Public Policy Briefing on Commercial Real Estate Finance April 12, - - PowerPoint PPT Presentation

Public Policy Briefing on Commercial Real Estate Finance

Thomas Kim Brad Cheney Senior Vice President Associate Vice President Commercial/Multifamily Legislative & Political Affairs April 12, 2016

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 114th 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

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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.

Source: MBA

mortgages.

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

Market Context

Source: MBA Annual Commercial/Multifamily Loan Maturity Volume

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