest Changes May Not Be Enough to Make Relief Effective, Head of Real Estate Industry Group Says”)
  • DeBoer testified about the MSLP on Sept. 9 before the Senate Banking, Housing and Urban Affairs Committee on how to improve access to Federal Reserve credit facilities for businesses such as manufacturing, retail, restaurants, real estate owners, and other asset-based borrowers. (Roundtable Weekly, Sept. 11)
  • DeBoer told the Committee, “The recommendations that I have made on the Main Street Lending Program … really require no additional funds from the federal government. They are administrative. They could be done tomorrow by the Treasury and the Fed if they wanted to.” (Roundtable Oral Comments and written statement / video of DeBoer’s Testimony and Q&A with Senators)
  • Fed Chairman Jay Powell testified before Congress on Sept. 23 that the central bank has “done basically all of the things that we can think of.” Powell added, “There is nothing major that we see now that would be consistent with opening it (MSLP) up further.” (American Banker, Sept. 23)
  • Last month, The Fed released its Summary of Commentary on Current Economic Conditions, showing that “commercial real estate conditions continued to deteriorate in many Districts.” (The Fed’s Beige Book, Oct. 22)
  • The Fed lending programs backed by pandemic relief legislation are set to expire at the end of December.  Fed Chairman Powell and Treasury Secretary Steven Mnuchin must decide which programs to extend into 2021. (New York Times, Nov. 5) 

The Roundtable continues to urge regulators and lawmakers to develop specific MSLP changes to bolster small business tenants and other industries struggling with the pandemic’s ongoing economic impact. 

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Powell and Mnuchin Urge More Congressional Pandemic Fiscal Relief; Fed Releases FAQs on Main Street Lending Program; Democrats Considering New COVID-19 Package

Posted on by Trey Jackson

Treasury Secretary Steven Mnuchin and Federal Reserve Chairman Jay Powell

Federal Reserve Chairman Jay Powell (right) and Treasury Secretary Steven Mnuchin (left) testified before House and Senate committees this week to discuss the government’s pandemic response.  Powell offered no option for administrative changes to the Main Street Lending Program (MSLP) credit lending facility while Mnuchin strongly urged Congress to repurpose unused COVID-19 relief funds in another legislative pandemic aid package.  (BGov, Sept. 23 and Reuters, Sept. 24)

  • Recommendations to improve access to the MSLP were a focus of recent testimony by Roundtable President and CEO’s Jeffrey DeBoer on behalf of the industry before the Senate Banking Committee.  (Roundtable Weekly, Sept. 11)
  • Powell responded about the MSLP that the Fed has done “… basically all of the things we can think of that are clear gains (but) we are looking to do more.”  He added, “… but I would say the things that we have done have been really to widen the appeal of that program and its effectiveness … there is nothing major that we see now that would be consistent with opening it up…”  (BGov and CQ Committee transcript, Sept. 23)

Fed Updates MSLP FAQs

Federal Reserve Building DC

The Fed on Sept. 18 issued new guidance to banks for the MSLP in an attempt to encourage increased lending.  The central bank’s revised “Frequently Asked Questions” for the MSLP emphasize that lender underwriting should look back to the borrower’s pre-pandemic condition and forward to their post-pandemic prospects. The FAQs also seek to clarify the Board and Department of Treasury’s expectations regarding lender underwriting.  (Fed news release)

  • In a news conference announcing the FAQs, Powell said, “I would say it may be that further support for commercial real estate will require further action for Congress – from Congress.”

     

  • During his three committee appearances this week, Powell consistently emphasized that more fiscal relief is needed from Congress to sustain an economic recovery from the pandemic.  Mnuchin struck a similar theme in his two committee appearances while urging Congress to pass a new package that would reuse unused funds from previous COVID-19 relief authorizations for urgent needs.

     

  • Mnuchin told the Senate Banking Committee this week that up to $380 billion could be repurposed.  “It would not cost an extra penny,” Mnuchin said.  (Reuters, Sept 24)

     

  • During the Sept. 24 hearing, Senate Banking Committee Chairman Mike Crapo (R-ID) in his opening statement referred to the committee’s earlier hearing on Sept. 9 on “The Status of the Federal Reserve Emergency Lending Facilities.”

    Real Estate Roundtable President and CEO Jeffrey DeBoer

  • Chairman Crapo said, “Jeff DeBoer (above) President  and CEO of the Real Estate Roundtable painted a bleak picture of the condition of the commercial real estate market. He said, ‘It is impacting their ability to meet their debt service obligations which increases pressure on financial institutions, pension fund investors and others.’  And he said, ‘It is pushing property values down to the detriment of local governments. It is causing much stress to pools for commercial mortgage backed securities and it is threatening to result in countless commercial property foreclosures. The situation must be addressed.’”  (Crapo’s Opening Statement, Sept. 24 and DeBoer’s testimony and Q&A, Sept. 9)
  • Crapo added, “Negotiating toward a realistic package that can actually get passed and signed into law would best serve the American people during this difficult time.”

     

  • Mnuchin told the Senate Committee that he and House Speaker Nancy Pelosi (D-CA) have “agreed to continue to have discussions.” (Wall Street Journal, Sept. 24)

Democrats Considering New Aid Proposal

House Speaker Nancy Pelosi (D-CA)

Pelosi has directed her committee chairs this week to assemble a scaled back coronavirus relief package of approximately $2.4 trillion that could be used for as a basis for potential discussions with the White House and Senate Republicans. (Politico, BGov, and The Hill, Sept 24)

  • Negotiations over a COVID-19 relief bill between Democrats and Republicans broke down in August over a nearly $1 trillion gulf between their proposals. 
  • The House passed a $3.4 trillion package in May (H.R. 6800), which is more than the $1.5 trillion President Trump indicated he would support and much larger than a $650 billion package supported by Senate Republicans.
  • House Democrats could vote on a new plan next week, which would appease lawmakers from battleground election states anxious to pass a pandemic aid package before adjourning to campaign – despite chances that a Democrat-only plan is unlikely to attract Republican support.

Speaker Pelosi said last week that the House would remain in session until an agreement is reached, and House Majority Leader Steny Hoyer (D-MD) clarified that Representatives would be on call to return to the Capitol on short notice in the event a deal is reached. (BGov, Sept. 15)

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Senate Banking Committee Chair Urges Expansion of Fed’s Main Street Lending Program to Accommodate Commercial Real Estate

Posted on by Trey Jackson

Senate Banking Committee Chairman Mike Crapo (R-ID) on July 31 submitted a letter to Treasury Secretary Mnuchin and Fed Chair Jay Powell encouraging the expansion of the Main Street Lending Program (MSLP) by setting up an asset-based lending program and commercial real estate program.  (Sen. Crapo’s letter, July 31)

  • Specifically, the letter encourages the Treasury and Fed to:
    • Establish a facility to accommodate asset-based lending could open access to critical resources for several industries that could not otherwise access the MSLP based on earnings or cash flow metrics. Such asset-based lending would be predicated on pledged collateral.
    • Address the unique circumstances faced by commercial real estate, including securitized commercial mortgages, whether through access in the MSLP or a separate facility. Several options have been circulated and should be carefully considered in crafting the appropriate terms.
  • The letter also directs the Treasury and Fed to sidestep the need for an additional Congressional appropriation of funds by utilizing the remaining funds available under section 4003(b)(4) of the CARES Act intended for Federal Reserve 13(3) facilities.
  • A coalition of nine real estate industry groups, including The Real Estate Roundtable, on July 21 submitted a set of recommendations to the Senate Banking Committee aimed at improving the Fed’s MSLP for commercial real estate owners and tenants.  The committee is currently reviewing the effectiveness of the MSLP and other Fed credit lending facilities launched to counter the economic repercussions of the COVID-19 crisis. (Real estate coalition letter, July 21 and Roundtable Weekly, July 24)
  • The MSLP became fully operational about a month ago with $600 billion in lending capacity.  Banks who participate in the program must make loans for at least $250,000, with strict requirements, and loans cannot be approved for highly-indebted companies.
  • The program to date has attracted only eight borrowers as of July 27 – according to a report released yesterday by the central bank – and been used to support only about $100 million in loans, with more in process.  (BGov, Aug 7)
  • Separately, four U.S. Senators wrote to Treasury Secretary Mnuchin and Federal Reserve Chairman Jay Powell this week with recommendations on reforming the Fed’s MSLP credit facilities.  (Senators’ letter, Aug. 4)
  • Sens. Mike Braun (R-IN), John Cornyn (R-TX), Kelly Loeffler (R-GA) and Thom Tillis (R-NC) offer specific ways the MSLP program could be amended to better serve borrowers across the nation to save millions of American jobs, including:
    • Increase the maximum debt-to-EBITDA leverage ratio that qualifies borrowers for loans.
    • Eliminate the 200% collateralization requirement in the MSPLF and increase the maximum loan amount.
    • Permit borrowers of MSLP loans to refinance debt within at least 12 months of the maturity period, revising the present prohibition on refinancing debt until it comes within 90 days of the maturity date.

The Congressional Oversight Commission held a hearing today on the MSLP.  The bipartisan commission is a five-person panel established by the CARES Act to monitor use of coronavirus aid funds. Witnesses at today’s hearing included Federal Reserve Bank of Boston President and CEO Eric Rosengren.  The Commission has released three reports, all of which are available for review at the Congressional Oversight Commission’s website.

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Real Estate Coalition Seeks Expansion of Main Street Lending Program for CRE Borrowers; Hotel Industry Seeks COVID-19 Relief

Posted on by Trey Jackson
The Federal Reserve in Washington, DC
Federal reserve building at Washington D.C. on a sunny day.

A coalition of nine real estate industry groups, including The Real Estate Roundtable, on July 21 submitted a set of recommendations to the Senate Banking Committee aimed at improving the Fed’s Main Street Lending Program (MSLP) for commercial real estate owners and tenants.  The committee is currently reviewing the effectiveness of the MSLP and other Fed credit lending facilities launched to counter the economic repercussions of the COVID-19 crisis. (Real estate coalition letter, July 21)

  • The coalition letter states, “The impact of COVID-19 has been especially devastating to commercial real estate tenants, borrowers and lenders. As our members attempt to navigate the fall-out from this crisis, there is a deficiency of reasonably priced capital sources to address temporary liquidity deficits. Should impacted assets go into foreclosure, a downward spiral follows, affecting jobs, property values, investors at all levels (including pension funds), and state and local tax revenues. The repercussions on communities will be profound and take years from which to recover.”
  • The coalition letter makes a number of recommendations for adapting the MSLP to support real estate. 

AHLA Comment Letter Requests Additional Liquidity Assistance

The American Hotel & Lodging Association (AHLA) sent a letter to the congressional leadership this week requesting additional relief as the leisure and hospitality sector faces the loss of 4.8 million jobs since February.  AHLA is urging Congress to:

  • Provide additional liquidity for severely impacted businesses through a targeted extension of the Paycheck Protection Program (PPP).
  • Establish a Commercial Mortgage Backed Securities (CMBS) market relief fund, with a specific focus on the hotel industry, as part of the Federal Reserve’s lending options.
  • Make structural changes to the Main Street Lending Facility (MSLP) established under the CARES Act to ensure hotel companies can access the program.
  • Include limited liability language to provide a limited safe harbor from exposure liability for hotels that reopen and follow proper public health guidance.
  • Include targeted tax provisions that will benefit severely injured businesses and their employees, including tax credits for capital expenditures or expenses to meet the industry’s Safe Stay initiative.

Moody’s Report Raises Concerns About CMBS Delinquencies for Hotel and Retail

Moody’s reported yesterday that special servicing and late payment volumes have both continued to spike as ongoing COVID-19-related cash flow disruptions severely hinder retail and hotel properties backing commercial mortgage-backed securities (CMBS) loans. 

  • The report shows that significant drops in revenue per available room (RevPAR) and low rent collections among nonessential business have resulted in hotel and retail loans making up more than 91% of special servicing transfers since 1 March. The remaining 9% was primarily office and mixed-use. Mixed-use property types typically included a retail or hotel component.  (Moody’s report, July 23)

Federal Reserve officials are scheduled to meet on July 28 and 29 to discuss how and whether to provide more economic stimulus. They are expected to address interest rates and the status of several credit lending programs, but will likely not release any proposal until the fall.  (Wall Street Journal, July 22)

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

Posted on by Trey Jackson

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

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

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

Main Street Lending Program Launches

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

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

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

Regulators Support Financing to Non-Bank Lenders

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

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

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

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Talks Continue on Next Phase of Coronavirus Stimulus as Federal Reserve Expands Main Street Lending Program

Posted on by Trey Jackson

The Federal Reserve in Washington, DC

Trump Administration officials are signaling support for another Coronavirus stimulus package that Congress is expected to consider next month.  (Wall Street Journal, June 11)

  • After the House of Representatives on May 22 passed a $3 trillion coronavirus relief bill, congressional Republicans have signaled they may be open to another COVID-19 legislative package, but on a measured basis. (Forbes, May 21 and Roundtable Weekly, May 22) 
  • Treasury Secretary Steven Mnuchin on June 10 testified before the Senate Small Business and Entrepreneurship Committee: “I definitely think we are going to need another bipartisan legislation to put more money into the economy.  I think whatever we do going forward needs to be much more targeted, particularly to the industries and small businesses that are having the most difficulty in reopening as a result of COVID-19.” (RollCall, June 10)
  • Mnuchin on June 11 responded to a question by Jim Cramer of CNBC’s “Squawk on the Street” about future coronavirus stimulus plans and rental payment pressures faced by commercial real estate.
  • Mnuchin said, “On the commercial side … it is more complicated.  You have companies, particularly in retail, that are having a lot of issues. They are going to have to deal with the rent.  The landlords then have to deal with mortgage payments.”
  • The Treasury Secretary continued, “…how do we help the industries that are especially impacted –- and I would say hotels, travel, entertainment, restaurants are right up there.  So we are going to need to be much more targeted in making sure that we get people back to work and help these industries.”
  • White House economic adviser Kevin Hassett on June 9 said the odds of passing additional coronavirus economic stimulus before Congress breaks for its August recess “are very, very high.”  Hasset added that the issue of business liability protections for employers is one of the “biggest problems” facing passage of another coronavirus package.  (Wall Street Journal, June 9 and Forbes, June 6).
  • Sen. John Cornyn (R-TX) emphasized the GOP’s position on May 18, stating on the Senate floor that “Senate Majority Leader McConnell (R-KY) and I … are working on a proposal that would put common sense reforms in place and protect those acting in good faith from being sued into oblivion.”  (Cornyn statement).  Potential employer immunity and anticipated litigation related to Covid-19 were the focus of a May 12 Senate Judiciary Committee hearing.  (Roundtable Weekly, May 15).
  • Sen. Cornyn this week stated the Republican liability proposal will be released next month. He added the plan would allow employers to choose which government coronavirus safety guidelines to follow while shielding them from lawsuits if their customers or workers contract the virus. (BGov, June 10)

A multi-sector coalition including real estate, tourism, technology, manufacturing, health care, and energy sector groups – led by the U.S. Chamber of Commerce – called upon Congress in a May 27 letter to enact temporary liability protections for businesses struggling to reopen and operate safely during the COVID-19 pandemic. 

Federal Reserve Actions

Federal Reserve Chairman Jerome Powell on June 10 stated the central bank will continue buying large quantities of bonds and leave interest rates near zero through at least 2022 as it anticipates the outbreak “will weigh heavily on economic activity” and “poses considerable risks to the economic outlook.”  (USA Today, June 10)

  • Powell added after the Fed’s two-day meeting this week, “This is the biggest economic shock, in the U.S. and the world, really, in living memory.  We went from the lowest level of unemployment in 50 years to the highest level in close to 90 years, and we did it in two months.”  (New York Times, June 10)
  • Powell stated, “To support the flow of credit to households and businesses, over coming months the Federal Reserve will increase its holdings of Treasury securities and agency residential and commercial mortgage-backed securities at least at the current pace to sustain smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions.”  (FOMC statement and Economic Projections, June 10)
  • The Fed has purchased agency mortgage bonds during the pandemic at a record pace totaling $719 billion, more than $12 billion per day on average, according to the New York Fed. (BGov, June 11)
  • On June 8, The Federal Reserve Board on expanded its Main Street Lending Program to allow more small and medium-sized businesses to be able to receive support. The Board expects the Main Street program to be open for lender registration “soon” and to be actively buying loans shortly afterwards. (Fed news release)
  • The Main Street Lending Program was established with the approval of the Treasury Secretary and with $75 billion in equity provided by the Treasury Department from the coronavirus economic relief package, The CARES Act.

The changes include:

  • Lowering the minimum loan size for certain loans to $250,000 from $500,000;
  • Increasing the maximum loan size for all facilities;
  • Increasing the term of each loan option to five years, from four years;
  • Extending the repayment period for all loans by delaying principal payments for two years, rather than one; and
  • Raising the Reserve Bank’s participation to 95% for all loans.
  • This chart has additional details on the changes.
  • Once lenders have successfully registered for the program, they will be encouraged to make Main Street loans immediately. The Main Street Lending Program intends to purchase 95% of each eligible loan that is submitted to the program after meeting all requirements. The Main Street Lending Program will also accept loans that were originated under the previously announced terms, if funded before June 10, 2020.

The Roundtable’s Real Estate Capital Policy Advisory Committee (RECPAC) and Research Committee discussed the Fed’s actions as part of the economic outlook and the state of real estate capital and credit markets during its remote meeting yesterday held in conjunction with The Roundtable’s Virtual Annual Meeting.

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