Industry Leaders, Warning of a Pending Wave of Foreclosures, Hope to Tap Into Funds to Shore Up Loans and Unfreeze Asset-Backed Securities
|U.S. Treasury Secretary Henry Paulson|
A dozen trade groups headed by the Real Estate Roundtable are lobbying the Federal Reserve to include the commercial real estate industry in a $200 billion credit facility to help stave off a coming wave of foreclosures by unfreezing credit and helping investors purchase or guarantee commercial mortgage-backed securities (CMBS).
Industry leaders are asking that the Fed use funds from the Term Asset-Backed Securities Loan Facility (TALF) to guarantee, finance or purchase the asset-backed securities collateralized by newly or recently originated commercial real estate mortgages. The Treasury announced TALF late last month with the aim of freeing consumer credit such as auto loans, student loans and credit cards.
Estimates of commercial mortgages maturing by the end of 2009 range from about $160 billion to $400 billion, with even more coming up for refinancing in 2010 and ’11. Up to three-quarters of that debt is supplied by CMBS and commercial bank financing. But CMBS has all but evaporated this year and banks have turned off their spigots, potentially affecting the refinancing of more than $3 trillion in commercial real estate debt.
"Right now, we believe there is insufficient systemic capacity to refinance expiring, performing commercial real estate loans," the trade groups said in a Nov. 26 letter to Treasury Secretary Henry Paulson. "In fact, the bonds of publicly traded real estate companies now trade at a level suggesting investors do not believe that sufficient credit will be available through the system to refinance over the next several years. See the letter made available by the Real Estate Roundtable
"Without leadership by the government through significant policy action, we believe jobs will be further threatened, the banking system will face additional pressures, and the savings of countless citizens will be unnecessarily lost or severely eroded."
In addition to the Roundtable, signing the letter was the American Land Title Association, American Resort Development Association, Appraisal Institute, Building Owners and Managers Association (BOMA), the International Council of Shopping Centers (ICSC), Mortgage Bankers Association, National Apartment Association, National Association of Industrial and Office Properties (NAIOP), National Association of Real Estate Investment Managers, National Association of Real Estate Investment Trusts (NAREIT) and the National Multi Housing Council.
In a news briefing with reporters Monday, Jeffrey DeBoer, CEO of the Roundtable, said the most important goal of the lobbying effort is "to make sure that healthy businesses -- like the vast majority of real estate -- don’t become unhealthy because of the unavailability of financing in the marketplace."
It’s uncertain how much in terms of government funds will be needed, but DeBoer laid out a framework for a facility very similar to that established for the asset-backed securities market last month. For example, a series of private-sector originating loans would be made available with $20 billion in TARF funds combined with $180 billion in financing from the Fed, for a total credit facility of $200 billion in new securities backed by newly originated and refinanced loans with updated underwriting and debt service coverage.
"In the credit card, auto loan, student loan and credit card area, banks don’t want to originate loans unless they have a way to transfer some of those loans to investors through securitization," DeBoer said. "We’re saying let’s do the same thing for commercial mortgages. There needs to be market support for investors who want to buy highly rated commercial mortgage securities.
"Once those securities have a market, then other securities will be able price off of that and it will slowly unfreeze the marketplace. If we can get the highest quality AAA, most senior supported securities going, the rest of the marketplace will flow through."
DeBoer said the CRE industry is aware that crafting a program "is a long process" that will likely be measured in months. The trade groups have stepped up lobbying efforts in recent weeks and plan to keep talking to policy makers from the Fed, Capital Hill, the Treasury and Fed, and the incoming Obama Administration.
There’s no one catastrophic failure of an institution looming that will sink real estate, but when all the problems and bad mortgages around the country are added up, "we’ll have dramatic negative implications for local governments, jobs and the tax base," DeBoer said.
Softening property prices aren't helping matters. Standard & Poor's this week announced that commercial real estate prices were down 0.6% versus a year ago, only the second annual decline in the index's almost 15-year history.
However, the rate of decline in the S&P/GRA Commercial Real Estate national index was lower in September compared with the 1.6% decline in August. The indices measure the change in commercial real estate prices by property sector and geographic region in the United States. It is, however, well below the high of +14.7%, reported in August 2006.
"For the second straight month, and the second time in the history of the index, the National Composite recorded a negative annual growth rate, but there are some potential signs of improvement in commercial real estate prices," says David Blitzer, managing director and chairman of the Index Committee at Standard & Poor's. "In the property sector, three of the four sectors had negative returns for the month and year-over-year period."
Office recorded its lowest annual return in its history (-3.1%) and was the worst-performing sector in the September/August period (-1.3%). On the positive side, apartments recorded positive returns for the one- month and 12-month period, returning +1.6% and +1.7%, respectively, Blitzer said.