Public Policy Briefing on Commercial Real Estate Finance April 12, 2016 Thomas Kim Brad Cheney Senior Vice President Associate Vice President Commercial/Multifamily Legislative & Political Affairs
Overview Washington Environmental Scan Capitol Hill 101 Introduction to Advocacy The Commercial Real Estate Finance Ecosystem and Market Context Recommendations for Policymakers Hill Meeting Day Agenda and Conversation Topics
Washington Environmental Scan • Policy Landscape: the intersection of ongoing regulatory actions and legislative needs • The 114 th Congress: • House Ratio: 247 GOP, 188 Democrat • Senate Ratio – 54 GOP, 44 Democrats, 2 Independents • Ongoing necessity to connect with, instruct, and persuade policy makers 3 BK
Capitol Hill 101 • The primary committees of jurisdiction dealing with Commercial and Multifamily Real Estate Finance issues • House Financial Services • Jeb Hensarling (R-TX) Chairman and Maxine Waters (D-CA) Ranking Member • Senate Banking Committee • Richard Shelby (R-AL) Chairman and Sherrod Brown (D-OH) Ranking Member • The other committees of jurisdiction of our issues include • House and Senate Appropriations Committees • House Ways and Means Committee • Senate Finance Committee
Introduction to Advocacy • Advocacy is not a once a year activity • The most effective advocate for your business is YOU • Lobbying is about relationships. It’s critical to develop them now because you’ll never know when you might need them • Contrary to public opinion, Members of Congress and their staffs want to build relationships with their constituents. Become their local expert on our issues • Ideas for year round advocacy include: • Develop a relationship with the staffer for your MoC that handles your issue • Meet with your MoC or their district staff back home • Invite your MoC and their staff to visit your office and meet with your team • As Tip O’Neill said, “All politics are local” If you’re so inclined, become political active with your local MoC
Public Policy Overview The Commercial Real Estate Finance Ecosystem Recommendations for Policymakers Recognize the interplay among capital sources Narrowly tailor regulatory regimes not intended to govern commercial real estate finance Improve regulatory framework for each capital source
The Commercial Real Estate Finance Ecosystem
The Commercial Real Estate Finance Ecosystem Commercial Real Estate includes: Office Buildings Multifamily Apartments Retail Stores and Shopping Malls Mixed-use Properties Industrial and Warehouse Facilities Hotel and Hospitality Properties Essential to many types of businesses, provides rental housing to more than 17 million households, and forms the infrastructure of American communities. Fundamental to the U.S. economy.
The Commercial Real Estate Finance Ecosystem The Commercial Real Estate market is supported by nearly $3 trillion in mortgages. mortgages. Source: MBA
The Commercial Real Estate Finance Ecosystem Commercial real estate is financed by diverse sources of capital , the majority of which comes from the private sector: Bank portfolio lending Securitization markets Life insurance companies Government-sponsored enterprises Federal Housing Administration Pension funds and other institutional investors Mortgage bankers work with multiple capital sources to deliver financing to owners of commercial real estate. The varied business models and funding sources contribute to a competitive business-to-business market. This financing ecosystem fosters investment in commercial real estate, distributes investment risk and return, and reduces the cost of constructing and maintaining properties.
The Commercial Real Estate Finance Ecosystem Sources: REIS, NCREIF, Moody’s/Real Capital Analytics
The Commercial Real Estate Finance Ecosystem Source: FDIC, Wells Fargo Securities and Intex, ACLI, Fannie Mae and Freddie Mac
The Commercial Real Estate Finance Ecosystem Source: Real Capital Analytics and Federal Reserve Board
Commercial/Multifamily Loan Maturity Source: MBA Annual Volume Market Context
Market Context • Earlier this year, the securitization markets saw significant volatility. • While market conditions appear to have stabilized, commercial mortgage backed securities (CMBS) and other fixed income securities had seen widening spreads. • Other executions that rely on the capital markets (Fannie Mae and Freddie Mac Multifamily Securities) also were affected during this period.
High Level Recommendations for Policymakers
Overview • Each major capital source that lends on commercial real estate is subject to distinct regulatory regimes and business constraints. • Both specific regulatory actions taken since the financial crisis and their cumulative impact could stifle liquidity in the commercial real estate sector. • The need for ample liquidity is especially hard-felt in 2016 and 2017 with expected loan maturities . • Regulatory relief and flexibility would be appropriate for the range of lending models -- from portfolio lending, to securitized finance, to government sponsored lending, to the market making functions essential to a liquid capital market.
Recommendations for Policymakers Recognize the interplay between capital sources that finance commercial real estate Given the diversification of financing sources, one source could step in when another experiences disruption. Policymakers should be mindful of the need for flexibility when liquidity needs cannot be met. • Narrowly tailor regulatory regimes that are not intended to govern commercial real estate finance • Regulations such as the Home Mortgage Disclosure Act (HMDA) were intended for consumer-facing lending, rather than business-to-business lending in commercial real estate finance. • Regulators should provide guidance that excludes applicability or limits disruption to the commercial/multifamily finance market – where CRE lending is not the focus of the regulation.
Recommendations for Policymakers Improve the regulatory regimes governing specific capital sources GSE Multifamily Implement transparent and reasonable process to adjust lending caps, as necessary, in light of market developments. Finalize reasonable duty to serve regulation. Support strong and liquid multifamily finance system. FHA Multifamily and Residential Healthcare Mitigate regulatory barriers to FHA financings that threaten to shrink FHA multifamily and residential healthcare market share to unsustainable levels. Continue process transformation efforts to make FHA competitive in multifamily and healthcare finance.
Recommendations for Policymakers Securitization and Market Making Build greater flexibility into Risk Retention rule (effective Dec. 2016) for CMBS. Reject Basel Committee’s Fundamental Review of the Trading Book Proposal affecting CMBS. Reject Basel Committee’s Step-in Risk Proposal affecting securitization vehicles. Bank Portfolio Lending Clarify through guidance a consistent application of the High Volatility Commercial Real Estate (HVCRE) rule to construction lending. Promote balanced and transparent examination approach by regulators, including under Dec. 2015 real estate guidance. Life Company Lending and Investments Retain current Risk Based Capital regime for CRE loans as part of NAIC’s scheduled review in 2016. Modify Risk Based Capital rule for CRE equity investments.
Capitol Hill Day Agenda – Wednesday, April 13, 2016 9:30 - Jennifer Shapiro - Office of Representative Emanuel Cleaver (D-MO) and Chris Brown - Office of Representative Blaine Leutkemeyer (R-MO) Suggested topic: H.R. 3700, the House passed HUD reform bill 10:00 – Gregg Richard – Office of Senator Mike Crapo (R-ID) Suggested topic: Commercial Risk Retention 10:30 – Congressman John Larson (D-CT) Suggested topic: Real Estate Tax Issues 11:30 – Senator Heidi Heitkamp (D-ND) Suggested topic: GSE Reform 12:45 – Senator Mike Rounds (R-SD) Afternoon: Option to join residential colleagues for your state delegation meetings and/or Capitol Hill tour
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