Source: Wall Street Journal
A lawmaker in the U.S. House of Representatives has presented a proposal aimed at shoring up the troubled commercial real estate industry and members of Congress are interested.
The yet-to-be introduced legislation would authorize the U.S. Treasury to provide as much as $15 billion to $25 billion in guarantees on new loans to the sector.
The temporary program would aim to halt the slide in commercial real estate prices that is battering banks’ balance sheets and making it difficult for property owners to renew their existing financing.
Rep. Walt Minnick (D., Idaho), who plans to introduce the measure by Thursday with co-sponsors from both parties, said three senators are working on companion legislation in the upper chamber.
The plan is likely to face resistance from lawmakers trying to rein in spending. Minnick said he was still finalizing the details of the measure but expects to have the administration’s support.
“We anticipate that they will support our plan based on preliminary discussions we’ve had with [Treasury] staff,” he told reporters at a real estate forum hosted Wednesday by the U.S. Chamber of Commerce.
Under the measure, Treasury would guarantee bonds backed by small-balance loans financing strip malls, office parks and other commercial properties.
In exchange, it would collect fees in the amount of 2% of each underlying loan in the bond.
To qualify for the federal backing, the bond would have to carry an investment-grade rating and each underlying loan in the security would have to be for $10 million or less. The program would phase out after three years.
Commercial real estate financing has been on the skids and sliding for the last few years. It followed the residential market’s downturn and property management companies and commercial building owners alike are struggling to keep space occupied while financing for renewals remains elusive. Commercial mortgage loans have been as difficult for smaller companies to get as residential loans for consumers, and with new financial reforms now signed into law, there are many new rules commercial lenders must adhere to which could further narrow options for property owners.
Minnick said the House Financial Services Committee would hold a hearing on his proposal next Thursday. He said Democratic House leaders had assured him the measure would get a vote in that chamber in September. However, the proposal must first be approved by the Financial Services panel.
The deep recession has sent delinquencies on commercial real estate loans soaring as high vacancies have dried up property owners’ revenue.
Meanwhile, trillions of dollars of commercial real estate debt are coming due over the next few years amid a crash in property values that is making it difficult for owners to sell or refinance. Commercial real estate prices have plummeted by 40% in some markets from the highs seen in 2007.
Large banks such as Wells Fargo (WFC), J.P. Morgan (JPM) and Bank of America (BAC) that aggregate commercial real estate loans into bonds have been unwilling to hold smaller loans, even for a short while, before packaging them for investors, an aide of Minnick said. The federal guarantee would spur them to purchase such loans, injecting liquidity into the market, the aide said. Community banks could use the proceeds to make new loans, helping to buoy prices.
The program would be overseen by a new board housed at Treasury that would set underwriting criteria. The Treasury secretary, the Federal Deposit Insurance Corp. chairman, the Federal Reserve chairman and other federal regulators would sit on the board, along with four industry experts.
Sens. Charles Schumer (D., N.Y.), Mike Crapo (R., Idaho) and Bob Corker (R., Tenn.) will soon introduce a companion measure in the Senate, Minnick said.
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My Take: You’re better off running a small NY quick books services company than an property management company right now. The commercial real estate sector has not bottomed out according to some experts and the worst is yet to come. You don’t need to look too far to see the evidence: Everywhere across the country commercial buildings and “space for lease” signs are rampant, and meanwhile small business owners, from the tax preparation accountants to the mom and pop dry cleaners are struggling to make rent.
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