[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
ALTERNATIVES FOR PROMOTING LIQUIDITY
IN THE COMMERCIAL REAL ESTATE MARKETS,
SUPPORTING SMALL BUSINESSES, AND
INCREASING JOB GROWTH
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
__________
JULY 29, 2010
__________
Printed for the use of the Committee on Financial Services
Serial No. 111-150
HOUSE COMMITTEE ON FINANCIAL SERVICES
U.S. GOVERNMENT PRINTING OFFICE
61-854 WASHINGTON : 2010
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC
area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, Washington, DC
20402-0001
BARNEY FRANK, Massachusetts, Chairman
PAUL E. KANJORSKI, Pennsylvania SPENCER BACHUS, Alabama
MAXINE WATERS, California MICHAEL N. CASTLE, Delaware
CAROLYN B. MALONEY, New York PETER T. KING, New York
LUIS V. GUTIERREZ, Illinois EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York FRANK D. LUCAS, Oklahoma
MELVIN L. WATT, North Carolina RON PAUL, Texas
GARY L. ACKERMAN, New York DONALD A. MANZULLO, Illinois
BRAD SHERMAN, California WALTER B. JONES, Jr., North
GREGORY W. MEEKS, New York Carolina
DENNIS MOORE, Kansas JUDY BIGGERT, Illinois
MICHAEL E. CAPUANO, Massachusetts GARY G. MILLER, California
RUBEN HINOJOSA, Texas SHELLEY MOORE CAPITO, West
WM. LACY CLAY, Missouri Virginia
CAROLYN McCARTHY, New York JEB HENSARLING, Texas
JOE BACA, California SCOTT GARRETT, New Jersey
STEPHEN F. LYNCH, Massachusetts J. GRESHAM BARRETT, South Carolina
BRAD MILLER, North Carolina JIM GERLACH, Pennsylvania
DAVID SCOTT, Georgia RANDY NEUGEBAUER, Texas
AL GREEN, Texas TOM PRICE, Georgia
EMANUEL CLEAVER, Missouri PATRICK T. McHENRY, North Carolina
MELISSA L. BEAN, Illinois JOHN CAMPBELL, California
GWEN MOORE, Wisconsin ADAM PUTNAM, Florida
PAUL W. HODES, New Hampshire MICHELE BACHMANN, Minnesota
KEITH ELLISON, Minnesota KENNY MARCHANT, Texas
RON KLEIN, Florida THADDEUS G. McCOTTER, Michigan
CHARLES A. WILSON, Ohio KEVIN McCARTHY, California
ED PERLMUTTER, Colorado BILL POSEY, Florida
JOE DONNELLY, Indiana LYNN JENKINS, Kansas
BILL FOSTER, Illinois CHRISTOPHER LEE, New York
ANDRE CARSON, Indiana ERIK PAULSEN, Minnesota
JACKIE SPEIER, California LEONARD LANCE, New Jersey
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
STEVE DRIEHAUS, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
DAN MAFFEI, New York
Jeanne M. Roslanowick, Staff Director and Chief Counsel
C O N T E N T S
----------
Page
Hearing held on:
July 29, 2010................................................ 1
Appendix:
July 29, 2010................................................ 37
WITNESSES
Thursday, July 29, 2010
Craft, Hon. Robert, Mayor, Gulf Shores, Alabama.................. 12
Daniel, Jonathan, Chief Executive Officer and Founder, Silo
Financial Corp................................................. 21
DiAngelo, Chris, Partner, Dewey & LeBoeuf, LLP................... 17
Gronstal, Thomas B., Iowa Superintendent of Banking, on behalf of
the Conference of State Bank Supervisors....................... 10
Helsel, James L., Jr., 2010 Treasurer, National Association of
Realtors (NAR)................................................. 16
Lancaster, Brian, Royal Bank of Scotland, on behalf of the CRE
Finance Council................................................ 14
Lindsey, Todd, Partner, US Capital............................... 19
Panasci, Ernest J., Shareholder and Director, Jones & Keller,
P.C............................................................ 23
APPENDIX
Prepared statements:
Craft, Hon. Robert........................................... 38
Daniel, Jonathan............................................. 43
DiAngelo, Chris.............................................. 48
Gronstal, Thomas B........................................... 65
Helsel, James L., Jr......................................... 62
Lindsey, Todd................................................ 71
Panasci, Ernest J............................................ 75
Additional Material Submitted for the Record
Frank, Hon. Barney:
Written statement of the National Association of Home
Builders................................................... 81
Bachus, Hon. Spencer:
Article from the American Banker, dated July 23, 2010........ 92
Perlmutter, Hon. Ed:
Article from Forbes.com, dated July 19, 2010................. 95
ALTERNATIVES FOR PROMOTING LIQUIDITY
IN THE COMMERCIAL REAL ESTATE
MARKETS, SUPPORTING SMALL
BUSINESSES, AND INCREASING
JOB GROWTH
----------
Thursday, July 29, 2010
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 10:10 a.m., in
room 2128, Rayburn House Office Building, Hon. Barney Frank
[chairman of the committee] presiding.
Members present: Representatives Frank, Kanjorski, Waters,
Watt, Moore of Kansas, Hinojosa, Clay, McCarthy of New York,
Scott, Green, Cleaver, Perlmutter, Donnelly, Minnick, Adler,
Kosmas, Himes, Maffei; Bachus, Biggert, Miller of California,
Hensarling, Neugebauer, Posey, Jenkins, Paulsen, and Lance.
Also present: Representative Shuler.
The Chairman. The hearing will come to order.
And I am going to first recognize the gentleman from Idaho,
Mr. Minnick, who was the major force in bringing this issue to
our attention, along with others on both sides of the aisle.
But he has made it a particular point and is one of those who
was most responsible for our decision to have this hearing.
So the gentleman from Idaho is now recognized for 3
minutes.
Mr. Minnick. Thank you, Mr. Chairman.
Mr. Chairman, and Ranking Member Baucus, thank you for
calling this hearing today on the Commercial Real Estate
Stabilization Act that I introduced with Heath Shuler, Suzanne
Kosmas, Mike Simpson, Martin Heinrich, and Steve LaTourette.
This is truly a bipartisan piece of legislation to address a
looming national crisis.
According to the Congressional Oversight Panel, the value
of the Nation's commercial real estate has declined by more
than 40 percent. In 2007, it was worth $5.5 trillion and
supported $3.3 trillion in debt. Today, it is worth only about
$3 trillion and will only support about $2 trillion in debt.
Most of the commercial real estate lenders on the smaller
projects in Main Street America are our local community banks.
As those $3.3 trillion in loans come due, either the already
overextended borrowers must come up with new equity or the
banks renewing the loans must write them down. Doing so impairs
the banks' capital and ability to continue doing business.
If this plays out in the free market, the Oversight Panel
estimates that as many as a quarter of America's 8,000 smaller
banks are at risk. This process is being accelerated by bank
regulators who are demanding our smaller banks reduce their
exposure to the falling commercial real estate market by
reducing their commercial real estate loans from an average of
over 3 times their capital to one-third that level.
In my State, fully a third of my banks are already under
Federal supervision, and many more fear they will be, come the
next bank examination. As a result, small business can't borrow
and, without credit, can't create the new jobs our economy so
desperately needs to continue the economic recovery.
This bipartisan bill will allow our smaller banks to sell
their performing loans--subject to the tough new risk-retention
rules we have just enacted--to larger money center financial
institutions, which will aggregate them into larger,
institutional-sized packages of loans and get them rated as
investment-grade by rating agencies, who now must stand behind
their ratings and can be sued if they prove negligent.
These larger financial institutions will then have these
packages guaranteed by the Treasury, making them marketable to
pension funds and other institutional buyers. This process will
jump-start the commercial mortgage bond market, which used to
supply two-thirds of the capital to the commercial real estate
market but has not existed at all for smaller properties since
the market collapsed 2 years ago.
This will allow our smaller community banks to clear their
portfolios of illiquid but performing commercial real estate
loans and reduce their inventories to levels demanded by their
regulators at fair market, not sacrificed, prices. This will
stabilize their balance sheets so they can both survive and
again begin lending to builders, developers, and small
businesses, who will create the new jobs required for our
economy to recover.
The program will be administered by a board consisting of
the Treasury Secretary, the Federal Reserve Chairman, the SEC
Chairman, the FDIC Chairman, the FHA Director, and four
industry experts appointed by the President.
Because the assets insured will be investment-grade, and
the Treasury will be paid a hefty 2 percent insurance fee, the
program will make money for the Treasury and will only be
required until the private market regains the confidence it
needs to create and market these instruments without needing a
Federal guarantee.
It will expire on its own accord in 3 years, and the
Secretary of the Treasury will have the authority to terminate
it sooner if he determines that the commercial bond market is
comfortably reestablished. All profits earned from the program
are required to be used to reduce the deficit.
Thank you, Mr. Chairman. I look forward to hearing from our
panel of experts.
The Chairman. I would note that the gentleman used 3
minutes and 50 seconds. That will leave us with 5 minutes and
10 seconds.
And I now recognize the gentleman from Alabama for 2
minutes.
First, let me ask unanimous consent that we have one of the
cosponsors, the gentleman from North Carolina, Mr. Shuler, join
us today. Is there any objection?
Hearing none, the gentleman is welcomed.
And the gentleman from--
Mr. Bachus. Mr. Perlmutter objected, I think.
Mr. Perlmutter. No, I withdrew it.
The Chairman. I didn't hear him. He did it visually.
Mr. Bachus. If he won't mention Tennessee Volunteer
football, I will go along with it.
Mr. Shuler. After last season, no.
The Chairman. The gentleman from Alabama is now recognized
for 2 minutes.
Mr. Bachus. Thank you, Mr. Chairman. And I thank you for
holding the hearing on issues facing the commercial real estate
market.
On an almost daily basis, I am told that financial
institutions, at the urgings of regulators, are making
additional capital demands on their borrowers with commercial
real estate loans, creating a vicious cycle of distress sales,
lower appraisals, and depreciation for neighboring properties.
Many of us are particularly concerned about the financial
challenges just ahead, where somewhere between $200 billion and
$500 billion in commercial real estate loans mature in the next
12 to 15 months.
These are aggravated in Alabama and the Gulf Coast by
economic fallout from the BP oil spill. There we are seeing a
preview of what we will soon experience throughout the country,
or may experience: a cascade effect of less tourism; a
diminished capacity to repay loans; lower appraisals, which
depress property values; fewer real estate sales; and overall
lower revenues for businesses and struggling communities.
In Alabama and other Gulf Coast States, the financial
impact has rippled from the shoreline throughout our entire
State due to less tax revenue. Aggravating that situation are
unfilled promises by BP to compensate for the losses, which is
particularly upsetting when the citizens of Alabama see BP's
public relations campaign on TV claiming to expedite the
claims, although their claims have not been processed.
It is my pleasure to invite Gulf Shores Mayor Robert Craft
to testify today to inform us about the additional challenges
facing communities and States dealing with what can only be
termed an environmental and economic catastrophe. He is, in
every sense of the word, an eyewitness to what is going on.
With regard to the broader commercial real estate market,
what is happening along the Gulf is indicative of what could
happen across the country if credit is not made available to
the marketplace. Once these loans come due, the losses to the
FDIC Insurance Fund could be significant.
One of the proposals we are hearing is a new $25 billion
fund for commercial real estate with the Treasury Department
with a 10-year full faith and credit. We need to look long and
hard at this, about whether we may be creating even more risk
from the private sector to the taxpayer.
A worthwhile strategy, in my view--and I will close with
this--is Mr. Garrett's legislation, the U.S. Covered Bonds Act,
on which Congressman Kanjorski and I joined him as original
cosponsors. This should move to the House Floor as soon as
possible. And I think it would be a valuable source of
liquidity to the commercial real estate market.
Thank you, Mr. Chairman.
The Chairman. The gentlewoman from Florida, Ms. Kosmas, for
2 minutes.
Ms. Kosmas. Thank you, Mr. Chairman. And thank you to those
who are here for the hearing. I just want to make a few quick
comments on this.
As a small business owner myself for most of my life, I
agree with the comment that community banks are the lifeblood
of our communities and that we have to ensure their continued
viability. Many of us have recognized for a long time and have
made comments in this committee and elsewhere about the need to
ensure that our commercial real estate markets remain viable so
that businesses can function.
Many businesses, both small and medium-sized, in my
district and elsewhere, cannot access new loans, and banks are
often forced to cut off their existing lines of credit. This,
of course, causes these businesses to lay off employees and
threatens their ability to continue to operate.
This dilemma is compounded by the fact that many community
banks are unable to find financial stability or are unable to
deal with the often arbitrary requirements regulators place on
them. As a result, the communities, both the businesses and
families within those communities that have been served for
years, are under threat of no longer having available to them
the vital credit and other services that they need from
institutions with whom they have built strong, long-term
relationships.
I think this bill is a very important piece of legislation.
It is a commonsense, bipartisan solution that smartly
facilities the development of private commercial credit markets
and incentivizes the free market to take action here. If we do
not act fast, we risk missing a window of opportunity for
properly dealing with the trillions of dollars in debt set to
come due over the next few years.
The price to pay for inaction will be significantly
increased in States like Florida. Florida's unemployment rate
continues to be the Nation's fifth highest. In addition, the
recent oil spill could easily cause a double-dip in Florida's
economy. With Florida's main economic drivers being tourism and
growth, we recognize that the oil spill has the potential to
exacerbate the difficult economic situation that already exists
there.
I really urge my colleagues to look closely at this and to
support this very fine piece of legislation.
Thank you, Mr. Chairman.
The Chairman. The gentlelady from Illinois, Mrs. Biggert.
Mrs. Biggert. Thank you, Mr. Chairman. I am pleased that we
are having yet another hearing on commercial real estate.
At my request, the Oversight and Investigations
Subcommittee held a hearing in Chicago in May on this topic.
Chicago is home to key leaders in all aspects of commercial
real estate, also called CRE, including acquisitions,
appraisals, mortgage lending, and securitization, to name a
few.
During our field hearing, we learned that the CRE industry
faced many obstacles to recovery, including property
devaluation and illiquidity in the securities market. We also
discussed the difficulty some banks, especially smaller banks,
have with concentrations of riskier or specific kinds of CRE
loans.
Several regulators testified, and it became apparent that a
few regulators clearly dropped the ball after the CRE crisis
that occurred during the 1990's. Some regulators failed to
issue regulations in a timely fashion to address concentrations
in CRE loans at financial institutions. And when these same
regulators finally issued regulations, these regulations were
clearly not enforced, as was discussed in many material loss
reviews of failed banks.
There are many ideas floating around about how to address
the problems in the market. However, I am very concerned with
any proposals that would create a new taxpayer-backed program
instead of addressing some of the fundamental problems with CRE
that have been mentioned.
Finally, I believe that one of the most important things
Congress can do to jump-start the CRE market is to move
legislation that will provide incentives for businesses,
especially small businesses, to create jobs.
This June, unemployment in Illinois was 10.4 percent, and
it remains above the national average of 9.5 percent. With
businesses downsizing or shutting their doors, workers being
laid off, taxes increasing, and regulatory and market
uncertainty, we can anticipate additional residential
foreclosures, followed by the commercial building vacancies.
Job creation should be the number-one priority for this
Congress.
With that, I look forward to hearing from today's
witnesses.
The Chairman. The gentleman from California, Mr. Miller, is
recognized for 2 minutes.
Mr. Miller of California. Thank you, Mr. Chairman.
I want to commend Mr. Minnick for trying to address this
issue, but there are some concerns with the way the bill is
proposed.
One concern in high-cost areas, for example Mr. Frank's
district or mine, putting a $10 million arbitrary cap on that
would tend to focus the amount more on commercial strip
centers, small commercial buildings. Those projects are
basically more sensitive to the economy than the larger
projects are.
But a problem I have that I don't think this is going to
address is something I brought up 3 years ago. There is not a
shortage of qualified borrowers, and there is not a shortage of
qualified projects. The problem is that lenders are put in a
situation by mark-to-market requirements that, if you take a
loan and it is devalued 45 to 50 percent, this bill does not
address that.
So if we are talking about a conforming loan, a loan that
basically is performing, that is not the problem. The problem
is the loans that you could say are not performing because of
ST requirements or mark-to-market that take a loan where the
lender is current with the borrower, yet when it comes time to
refinance the loan, the loan is upside down based on the SEC
requirements or mark-to-market. That will not change this.
And unless we are willing to address that issue, you are
not going to take a loan that you can say is performing,
because if it is performing, the small lender has no problem
with it, but taking that loan and giving it to a larger lender
and say the government is going to back that loan, we are going
to turn it into a commercial mortgage-backed security, you
can't do that if the loan is not performing and it is not
meeting current market standards.
So I applaud you for this effort because we need to address
it, but it does not address the problem we are going to face
out there. I agree, there is no way in the world we should put
the taxpayers at risk. But you are not going to have the
government come in and guarantee a loan that is not performing
to begin with. The loans that are going to be transferred or
are going to want to be transferred are the ones that are not
performing, because if a loan is performing, the lender has no
problem with the loan.
So why would a lender want to get rid of a performing loan
that meets the requirements, when the regulators are coming in
and saying, ``Get rid of the loans that do not meet the
requirement.''
And I could go 20 minutes on this, Mr. Chairman--
The Chairman. No, you can't.
Mr. Miller of California. --but I applaud you. I know you
will not let me, I know you will not lend me the time, but I
would love to work on this issue.
The Chairman. The gentleman from Colorado is recognized for
2 minutes.
Mr. Perlmutter. Thank you, Mr. Chairman.
And, Mr. Miller, you and I should sit down and work on this
together.
About 4 weeks ago, we passed a bill, the Small Business
Lending Act, and attached to that bill was a bill that I
proposed, along with Mr. Mike Coffman, a Republican from
Colorado, which did very much what Mr. Miller was talking
about. You took a capital loss on real estate but then
amortized it out over 6 years, up to 10 years, if small
business loans were being made by that particular bank.
A similar type of approach was taken back in the 1980's
with agricultural banks and other banks. Mr. Bill Isaac
addresses it, calls it a net worth certificate that was used
back in the 1980's. So that independent, small, community,
regional banks could weather the storm. And we have had a heck
of a storm over the course of the last 2 years.
One of our panelists, Mr. Ernie Panasci--from Denver,
Colorado, a prominent financial attorney in Colorado and in the
Denver area--helped us draft the amendment that has passed on
to the Senate and is part of the Small Business Lending Act. He
will testify today about the difficulties that a number of
Colorado banks and borrowers are having because of the drop in
commercial real estate prices.
And it is my pleasure to introduce him now, because I may
be gone when he finally gets to testify, that he is here to
speak on behalf of bankers and the real estate community in
Colorado on this very important subject.
With that, Mr. Chairman, I would yield back.
The Chairman. The gentleman from Texas, Mr. Hensarling, for
2 minutes.
Mr. Hensarling. Thank you, Mr. Chairman.
I think we all know that there are serious problems in our
commercial real estate market. Many fear that the worst is yet
to come over the next couple of years. This may be true. On the
other hand, I think I have noted that REITs are up 7.7 percent
this year, while our major equity indexes are pretty well flat.
I read recently that JPMorgan, Goldman, and Citi are at least
seemingly returning to the securitization market. So, how bad
things are, relatively speaking, I think to some extent it is
hard to tell.
I do know that, although this bill is well-intended--I took
very careful note of what the gentleman from California says. I
appreciate the experience and perspective that he brings. And,
indeed, I think the application of mark-to-market, even today,
is a significant part of our challenge. But I fear, at the end
of the day, that we are looking at one more taxpayer backstop,
perhaps one more taxpayer bailout, that I am not sure--in fact,
I feel quite dubious--that it is going to be worth the cost.
I know recently the Special Inspector General for the TARP
reported, ``The current outstanding balance of overall Federal
support for the Nation's financial system has actually
increased more than 23 percent over the past year, from
approximately $3 trillion to $3.7 trillion.'' At what point do
we say, enough is enough?
There are many people who benefited on the upside of the
run-up of the commercial real estate market. They enjoyed the
upside, and now they want the taxpayer to be exposed to the
downside.
I think ultimately, we are going to have to concentrate on
the demand side of this equation, and that is getting the
economy moving. And, again, I fear that the greater problem is
not lack of capital, it is lack of confidence from the actions
of this President and this Congress. And until that changes, we
are not going to solve the market problems.
The Chairman. The gentleman's time has expired.
Next, I will go to the gentleman from Texas, Mr.
Neugebauer, because our last speaker is a non-member and we
take members first. The gentleman from Texas, Mr. Neugebauer,
for 2 minutes.
Mr. Neugebauer. Thank you, Mr. Chairman. I appreciate you
having this hearing.
Obviously, all of us know that the commercial real estate
borrowers are looking to refinance some of their loans, but
they are faced with lower property values, higher vacancy
rates, and there are reasonable questions about the capacity of
the lenders to be able to do that.
I appreciate the gentleman from Colorado and others who
work on this issue. But the problem here is that everybody's
answer to freeing up the credit markets again is putting the
taxpayers on the hook for some of the risk.
These markets functioned before without the taxpayers, but
now, for some reason, we, with this big marriage of the Federal
Government and all these markets--and many of us voted against
that because we knew it was going to be a rocky marriage to
begin with, but what I have been saying for a number of months
is that the divorce is going to be worse than the marriage. And
that is weaning the private markets from saying, ``You know
what? We are not quite sure we want to take that risk, but we
might be willing to take it if the taxpayers would pick up part
of the tab.''
We can't build a long-term future for this country on the
backs of the taxpayers. The taxpayers, quite honestly, are
facing their own challenges right now. And so what we really
need to do is get rid of all of this uncertainty that we have
created in Congress about the potential implications of
regulations and taxation and get the government out of the way
and let the free markets work.
Free markets, when allowed to function properly, aren't
kind, but they are very efficient. The problem is that we have
delayed the efficiency in the market by all of this
intervention. And what it is really time to finally do is let
the free markets work, and they will work through this.
But very few times when you put the taxpayer on the hook
are we going to be able to unhook the taxpayer. And the
taxpayers back home in Texas are tired of being hooked up.
With that, I yield back my time.
The Chairman. The gentleman from North Carolina.
I am sorry, but we don't have back-and-forth during opening
statements.
Mr. Perlmutter. I just wanted to have something admitted
for the record.
The Chairman. Oh, yes.
Mr. Perlmutter. An article that Steve Kagen, Ron Klein, and
I wrote for Forbes magazine, dated July 19, 2010.
The Chairman. Without objection, it is so ordered.
I also have been asked by the National Association of Home
Builders to put their statement in the record. I will just read
the operative paragraph:
``NAHB urges Congress to direct financial institution
regulators to encourage lenders to work with residential
construction borrowers who have loans in good standing by
providing flexibility on reappraisals, loan modifications, and
perhaps forbearance. Solutions could include allowing
institutions to continue making and holding sound acquisition,
development, and construction loans even if they are above the
loan-to-capital thresholds and to permit institutions to write
down troubled loans over an extended period up to 10 years.''
If there is no objection, I will put that in the record.
And the final statement comes from the--
Mr. Minnick. Mr. Chairman?
The Chairman. Yes.
Mr. Minnick. I would ask your permission to enter into the
record the text of an interview that I gave on this topic that
appears in today's New York Times.
The Chairman. Without objection, it is so ordered.
Mr. Bachus. Mr. Chairman, I ask for unanimous consent that
anyone who--
The Chairman. Right, we have general leave that anything
that members want put in the record can be put in. The
gentleman is correct. There is no objection.
And finally, without objection, we will hear from our non-
member who is a cosponsor of the legislation, the gentleman
from North Carolina, Mr. Shuler.
Mr. Shuler. Thank you, Mr. Chairman.
Chairman Frank, Ranking Member Bachus, and members of the
committee, I appreciate the opportunity to participate in this
hearing to discuss the Commercial Real Estate Stabilization Act
with you. I am proud to introduce this bill with Walt Minnick
and Suzanne Kosmas because I truly believe that commercial real
estate and failing community banks are problems for my district
and the rest of the country.
This problem starts with commercial real estate but doesn't
end there. In rural America, the concerns about commercial real
estate are pressing. Depressed commercial real estate values
are also affecting the big picture. What starts with commercial
real estate stretches from local community banks to our small
businesses, decreasing the amount of job opportunities and
stunting job growth. If community banks can't lend, and they
can't refinance the loans on their books, they will be seized
by the FDIC. Once that happens, small business lending and job
growth are doomed.
We are all just beginning to understand the scope of this
large, multi-trillion-dollar problem. It is complicated, and
until today, most people decided to kick the can down the road
and to ignore the problem. Congressman Minnick and others,
along with our staff, have held over 300 meetings over the last
year with all affected parties and only come to the conclusion
that something has to be done, and done fast.
I think this bill is an effective, practical way to start
addressing the lack of credit and liquidity in the commercial
real estate market, which, in return, will start giving some
community banks and commercial real estate developers around
the country a fighting chance.
At the rate that we are going today, if we don't get this
bill moving or come up with something similar to address this
problem, we will have a massive problem for our Nation's real
estate and business world. CRESA affects Main Street America
and everyday small businesses and entrepreneurs. I look forward
to working with you through this piece of legislation.
I yield back the balance of my time.
The Chairman. We will now begin the hearing. We will start
with Mr. Thomas Gronstal, who is the superintendent of the Iowa
Division of Banking. He is here on behalf of our frequent
collaborator, with whom we enjoy working, the Conference of
State Bank Supervisors.
I would note that, in the financial reform bill, where
there are entities set up consisting of groups of regulators,
at the initiative of the House, the Conference of State Bank
Supervisors is a participant. And we welcome the ability to
work with the CSBS. Thank you.
Mr. Gronstal, go ahead.
STATEMENT OF THOMAS B. GRONSTAL, IOWA SUPERINTENDENT OF
BANKING, ON BEHALF OF THE CONFERENCE OF STATE BANK SUPERVISORS
Mr. Gronstal. Thank you. Good morning, Chairman Frank,
Ranking Member Bachus, and distinguished members of the
committee. As was stated, I am Tom Gronstal, superintendent of
banking for the State of Iowa, and chairman of the Conference
of State Bank Supervisors.
Thank you for inviting me here today. We appreciate the
time that the committee and that Representative Minnick, in
particular, have devoted to exploring the means for stabilizing
the commercial real estate market and overcoming the challenges
that community banks continue to face in serving this market.
The current economic environment has created a great deal
of uncertainty in the commercial real estate market. This
uncertainty poses challenges for businesses, investors, and
banks. Investors and businesses are likely to restrain capital
investments and plans for expansion, and lenders hesitate to
extend credit as they struggle to ensure collateral protection
and the ability to repay.
These issues are having a significant impact on the
commercial real estate market, affecting the performance of
existing loans, valuations on bank balance sheets, and,
ultimately, the availability of credit.
In my home State of Iowa, the number of banks with
considerable commercial real estate concentrations has declined
over the past 3 years. Public demand for commercial real estate
loans has greatly diminished, and there is very little new
development occurring in the State. This has caused
unemployment in the construction sectors to rise notably over
the past 2 or 3 years.
Most of my colleagues around the country are seeing many
aspects of the commercial real estate market stabilizing, but
general demand for commercial real estate loans continues to
lag, and banks' interest in funding new commercial real estate
loans is still low.
As regulators and policymakers, we must recognize that any
economic recovery will be uneven. In some regions of the
Nation, portions of the banking industry and financial markets
continue to face significant challenges, even as other areas
are showing signs of recovery.
Given where we are in the current economic cycle, we
believe that Congress can play an important role the commercial
real estate market by providing a Federal guarantee for
prudently underwritten loans. Therefore, CSBS supports the
objectives of Representative Minnick's Commercial Real Estate
Stabilization Act, its focus on small and mid-size
institutions, and its approach of leveraging a government
guarantee to incent private lending and investment activity.
Federal guarantees have been effectively used to support
bank lending to small businesses and farmers, and CRESA can be
structured as a measured risk to support private investment and
lending to further public policy and economic objectives.
In addition, CRESA contemplates conservative lending by
community banks and other institutions with the expertise and
experience to engage in successful commercial real estate
lending. The program's use of a government guarantee to attract
and encourage private market activity increases the likelihood
of broader market benefits beyond the individual transactions.
Ultimately, implementation of CRESA could provide fuel for
market stability and remove uncertainty among market
participants.
In terms of the program's structure and oversight, we
propose that State bank regulators should be represented on the
program's oversight board. Giving CRESA's stated focus on
smaller institutions, State bank regulators, as prudential
regulators of the vast majority of community banks and because
of our knowledge of local economies, should be a part of CRESA
oversight.
CSBS remains a fierce supporter of the Nation's dual
banking system, which supports community banking. We commend
Congress for reaffirming the dual banking system in the Dodd-
Frank Wall Street Reform and Consumer Protection Act. And we
believe Representative Minnick's proposal is also an
affirmation of the dual banking system and the vital role
community banks play in our national economy.
Ultimately, our Nation's leaders must seek to create a
holistic approach to stabilize all banking industry
participants. Government efforts must be undertaken, with the
stated objectives of stabilizing not only the national economy
but local economies as well. Only through preserving a diverse
financial industry and stimulating local economies will we
ultimately enjoy a comprehensive and sustainable economic
recovery.
I appreciate the opportunity to testify today, and I look
forward to answering any questions you may have. Thank you.
[The prepared statement of Mr. Gronstal can be found on
page 54 of the appendix.]
Mr. Minnick. [presiding] Thank you, Mr. Gronstal.
The Chair asks the gentleman from Alabama to introduce our
next witness.
Mr. Bachus. Thank you.
It is my pleasure to introduce Mayor Robert Craft of Gulf
Shores, Alabama. He has not only been a dynamic public figure,
but he is also a highly successful businessman and farmer. He
has a 1,200-acre turf farm and sells to a lot of landscapers
and contractors. He also developed and is the owner of a
residential planned community, which is actually nine
residential--I guess you would call them villages. It has two
Arnold Palmer golf courses on it, a Courtyard by Marriott, and
also a condominium complex.
So he has seen it, not only as mayor, but also as a
businessman dealing with banks. He has seen his community, over
the past 30 years that he has been a resident, mushroom and
prosper despite hurricanes. But what he is facing today is, I
think, the most challenging time that Gulf Shores has faced in
its long and prosperous history: a combination of the tough
economics and then aggravated tremendously by the BP oil spill.
So he is truly an eyewitness to what is happening, as I said in
my opening statement. And I look forward to his testimony.
I know I was talking to--Congressman Shuler and I were at
breakfast together, and he was talking about some of the
challenges facing North Carolina. And I think because of the
oil spill, we are probably just 2 or 3 months ahead of the
curve, but I know you are experiencing a lot of the same
frustrations that the mayor discussed with me yesterday, and we
have heard it here, and that is this vicious cycle of banks
because the regulators are pushing them into taking action and
calling loans or asking for more collateral, had distress
sales. I know your son is--
Mr. Watt. Mr. Chairman, could we get on with the hearing
instead of listening to our colleague?
Mr. Minnick. Yes, I guess we can. We have been doing this
since before you got here. All the members--
Mr. Watt. But we are past the opening-statement point. We
are trying to listen to the witnesses.
Mr. Minnick. You may proceed, Mr. Bachus.
Mr. Bachus. Thank you.
Let me just close by saying, I appreciate you being here,
Mayor Craft.
Mr. Craft. Thank you, sir.
Mr. Minnick. Mayor Craft?
STATEMENT OF THE HONORABLE ROBERT CRAFT, MAYOR, GULF SHORES,
ALABAMA
Mr. Craft. Chairman Frank, Ranking Member Bachus, and
members of the committee, first let me state again how much the
Gulf Coast residents along the Gulf of Mexico appreciate your
interest in our region in the aftermath of this BP oil spill.
This hearing concerns possible legislative efforts to
address the ongoing difficulties in the commercial real estate
market. Of course, these difficulties have had a very
significant impact along the Gulf Coast of America. Property
values have fallen dramatically in our communities, as they
have fallen elsewhere. Banks that provided credit to our
community have been significantly damaged. Over the past
several years, these banks have charged off tens of millions of
dollars of loans in Gulf Shores alone. Now, Federal bank
regulators are requiring further write-offs based on the
temporary loss of real estate value, given the uncertainties of
the conditions created by the oil spill.
Once the leak is stopped and the beaches are cleaned up,
tourism will return, and property values will return as well.
That doesn't mean they will return to 2006 valuations, but they
will certainly return to pre-spill valuations. In fact, Mr.
Feinberg has stated that his BP fund claims process will not
recognize any real estate claims for just this reason: Real
estate values are only down temporarily.
Unfortunately, the bank regulators are aggravating the
problems on the Coast by various actions they have taken. The
interagency statement that these regulators issue is of no
value either to the affected banks or to the residents of the
Gulf Coast. The statement that urges banks to waive late fees
and ATM charges are gestures of no meaning.
Our banks have had Federal examiners twice force them to
write off millions of dollars in performing loans that are
current simply on the basis that the underlying collateral has
lost value since the oil spill. This makes no sense. It just
makes recovery of the region that much more difficult, if not
impossible.
Without help, Gulf Shores and Orange Beach, our neighbor to
the east, would lose what has taken decades to develop across
multiple generations of families. With the loss of business
revenues, Gulf Shores and Orange Beach are at the risk of
losing businesses needed to serve as the driver of our only
island economy: tourism. Once this family business
infrastructure is lost, it cannot be magically recreated.
Every business located on the island is directly affected
by this disaster and has suffered loss. There are no
exceptions. From the beginning of this disaster, our community
has been assured that we would be made whole by BP. This has
not occurred.
The financial impact of the oil disaster is devastating.
Our local community of Gulf Shores and Orange Beach has
approximately $1.3 billion of existing debt that is dependent
on tourism revenue to service.
The Gulf Coast would urge this committee to work with
Federal bank regulators to provide its banks time to work out
the problems created by this spill. They need more than an
interagency statement on ATM fees. Here are a few concrete
examples of what is needed:
Appraisals: Bank regulators continue to insist on new
appraisals even though the real estate market is so unstable as
to make meaningful comparables impossible. It is essential that
the bank regulators accept existing, pre-spill appraisals, not
distressed valuations caused by arbitrary markdowns in the
aftermath of this spill.
Bank regulators should also recognize BP and Feinberg
claims as equivalent to insurance claims when those claims are
corroborated with data. Thus, examiners ought to take these
claims into account when assessing the repayment prospects of a
loan.
There is another reality they should consider, and that is
the effect this spill has had on the coastal banks' ability to
raise capital. The investor community has begun to re-enter the
bank capital market, even for troubled banks, but the investors
have indicated that they want to let the market settle after
the spill is over before investing in these area banks. The
regulators should work with these banks to give them more time
to raise capital.
In sum, the bank regulators need to give these banks some
breathing space. And, in the long run, this will reduce the
cost to the taxpayer by saving many of these banks and also
allowing our area economy to recover.
Finally, these points are exactly in line with a letter
that Chairman Frank and Mr. Minnick sent to the Federal bank
regulators in the fall of last year. I am told by bankers that
the regulators have not responded in the requested manner.
As you consider this difficult decision, please understand
the consequences of adding another layer to the recovery of
this region. Failure of many banks and most businesses is a
certainty. Please don't underestimate the urgency that exists
here. We would deeply appreciate any help you can provide in
obtaining the relief mentioned here, and in Chairman Frank and
Mr. Minnick's letter of October 29, 2009.
Thank you.
[The prepared statement of Mayor Craft can be found on page
38 of the appendix.]
Mr. Minnick. Thank you, Mayor Craft.
Mr. Lancaster?
STATEMENT OF BRIAN LANCASTER, ROYAL BANK OF SCOTLAND, ON BEHALF
OF THE CRE FINANCE COUNCIL
Mr. Lancaster. Thank you, Chairman Frank, and Ranking
Member Bachus. My name is Brian Lancaster, and I am here today
as a board member of the Commercial Real Estate Finance
Council, which represents all lenders, issuers, investors, and
other services in the commercial real estate finance business.
Today, my testimony will focus on three areas: the
challenges facing the $3.5 trillion market for commercial real
estate finance; the unique structure of commercial mortgage-
backed securities and the need to customize reforms; and
suggested policies to support commercial real estate and small
business.
As the lagging indicated, the $7 trillion commercial real
estate market is now feeling the full impact of a prolonged
recession. Today, a perfect storm exists with four
interconnected challenges. We are in the midst of a severe
recession. Unemployment, consumer spending, business
performance, and asset values have all deteriorated and
compound the CRE downturn. A severe equity gap exists in
commercial real estate. Commercial properties have lost 30
percent to 50 percent of their value since 2007, and this is
arguably the biggest challenge facing commercial real estate
today.
More than a trillion dollars in commercial real estate
loans mature in the next several years. More troubling, many of
these loans will require significant borrower equity to
refinance, given the decline in property values. The CMBS
markets are restarting, but slowly. CMBS issuance plummeted
from a peak of $240 billion in 2007, nearly 45 percent of all
commercial real estate lending, to $12 billion in 2008, $2
billion in 2009, and, at $2.4 billion for the first half of
this year, is just now starting to pick up.
The four key areas we believe that will provide a framework
for recovery are as follows:
Increased coordination of accounting and regulatory
reforms. Beyond the economic conditions, the largest impediment
to a revival of the commercial mortgage-backed securities
market is the uncertainty that exists due to regulatory and
accounting changes. Separate from Dodd-Frank, the market
already has seen several retention proposals from the
regulators: new risk-based capital proposals and retroactive
changes to securitization accounting under FASB 166 and 167.
When taken together, these changes create tremendous
uncertainty and make it difficult to make a loan, buy a bond,
or develop or expand a securitization program.
Dodd-Frank includes a study on the combined impact of
securitization reform proposals and credit availability. This
report is important, but Congress also should promote greater
coordination between regulators and accounting policymakers.
Policymakers must remember that the commercial mortgage-
backed securities market is very different in several ways.
CMBS borrowers are sophisticated businesses with income-
producing properties. The CMBS structure typically has 100 to
200 loans that average $8 million in size. There is significant
transparency; although it can be made better, it is actually
quite high. At the Commercial Real Estate Finance Council, we
have the Investor Reporting Package, which was designed by
investors for investors to improve transparency. And it is the
only market with first-loss investors who re-underwrite all
loans prior to issuance.
Dodd-Frank rightfully ensures that retention rules are
considered jointly with some specific considerations for
commercial real estate loans and CMBS. We applaud Congress for
these distinctions, and we urge regulators to ensure that risk
retention for commercial real estate loans is implemented in
such a way as to promote a recovery of the flow of credit to
the real estate borrowers and sound lending practices.
Investors need certainty in regulation and confidence in
other areas such as ratings and contractual agreements.
Policymakers should consider ways to use securitization as an
exit strategy after institutions fail, similar to the
Resolution Trust Corporation's. Other items include creating a
U.S. covered bond market as an additive tool, accounting relief
for consolidation, and proposals to recognize losses over time.
However, the challenges facing the commercial real estate
market today are beyond the scope of what any one program could
or should do in attempting to provide a solution. Today,
smaller financial institutions, such as small and regional
banks, face the greatest strain from commercial real estate,
particularly construction loans and land loans that have not
been securitized. In fact, approximately 1,500 U.S. banks are
at risk, according to the FDIC, due to commercial real estate
exposure which is on balance sheet.
Given the commercial real estate challenges faced by small
institutions and small businesses, it is logical that the small
business lending fund also incorporate small commercial real
estate mortgages that are income-producing. The council
applauds Congressman Minnick's efforts to clarify the
definition of small business lending to commercial real estate
loans. If implemented properly, it could assist in
recapitalizing small banks while incentivizing commercial real
estate lending to small business to fuel job growth.
The council commends Representative Minnick's efforts with
CRESA, and we would make the following points: Additional
liquidity could be helpful, but any approach should incentivize
financial institutions and borrowers to deal with the equity
gap in existing loans. Encouraging securitization of such high-
quality assets could maximize benefits by freeing up balance
sheets and promoting additional private lending. We stress that
mortgage lending for small businesses be provided by a variety
of small, mid-sized, and larger banks, life insurers, and other
nonbank lenders.
Thank you.
Mr. Minnick. Thank you very much.
I neglected to mention that Mr. Lancaster is speaking on
behalf of the Commercial Real Estate Finance Council. And we
appreciate your cataloging the issues that face your members.
Thank you for your testimony.
Mr. Lancaster. Thank you, Representative Minnick.
Mr. Minnick. I would now like to call on Mr. James Helsel,
who is going to speak on behalf of the National Association of
Realtors.
STATEMENT OF JAMES L. HELSEL, JR., 2010 TREASURER, NATIONAL
ASSOCIATION OF REALTORS (NAR)
Mr. Helsel. Thank you, Mr. Chairman, Ranking Member Bachus,
and members of the committee. My name is Jim Helsel. I am the
2010 treasurer of the National Association of Realtors, and I
thank you for the invitation to testify before you today.
I have been a Realtor for more than 35 years, specializing
strictly in commercial real estate. I am president of Helsel
Incorporated Realtors in Camp Hill, Pennsylvania. I am here
today to testify on behalf of the 1.1 million Realtors of the
National Association of Realtors.
We are in support of several resolutions to ease the
commercial real estate credit crisis and to restore lending to
the small business community.
First, I want to address H.R. 5816, the Commercial Real
Estate Stabilization Act. We applaud its goals to help
stabilize the commercial market and to clear troubled
properties off the market. We are ready to work with
Representative Minnick and the committee to review this
proposal to see how it could help restore our industry.
Second, NAR strongly supports H.R. 3380, introduced by
Representatives Kanjorski and Royce, which would raise the
credit union members' business lending cap from 12.25 percent
to 25 percent of total assets.
Lack of available credit remains a significant challenge
for our industry right now. What is more, it is the smaller
regional and community banks with large commercial real estate
exposure that count for almost one-half of the entire business
loans issued in the country. That has put a significant dent in
the commercial and the credit availability to small business
communities. In turn, this has reduced cash flow and elevated
vacancies in the commercial markets.
In the past, consumers and businesses have relied on credit
unions to fill the gaps when banks cannot serve them. But
today, credit unions are hampered by the 12.25 percent cap that
is before them. The Credit Union National Association estimates
that if H.R. 3380 were signed into law, credit unions could
extend up to $10 billion in additional business loans, helping
create 108,000 jobs.
We strongly urge this committee to move H.R. 3380 forward.
Furthermore, we also support the Administration's proposed
increase of the cap on credit union member business lending at
27.5 percent of total assets. However, we oppose the
Administration's requirement that credit unions must have at
least 5 years of member business lending experience in order to
qualify for the higher limit. It would unfairly prevent credit
unions that are well-capitalized and ready to lend to the small
business community from participating.
Anecdotally, I would like to just tell you a very short
story. About a year ago--I am, by the way, a very small
business in central Pennsylvania--I had the opportunity and the
requirement to refund and to refinance a loan I had on a small
building where my business exists. That building sat on a loan
that was a 20-year amortization with a 10-year balloon. At the
end of 10 years, 1999, it was my obligation to refinance the
loan. It was a performing asset; it was a performing loan. We
had never missed a payment. The asset was performing on its
own, as well.
I went to three banks, one which held the loan and two
others, all of which said, ``I am sorry, Mr. Helsel. We are out
of the real estate business right now.'' I went to a credit
union. In 3 days, the credit union gave me a commitment letter
subject to an appraisal.
By the way, the equity, the LTV on that loan was 20/80. I
only owed 20 percent of the value of the property. I could not
get a loan through a commercial bank, and I went to a credit
union. So, anecdotally, it tells you--and that is typical of my
business and my business climate right now.
Third, I want to address the small business lending fund
legislation in SBA loans. NAR recommends that you pass H.R.
5297, the Small Business Jobs and Credit Act of 2010, which was
introduced by Chairman Frank. This legislation contains lending
provisions that help ensure community banks have both the
incentive and the capacity to increase total loans to small
businesses. We strongly urge you and encourage you and your
colleagues in the Senate to pass this legislation quickly.
Many small businesses are having trouble obtaining SBA
loans right now. While we applaud the SBA's decision to include
real estate professionals as eligible candidates for SBA loans,
we believe raising loan limits for both SBA 7(a) and 504 loans
can further add relief. Raising these loan limits will open up
another avenue for commercial property owners to get the credit
they need. Furthermore, permitting SBA 504 loans to be used to
refinance performing commercial properties will also help ease
the liquidity crisis in the commercial sector.
In conclusion, NAR believes it is critical for Congress to
act quickly and to get capital flowing to small businesses in
the commercial real estate market. A strong commercial real
estate sector is critical to millions of U.S. jobs and to
helping keep our overall industry afloat, and our overall
economy afloat more importantly.
Thank you for this invitation to testify before you. I am
happy to answer any questions you may have. Thank you so much.
[The prepared statement of Mr. Helsel can be found on page
62 of the appendix.]
Mr. Minnick. Thank you very much, Mr. Helsel.
Next, we will hear from Mr. Chris DiAngelo, who is a
partner at Dewey & LeBoeuf, a firm that I believe has done more
legal work on documentation of commercial real estate lending
than any firm in the world.
Mr. DiAngelo?
STATEMENT OF CHRIS DiANGELO, PARTNER, DEWEY & LEBOEUF, LLP
Mr. DiAngelo. Thank you, Mr. Chairman, Ranking Member
Bachus, and members of the committee. I appreciate the
opportunity to speak with you today about this piece of
legislation.
As the chairman mentioned, I am a partner with the Dewey &
LeBoeuf law firm in New York City. I had the structured finance
group. I have worked with banks and real estate lending for
about 30 years.
I would just like to make a couple points about this bit of
legislation, primarily from a legal point of view, but also
from a somewhat economic point of view, just having been in the
industry for such a long time.
The first point I would like to make is to raise the
connection between small balance commercial real estate lending
and small business lending generally. In this country, most
small business lending actually does take the form of
commercial real estate lending. And, furthermore, another
connection is the connection between small business lending and
jobs. There was one study that I read recently, an SBA-related
study that said, for every $650,000 worth of SBA lending, one
job was created. So, again, in this country, all three of these
things are tied pretty closely together: small business
lending; small balance commercial real estate lending; and
jobs.
The second point I would like to make is the connection
between small balance commercial real estate and community
banks. What happened in this country over the past, say, 20
years was the phenomenon where you had the Federal GSEs, Fannie
and Freddie, basically took a large part of the residential
market away from the smaller banks. You had large non-
depository finance companies do the other types, the so-called
subprime and alt-A mortgages. You had the larger banks also
doing credit cards, other types of consumer finance, large
finance companies such as Ford Credit and GMAC. There was
really very little left for the community banks to do other
than this type of product, the small balance commercial real
estate loan.
That is not to suggest that the product is a bad product or
that the loans were bad. It is just pointing out that--we read
so many reports today about the concentration of commercial
real estate at these smaller banks, and we should understand
how that happened.
The third point I would like to make relates to the issue
of what happens if we don't address this problem. We actually
see it happening pretty much every Friday when the FDIC sends
out its weekly e-mails about the closings of banks.
And I want to make an important point about that, because I
understand the reluctance for Congress and the government to
embark on another Federal program. But I do want to point out
that, right now, these problems of the commercial real estate
lending and the community banks simply rolls to the FDIC.
Again, it is not the FDIC's fault; the FDIC does not have the
authority to deal with anything other than receivership
estates.
So it seems to me, at least in looking at this legislation
and comparing it to the authority of other Federal agencies,
that by letting these problems roll into bank receiverships, we
are probably maximizing the cost to the government, rather than
trying to take this particular narrow problem and--I don't want
to say nip it in the bud, because the bud may have already
passed--but at least get it a little earlier in the process
before it rolls into a receivership estate.
This problem also has been remarked on by a number of
commentators, including Professor Warren's committee, which
dedicated its February report to commercial real estate. This
problem of commercial real estate lending has been unusually
sticky, and the various programs, to date, have just not been
able to address it thoroughly.
This particular bit of legislation, I have reviewed quite
carefully, and it seems to be very similar in one regard,
although in different operation, to the TALF program, which was
used to jump-start the securitization markets generally,
although it had difficulty cracking the commercial real estate
nut. By similar to TALF, I mean that it was a program that was
rolled out by the Federal Government and quickly became
unnecessary. It was designed to quickly become unnecessary. And
the private market has taken asset-backed securities, by and
large, over from the TALF program.
There are two quick points I want to make. Covered bonds, I
understand that is moving ahead, and I think that is a great
idea. The one observation I would make about covered bonds is
it will very likely be a large bank program, and it will be
very difficult to get these smaller banks and these types of
loans into that program.
The second thing I would like to mention in passing is the
mark-to-market observation. That is a very difficult problem.
And I note that this legislation does not try to solve that
problem, but rather it asks the regulators to try to solve that
problem. It is a very difficult problem to address through
legislation.
Anyway, thank you for your time, and I look forward to
working with you and answering any questions.
[The prepared statement of Mr. DiAngelo can be found on
page 48 of the appendix.]
Mr. Minnick. Thank you, Mr. DiAngelo.
Next, we have Mr. Todd Lindsey. Mr. Lindsey has a 20-year
background, I understand, in the early stages of the CMBS
market and has as much experience as anyone in the room in the
smaller segment of the market which this bill intends to
address.
Mr. Lindsey?
STATEMENT OF TODD LINDSEY, PARTNER, US CAPITAL
Mr. Lindsey. Thank you, Mr. Chairman, for the opportunity
to testify today.
Over the last 15 years, our credit markets have become
increasingly reliant on and structured around securitization.
Leading industry experts and government officials, including
Secretary Geithner and Chairman Bernanke, have stated that a
functioning securitization market is a vital part of our credit
system and our economic recovery.
Over the last 24 months, much has been done by government
and private industry to stabilize the credit markets,
including, as Chris mentioned, parts of the securitization
market. The residential real estate, consumer credit, and
corporate credit markets have stabilized, in large part because
of successful government programs targeted at those particular
markets. The commercial real estate market has been left behind
and now poses very significant risks to the credit system and
our economic recovery.
As Congressman Minnick stated, in 2007, the value of all
commercial real estate was approximately $5.5 trillion.
According to many research reports, values have declined by 40
percent or more from those highs. This decline has destroyed
over $2 trillion of equity in the commercial real estate
markets. Further declines will create greater losses, and a
majority of those losses will be absorbed by the banking system
and, ultimately, the taxpayers.
The simplified graph that I have included in my testimony
that I think you all have a copy of shows the significant risks
that are created by a further devaluation of commercial real
estate. As you can see in that graph, if you take a look at it,
losses between $300 billion and $1.8 trillion are possible. It
is important to understand that our entire banking system is
capitalized between $1.2 trillion and $1.4 trillion. Real
estate losses of the magnitude demonstrated in this graph will
have a catastrophic effect on our credit system and our
economy.
It should also be pointed out that many commercial real
estate transactions are reflecting reductions of value of 70
percent or greater. This is the free market fixing the problem.
The lack of a functioning credit market will continue to be a
major cause of further declines.
In 2007, the commercial real estate securitization market
provided $240 billion of funding to the commercial real estate
sector. Since that time, the commercial securitization markets
have been shut down. With economic regulatory and accounting
risk clouding the market, the future of securitization is
unclear.
In short, without some sort of government assistance, the
securitization markets are not likely to provide any
significant credit to the commercial real estate market.
Because commercial real estate loans generally do not fully
amortize over their loan term, the Nation's stock of commercial
real estate loans is refinanced on a regular basis. It is
estimated that $1.3 trillion of loans will reach maturity in
the next 36 months.
A majority of the smaller balance commercial real estate
loans are on the balance sheets of our Nation's community
banks. But because of both capital and regulatory constraints,
many banks are not in a position to make new loans or refinance
their existing loans.
The bill we are discussing today is designed to jump-start
the private commercial mortgage-backed securities market. The
CMBS market is well known by market participants and has
demonstrated the ability to facilitate the funding of large
numbers of loans.
The bill directs the Treasury to guarantee bonds, backed by
newly originated commercial loans, and the taxpayer will be
protected in the following ways:
One, a large guarantee fee will be paid to the Treasury.
This fee will be structured to offset any costs or losses of
the program and hopefully, and I truly believe, generate very
substantial profits to the taxpayers.
Only newly underwritten loans, underwritten in accordance
with guidelines developed by industry experts, will be included
in the program.
All properties will be reappraised at today's market
valuations. Making loans at a low point in the real estate
cycle has historically been very safe.
This program is not a silver bullet, and it is not a
bailout for financial institutions or real estate developers.
To the extent individuals or institutions have made poor
decisions, they will suffer the consequences of their actions.
The bill simply supports the extension of reasonable credit to
the commercial real estate sector.
I look forward to any questions you may have on this
program or the market in general. And thank you very much for
your time and attention to this matter.
[The prepared statement of Mr. Lindsey can be found on page
71 of the appendix.]
Mr. Minnick. Thank you very much, Mr. Lindsey.
I would like to now call on the gentleman from Connecticut,
Mr. Himes, to introduce our next witness.
Mr. Himes. Thank you, Mr. Chairman.
And it is a delight to introduce to the committee Mr.
Jonathan Daniel from Stamford, Connecticut, a constituent, and
principal and founder of Silo Financial Corporation, which
provides a broad range of specialty capital--bridge mortgages,
mezzanine loans, and other financing--in the commercial real
estate market.
Mr. Daniel has been in my office on a number of occasions
talking about an innovative potential solution to the
challenges that we are talking about today using and leveraging
the successful SBIC program. And I look forward to having the
opportunity to share his ideas with the committee.
Thank you.
STATEMENT OF JONATHAN DANIEL, CHIEF EXECUTIVE OFFICER AND
FOUNDER, SILO FINANCIAL CORP.
Mr. Daniel. Chairman Frank, Ranking Member Bachus,
Congressman Himes, and committee members, thank you for the
invitation to participate in today's committee hearing.
I am the principal and founder of Silo Financial Corp. from
Stamford, Connecticut, which is a private real estate finance
company that provides capital to small- and medium-sized real
estate owners and developers.
I would also like to recognize that Jay Rollins of JCR
Capital, a Denver-based private real estate finance company,
has worked tirelessly with me on this initiative.
In reference to H.R. 5816, I trust that this program could
provide smaller community banks with a means to underwrite and
originate new qualified commercial mortgages, which they are
currently unable to originate due to balance sheet issues,
overexposure to real estate, and stringent regulatory
oversight. The ability to finance more transactions could
likely help create a floor for commercial real estate values
and create work for many professionals, including electricians,
plumbers, roofers, general contractors, pavers, and more.
Credit is the backbone of commercial real estate, and it
remains extremely challenging for nearly all small balance
commercial property owners to access mortgage capital. The
convergence of declining fundamentals, lack of capital, and
maturing loans have created a ticking time bomb of loan
defaults, job losses, and property foreclosures that may sweep
through this country worse than the residential mortgage
crisis.
According to a 2007 study by NAIOP, the operating outlays
associated with office, warehouse, and retail space built in
2007 alone are estimated to total $2.4 billion annually. This
direct spending of building operations would add $5.1 billion
to the GDP, support approximately 57,000 jobs, and generate
$1.6 billion in new personal earnings. If we extrapolate the
results of this study and apply it to the entire commercial
real estate marketplace, encompassing over 32 billion square
feet, then the impact to GDP and jobs is exponentially
significant.
According to the Congressional Oversight Panel's report,
``Commercial Real Estate Losses and the Risks to Financial
Stability,'' hundreds more community and mid-sized banks could
face insolvency, extending an already painful recession.
To address this crisis, we have developed a practical
intervention initiative that, combined with H.R. 5816, could
help contain and begin to remedy the commercial real estate
crisis--at no cost to taxpayers.
Further, we are proposing a program where we, the lenders,
will provide equity capital in a first-loss position, thereby
insulating taxpayers from risk. In this program, the government
would be a secured lender at no more than 50 percent exposure
to today's real estate values.
We propose the expansion of the Small Business Investment
Company Program to include the financing of small balance
commercial real estate. The existing Small Balance Investment
Company Act was formed in 1958 in efforts to provide capital to
startup and capital-deprived companies and businesses. In light
of the commercial real estate crisis, we are proposing the SBIC
Act to temporary allow the participation of qualified small
commercial mortgage lenders.
The Small Business Investment Company Program is a unique
public-private partnership that has provided over $57 billion
in financing to more than 107,000 small U.S. companies since
the program's creation. There are hundreds of small real estate
finance companies across the country, like Silo in Stamford,
Connecticut, and JCR Capital in Denver, Colorado, which provide
commercial real estate loans. Typically, these finance
companies utilize private-sector equity combined with bank
lines to make loans.
Unfortunately, these smaller finance companies are also
prohibited from accessing capital themselves in this market
environment. This, in turn, means even less capital can flow
into commercial real estate markets. Thus, banks have less
take-out options, values continue to decline, and community
banks are forced to close.
The SBIC Debenture program, which has never lost money,
would work perfectly to accommodate small real estate finance
companies' need for capital in an effort to complement bank
lending in this environment. Generally, SBICs have one-third of
their own capital at risk in a first-loss position. So, for
example, if ABC Real Estate Finance Company had $50 million of
equity and was granted an SBIC commercial mortgage license, it
could borrow $100 million at market rates and have $150 million
to deploy and originate small balance commercial real estate
loans with. To the extent these loans in a portfolio were made
at no greater than 75 percent of today's values, the taxpayer's
last dollar exposure would be no greater than 50 percent of
today's values.
To conclude, the SBIC program would be a perfect temporary
and complementary solution with H.R. 5816 until the traditional
capital markets return to normal.
Thank you again for your invitation to discuss the
important issues of today's hearing. I will be happy to answer
any questions that you may have.
[The prepared statement of Mr. Daniel can be found on page
43 of the appendix.]
Mr. Minnick. Thank you very much, Mr. Daniel.
Our next and final witness is Mr. Ernie Panasci. He was a
shareholder at Jones & Keller and was introduced earlier by my
colleague, Mr. Perlmutter.
Mr. Panasci?
STATEMENT OF ERNEST J. PANASCI, SHAREHOLDER AND DIRECTOR, JONES
& KELLER, P.C.
Mr. Panasci. Thank you.
Chairman Frank, Ranking Member Bachus, and members of the
Financial Services Committee, thank you very much for the
opportunity to testify at today's hearing on behalf of
financial institutions in the United States.
As you stated, I am an attorney in Denver, Colorado,
representing financial institutions throughout the western
United States. My financial institution practice in the States
in which it covers gives me a broad perspective on what is
going on in community banks in the western region of the United
States.
I am here today to discuss H.R. 5816, the Commercial Real
Estate Stabilization Act of 2010, and complementary legislative
regulatory proposals that would increase the availability of
credit and improve the financial condition of financial
institutions. My analysis of this bill leads me to believe it
will be a step in the right direction to unclog the commercial
real estate lending markets.
The old 8 and 10 percent capital guidelines imposed by the
regulators have been replaced by 10 and 12 percent and, in some
instances, far greater capital requirements on financial
institutions. Most financial institutions are having a
difficult time raising equity capital and, as such, are not
able to make new loans because each dollar lent by a financial
institution requires 10 to 14 cents in additional capital,
depending upon the capital requirements imposed upon the
institution.
The commercial real estate credit guarantee program would
enable financial institutions to remove the guaranteed portion
of these credits from their CRE portfolio, enabling them to
make additional commercial real estate loans.
The program as outlined by the bill would be a benefit to
financial institutions. However, I suggest the House consider
limiting the maximum guaranteed amount to one institution to
approximately 3 percent of its total risk-based capital as of a
certain date and, if possible, increasing the amount of total
guaranteed dollars to some amount in excess of $25 billion. My
belief is that the Secretary of the Treasury will find a great
interest in this program.
In addition to the commercial real estate guarantee
program, I applaud Congress for its passage of the Dodd-Frank
Act. In particular, I believe that section 616 of the Dodd-
Frank act is very relevant to the proposed commercial real
estate credit guarantee program and small business lending
program. As you know, section 616 requires the Federal Reserve,
in establishing regulations for capital standards, to take such
standards into account as countercyclical economic conditions.
In other words, in times of economic prosperity, the capital
standards should be higher and, in times of economic stress,
the capital standards should be lower.
With the combination of a decrease in the capital standards
applicable to banks during these economic times and the
implementation of amortization provisions of the small business
lending fund program, overall, banks will be in a much better
position to lend to businesses. I encourage the Federal Reserve
to act on these countercyclical regulations as soon as
possible, given the fact that we are still in the middle of an
economic crisis.
While I believe the foregoing will provide some relief to
financial institution lending and to financial institutions, I
cannot stress enough the importance of the implementation of
the temporary amortization authority currently provided in H.R.
5297.
As you are aware, Regulation H, enacted by the Federal
Reserve in the 1980's, assisted agricultural banks with the
amortization of agricultural loan losses. The FDIC report
concerning banks that participated in this program states that,
of the 301 banks operating in the agricultural capital
forbearance program, 201 were operating as independent
institutions 1 year after leaving the program, another 35 had
been merged without FDIC assistance, and 65 banks failed. As
these results indicated, after a period of forbearance, a large
majority of the institutions in the program were either able to
recovery or had sufficient value to be acquired. Losses of the
65 banks that failed were similar to those of other failed
banks.
The combination of increasing capital demands due to the
economic conditions that the country as a whole has been
experiencing have contributed to a decrease not only in
commercial real estate loans but also small business lending.
Many bankers now realize that the loan portfolio
diversification isn't necessary and are not able to undertake
small business lending due to the aforementioned issues.
Enabling institutions to increase small business lending would
have a positive impact and would subsequently increase banks'
capital.
I look forward to any questions you may have.
[The prepared statement of Mr. Panasci can be found on page
75 of the appendix.]
Mr. Minnick. Thank you very much, Mr. Panasci.
And I thank all the members of the panel for their
thoughtful testimony and for rearranging your schedules to be
with us today.
I would like to start by asking Mr. Lindsey: You heard the
testimony of two of my colleagues, in their opening statements,
that this legislation was ill-advised and untimely from the
standpoint of creating additional risk to the taxpayer and
would cost the taxpayer, potentially, and was indirectly
another form of bailout.
In your testimony, you indicated you thought exactly the
opposite was the case. Could you explain to us, again, why?
Mr. Lindsey. Yes. And I wish they were here to hear my
answer.
The structure of this program calls for a 2 percent
guarantee, and that is a minimum fee, to be paid to the
Treasury Department. I think that fee is probably 4 to 5 times
what the industry used to charge for ensuring a similar risk.
What we are talking about here is the Treasury Department,
what we call in the industry, wrapping investment-grade bonds
to Triple A bonds. By doing that, what they do is they help
private industry accumulate loans. Because, right now, the
biggest risk to securitization is the accumulation of loans in
preparation for securitization. The big banks are worried that
something may happen in that 6-month period of time that makes
them keep all these loans on their balance sheet or have to
fire-sell them into the market, and they are very hesitant to
do it.
So, I think the 2 percent fee that is in the program is
more than enough to cover any costs or projected losses. And,
of course, we would be modeling with the Treasury Department
the structure and creating the default models that would make
sure that was the case. I think that the legislation is written
to make sure that it is at least neutral to the taxpayers.
Mr. Minnick. And, Mr. DiAngelo, you indicated that another
cost of doing nothing might be a substantial number of
commercial banks going under, being seized by the FDIC, and
that those costs would also accumulate to the taxpayer.
Could you elaborate as to why those costs might be incurred
if this legislation is not passed?
Mr. DiAngelo. Yes. Most of the bank failures that have been
occurring at the community bank level have been, frankly, due
to this problem, the commercial real estate problem, and
particularly, even more narrowly, the small balance commercial
real estate loans.
Again, the FDIC is not set up to proactively deal with
these problems. It can only deal with a bank once it is in
receivership. There is really, at the moment, no agency that
can tackle this particular problem. When the problem was
tackled in the 1980's and early 1990's, the government set up
the RTC as a separate entity to deal with it. But, once again,
I think that was from receivership estates. It was essentially
taking a job that the FDIC is doing now on its own and creating
a separate entity just to do those transactions.
We don't have that today, so the FDIC--it is funny, the
FDIC--we, collectively, have really asked the FDIC to do a job
that it was not set up to do, which is to try to respond to a
lack of liquidity in the commercial real estate lending
markets. So what happens is, you have an agency that is really
not set up to tackle this problem, but by default it tackles it
anyway; any losses roll to the deposit insurance fund, which is
not precisely a taxpayer-supported fund, it is funded by bank
assessments. But I would imagine that the bank assessments
somehow gets passed on to the bank customer, so the difference
between something that like and a tax is probably fairly small.
So my point on this is that the sooner we could get to this
problem, probably the less cost it is going to be writ large to
the banking industry and the public.
Mr. Minnick. Thank you.
And, quickly, Mayor Craft, you indicated in your testimony
that you thought 1,500 banks may be at risk if we simply let
the market play out. Do you have an estimate for us of the cost
to the customers and taxpayers if that free-market scenario
plays out?
Mr. Craft. Yes, sir. We, in our small community, have 32
miles of beach area, and we are a very small portion of the
entire Gulf Coast community affected. We have existing about
$1.3 billion worth of debt in acquisition, development, and
operational costs. And we are severely impacted. All of the
economy within this region is either tourism or fishing, both
of which are highly seasonal and have been devastated with cash
flow. And that will flow back on the banks as we try to make
the payments on existing credit and try to survive to the next
season.
Mr. Minnick. Thank you, sir.
Ranking Member Bachus?
Mr. Bachus. Thank you.
Let me say that the testimony has been very helpful this
morning, and I think there are several proposals in the
testimony that merit consideration. And I think one thing that
I take out of this hearing is that the risk of not doing
something is greater than the risk of doing something; and that
if it is well thought out, that the exposure to the taxpayer
will be minimal, and that we can protect the taxpayer, and that
any losses actually could be minimized that the taxpayer would
take. So we will take these proposals very seriously.
And, also, I would like to, I guess, associate myself with
the testimony several of you had, that the way to create jobs
is small business and small business lending. Many of our
programs to date have been, I think, designed to help the
larger institutions. And that is a significant failure that we
have had over the past 2 or 3 years; we have neglected the
smaller institutions. And a lot of these programs that have
gone out before were smaller institutions, and our regional
banks even, on occasion, weren't able to take advantage of
that.
It has also created a perception, which I think is true, in
the general public that our larger institutions, both by the
regulators and by the response, have been protected and
insulated, when, really, a lot of the risk-taking and what
happened was a direct result of some of their activities, and
that our smaller banks and our businesses and commercial real
estate is more of a victim of what they did. And it is really
not a fair approach that has been taken.
So we will not dismiss these proposals as simply more
exposure to the taxpayer, I can tell you, speaking for myself
and at least some of the other members.
Let me ask Mayor Craft: If the bank regulators don't
respond positively to the relief you are seeking from the
coastal community banks, what would you suggest the Congress
do?
Mr. Craft. Take some type of legislative action to help. We
cannot survive as a community without our regional and local
banks. With the season out there, it is as important to our
economy as our fisheries and our lodging industry, either one.
So we have to have survival of our banks. And if we don't
take some action, particularly as it relates to the
reappraisal--which I know the valuations are going to be quite
a bit less than the loan value, probably, and we do not have
the availability to meet a cash call as a community. So we
certainly need some legislative help.
Mr. Bachus. All right. Thank you.
My second and last question, Mayor Craft, you state that
real estate prices that existed pre-spill in the early part of
this year will return after the leak is stopped and the beach
is cleaned up. In fact, a lot of them are clean today. I think
you keep getting the same picture of the same beach, and it
affects the tourism.
What is your basis for that assumption?
Mr. Craft. Very little of the real estate holdings that are
mortgaged and financed are residential real estate. Most of it
is investment real estate. It participates in the tourism
economy. Once the tourism economy improves, the values will go
up with it.
And we are becoming confident that, with Mr. Feinberg, in
our discussions and meetings with him, that he understands the
urgency and understands the requirements of funding the cash
revenue that has been lost in these industries in the past
year.
Mr. Bachus. All right.
Let me say to Congressman Minnick and others, I think one
strong argument for addressing this problem, particularly
helping the community and small banks, is we have this so-
called doctrine that has become pretty infamous over the last 2
years of ``too-big-to-fail.'' And what we have done with a lot
of our actions are grow the largest banks to the point where
they are about 50 percent bigger than they were before the
crisis.
So, as we continue to lose our regional and community
banks, we are going to be in a situation where we are going to
create even larger institutions. And one of my somewhat
disappointments about this legislation was we did create a
``too-big-to-fail,'' where we said that if they fail, the
government would, at least in an implied way, come in and bail
out the creditors or counterparties. I believe in America you
should not create two classes. And, actually, it makes their
cost to capital less.
So, I will be interested in seeing how the regulators
respond to that. Because they literally begged us to give them
the authority to step in and help these ``too-big-to-fail''
institutions, which are getting bigger by the day.
Mr. Minnick. I would like to thank the ranking member for
those thoughts and also for his suggestion that this important
problem which faces Main Street be addressed in a bipartisan
fashion. Thank you.
The Chair calls on the gentleman from North Carolina.
Mr. Watt. Thank you, Mr. Chairman. I want to compliment the
chairman on how good he looks in that chair up there. He looks
very comfortable.
I don't want anything I say here to suggest any animosity
toward the bill that we have been talking about. I actually
support it. But there are some realities here that my
colleagues on the other side have pointed out that raise some
interesting questions, because most of them are very much free-
market people. They don't want the government to do anything
that is involved in the free market. And I suspect, when I talk
to most constituents of mine who fit the demographic profile
that our witnesses seem to fit, that most of them are free-
market people too.
So we are constantly in this battle of how much should
government be doing versus the private sector. And this is a
government program, because, at some level, what is being
proposed is making government the backstop, taxpayers the
backstop for this. I support that. I have been supporting it
for years in various contexts, similar to the SBIC proposal
that Mr. Daniel testified about, the MESBIC program that we
have been talking about for years to try to stimulate
development and investment in minority and underserved
communities.
But there are some troubling things I have heard in this
testimony today also. And one of those came from Mr. Helsel
when he said that he had this balloon loan, and he got to the
end of the amortization period and his option was to refinance.
And Mr. Lindsey reaffirmed that, because he said real estate
mortgages are never intended to be amortized completely.
You take the combination of those two things, and that is a
troubling position that you are in. Because most of the people
I know, when they get a short-term balloon loan and they get to
the end of it, they know that they have an obligation to pay
that loan, not to refinance it.
That is the same thing that we have criticized the
speculators about. You got a lower interest rate on a 10-year
loan with a balloon on it than you would have gotten on a 30-
year loan had you fully amortized it.
So do I understand that the real estate market is not set
up anymore to amortize loans ever? Do we always contemplate
that they would be refinanced at the end of some payment term?
That is a troubling notion to me, because I never thought of
that. And I practiced law in this area for 22 years. When we
got a loan, we expected to pay it. And that is the kind of
personal responsibility that we have been preaching to every
borrower in this country.
So, tell me I misheard you when you said what you said, or
tell me what the rationale for this is.
Mr. Helsel. Congressman, the fact is that most commercial
loans are never set up to be paid off over the balance of the
entire mortgage.
Mr. Watt. But should we be encouraging that as a
proposition?
Mr. Helsel. I am not sure if we should encourage it or
discourage it. It is the system that we work in. And the system
we work in says that we will give--
Mr. Watt. But that is not the system we work in for anybody
else in this country. You borrow money, and you pay it back at
some point. Or you assume the risk, not the taxpayers assuming
the risk.
Mr. Helsel. I guess I would say that, under a residential
scenario, I would agree with you. But the fact is that, in
order to make a commercial transaction work, many times the
only way to drive down the cost of the mortgage is to take a
loan, as you suggested, which gives you a lower rate at the
front end, recognizing you are going to refinance it sometime
over the balance of the total period of that loan. And that is
about $1.4 trillion in loans that are going to come due over
the next 18 months to 2 years. So that is the situation we sit
in right now.
I would have been happy to take a 20-year loan at the rate
I had been given. Unfortunately, I didn't have that opportunity
by the banks.
Mr. Minnick. The time of the gentleman has expired.
Mr. Lindsey. One thing the securitization model can do is
extend longer amortization--
Mr. Minnick. The gentleman's time has expired.
The Chair recognizes the gentleman from Texas.
Mr. Watt. Could I just request that they submit their
answers to the questions that I posed in writing? We can't do
this in 5 minutes, so I would like to get written responses to
the questions, if I could.
Mr. Minnick. The Chair asks the witnesses to respond in
writing to the gentleman from North Carolina.
Mr. Green?
Mr. Green. I pass.
Mr. Minnick. The Chair recognizes the gentleman from North
Carolina, Mr. Shuler.
Mr. Shuler. Thank you, Mr. Chairman.
I also want to thank the ranking member for his comments,
as well.
I first want to tell Mayor Craft, our heart goes out to
people in the Gulf region. I spent some time in Louisiana, and
I know the whole Gulf Coast has been hit numerous times now. It
is just, how much can you take?
So, you start to realize, being in North Carolina, most of
your folks, when they retire, they will move to the mountains
of North Carolina. And what is happening is, because of the
commercial real estate, the endeavors that they have been in in
the Gulf region and the depreciated value that they have now on
their real estate, they can't get that home equity loan or they
can't sell their home to the value that they have in it. So
that is prohibiting them to actually come into my region. We
see how that has a huge impact on our region. So our heart goes
out to all the people in the Gulf region, and hopefully it all
gets cleaned up and gets the economy back up.
To Mr. Lindsey, what happens in a normal real estate
process from the standpoint of if a bank has a bad, let's say,
developer, who has a strip center, $7 million valued on it, and
that person hasn't does his performance, he is not a very good
manager, he doesn't have good anchor tenants, what happens to
that piece of property? What impact does it have to the person
right across the street, who has a very similar value of real
estate? What happens to the manager who has done very well and
gotten great anchor tenants and has never missed a--what
happens to his real estate value?
Mr. Lindsey. As real estate values decline--in your
example, if there were two similar properties across the street
from one another, and one is in trouble with the bank, someone
like myself--and I have done it--would buy that property at a
substantial discount.
I can give you a real-world example. We purchased a note
from a bank. The note was $6 million. We paid $825,000 for it.
The original valuation of the property was about $8 million.
There is a sister center across the street. Our property was
less than optimally occupied. The one across the street was
almost fully occupied. The strategy for us, because our cost is
so low, will be to cut rents in half, go across the street and
get the tenants from the people over there. By the way, that
particular property happens to be also bank-owned.
So we will take those tenants, put them into our building,
and then buy that building from them at a substantial discount
and then re-tenant it. Whenever there are loans clearing at
these very low valuation levels, the first thing that we do is
cut rents and fill up our buildings.
If you look at what happened in the RTC, there were
formulas that most of the market was using at the time where
you just look at the property and say, ``I have to cut rents to
60 percent of market,'' let's say, and ``I want a 10 or 12
percent rate of return, and that drives my purchase price,''
and that is what they did. But the problem with that is it
pulls the entire real estate complex down. I think ultimately
it affects everything.
Right now, you see some healing in the bigger part of the
market. I am talking about trophy properties. There are
transactions happening there. And I think the market feels like
they are insulated from the risks that we are talking about
today. I disagree. A $10 million loan supports a pretty big
property. And if guys buy those at substantial discounts, they
are going to start poaching tenants out of these big buildings,
and, ultimately, those big buildings will start to decline in
value, as well. They are not going to escape this, in my
opinion.
Mr. Shuler. What would be the impact if, let's say, the
project that has full tenants was owned by an individual? Would
you say that person's value would decline such that they may
not have the opportunity to use some of the equity in that
piece of real estate to go out and create another job or create
another business or buy another piece of real estate?
Mr. Lindsey. I totally agree with you. To the extent you
have equity destruction of any type--and, like I said in my
testimony, there has been $2 trillion worth of equity
destruction. In the past, people would have been able to borrow
money based on the value of their real estate and do something.
Right now, what everybody is doing is paying off debt instead
of investing it in their businesses. It is a very serious
problem.
Mr. Shuler. Mr. Craft, do you kind of see the same thing?
If something happened to--I guess you own a sod farm, and let's
say one of your competitors ended up in a bankruptcy situation
and they did a short sell on the courthouse steps. And let's
say it was a $6 million piece of real estate and they bought it
for $600,000. Think about the impact. That is going to have
significant impact on the valuation of your own product.
Are you starting to see some of that in the Gulf Coast? And
I know that we have the problem with the BP situation, but
there have been a lot of problems, certainly, in the Gulf Coast
region for the last 2 years, well before BP came in and kind of
compounded that problem. Have you started to see where the
banks are, kind of, locking some of these businesses up based
upon maybe bad practices of a competitor?
Mr. Craft. Absolutely. And when we have that situation, not
only does your competitor buy a piece of property at a much
lower price, he has a much lower cost. And so he has a
competitive advantage over those of us who are in business who
have stayed solvent. So it has a definite impact.
Mr. Shuler. Thank you, Mr. Chairman.
Mr. Minnick. Thank you, Mayor Craft.
The Chair recognizes the gentlewoman from Florida.
Ms. Kosmas. Thank you, Mr. Chairman, and thank you for the
opportunity to work on this legislation with you.
I want to thank all the members for being here today.
I think since I have been here, for the last 18 or 19
months, I have been pretty vocal and outspoken about this
issue, which I think has been under the radar screen for many
people, I think, for two reasons: one expressed by a colleague
a few minutes ago, where the average person walking down the
street doesn't even know that commercial real estate loans come
due, are rolled over, refinanced, whatever term you want to
use, on a regular basis. So they assume that all real estate
lending, including commercial real estate lending, has the
potential to be at a 20- or 30-year fixed rate, which, of
course, we know is not true. So, perception-wise, we are in a
dilemma, where, for most people, they don't recognize the
problem. So I appreciate very much the opportunity to put this
focus on it.
I also wanted to thank Mr. DiAngelo, particularly, for
pointing out the very close connection between the viability of
the community banks and the credit and services that they
provide for small businesses in our communities and what that
has to do with job creation, economic stability, and economic
growth. It is also unrecognized by many people that those small
businesses we hear about frequently create 60 to 70 percent of
new job opportunities, and they cannot function, they cannot do
that if they do not have access to credit.
And the reasons that have been outlined today that they
don't have the opportunity to move forward, make loans to those
folks, particularly those with whom they have long-term, good
relationships. And, in many instances, performing loans that
have never been delinquent are being called due in ways, as I
say, that are unfamiliar to most people.
So, mostly I want to thank you all for being here, helping
us put this into focus. I appreciate the comments, also, of the
ranking member, that he recognizes that this is a bipartisan,
commonsense solution that will be helpful both to small
businesses and to the community banks that provide so many
great services to those small businesses in creating jobs.
I want to identify, also, with Mayor Craft and the comments
he made and the comments made by others about the appraised
value of real estate and the difficulty that puts into the
equation. But, being from Florida, we also are experiencing
much of the same problem that you are, with regard to the oil
spill. Frankly, in a State that is built on tourism, even the
perception of oil on the shores affects our ability to attract
visitors. And so we end up in the same dilemma that you are,
whether or not our shores are actually affected to the same
degree that yours are. So I want to make sure that we are in a
position that we can continue to work with you in trying to
find a solution crafted specifically to that dilemma.
Some of the proposals that have been made provide for an
18-month period of relief from the usual appraisal requirements
in order to allow the markets to more rationally value real
estate along the Gulf Coast.
Do you have a time period in mind? Or what time period
might you suggest if there were a way in which the Florida
delegation, along with the delegations from the other Gulf
States, could come together? Is there a timeframe specifically
that you would recommend?
Mr. Craft. I think 18 months is a reasonable amount of
time. We feel fairly confident that we are well-positioned
without this layer of an additional level of threat to our
business operations that we will recover from the oil spill and
we will recover once we start getting the moneys paid. And so,
in 18 months, I think we will be stabilized as a business
economy, in the hopes then that will raise the valuation up.
Ms. Kosmas. Thank you very much.
Thank you, Mr. Chairman. I yield back.
Mr. Minnick. The Chair recognizes the gentleman from
Colorado.
Mr. Perlmutter. Thank you, Mr. Chairman.
And I apologize to the panel that I had to step out for a
meeting on these very subjects with one of the members of the
regulating community.
I would like to focus my first question to you, Mr.
Panasci. In your experience representing different financial
institutions in Colorado and the Rocky Mountain West, when--
sitting on this committee, we saw a heart attack occur on Wall
Street about 2 years ago. And then those ripples now have
reached other States, obviously, for some time.
Have you had any experiences with any of the financial
institutions you represent or know about where they had good
loans that had been examined, and then they go from a number
one bank, CAMEL 1 or whatever they call those, to something
else? Can you elaborate?
Mr. Panasci. One of the perceptions and, I will say,
positions espoused is that these bad loans were made relatively
recently. A lot of the loans that the banks are having problems
with today are loans that existed in their loan portfolio for
years, prior to 2007 and earlier.
And these loans were on the books of the banks at a time
when they were CAMEL 1- or 2-rated banks, which are the best
CAMEL ratings you can have is 1 and the worst is a 5. And then
all of a sudden the regulators come in, they examine the
portfolio, and perhaps correctly, and all of a sudden the CAMEL
rating goes from a 2 to a 4, or a 1 to a 4 or a 5. And those
loans existed in the portfolio for many years when they had a
higher CAMEL rating. It wasn't as if the bankers immediately
got stupid and starting making bad loans. These are loans that
existed over a period of time.
So there is a tremendous impact on the economy. And
everybody here has talked about what happens, what the
spiraling effect will be based on the decrease in values of
commercial real estate that could come and probably will be
coming in the future.
So these loans existed for an extended period of time. And
I can tell you, based on my experience, I meet with the
regulators constantly, and I represent a lot of financial
institutions throughout the West. And in my meetings, the
bankers are very tired, and a lot of them want to get out of
the industry. But you know what? The regulators are tired, too.
They go in, and they are delivering an ugly message to the
bankers. The bankers receive the ugly message. And everybody is
tired.
And the industry needs help. There is no question about it.
What you don't want to have is 1,500 banks fail, because just
look at the statistics on bank failures and the realization on
the assets that the FDIC seizes. It is anywhere from 60 to 70
percent loss on these institutions. And if you take that
across-the-board in commercial real estate, you are looking at
some real problems.
I am very familiar with Congressman Minnick's area because
I represent some banks in the State of Idaho. The Boise area is
having an extremely difficult problem right now in commercial
real estate.
So there is a number of solutions that can be undertaken to
help resolve these problems, and I think the bills that you are
looking at right now are very important. I cannot overemphasize
the importance of a loan loss amortization program for these
banks, like we had in the 1980's for agricultural banks. These
banks are profitable, pre-loan loss reserve, their operating
profits are there; they can work through these problems. They
are better equipped to work through the problems than the FDIC.
If you remember, the Department of Liquidation was
established in the 1980's and closed down in the 1990's when
the economy improved. What makes us think that the FDIC is
well-equipped to start up a Department of Liquidation again? It
is a new agency, in essence, a subdivision within the agency.
So it is a big problem, and it is going to continue to get
worse.
Mr. Perlmutter. I thank you.
And I think the whole point of this--and I appreciate the
gentleman from Idaho bringing this bill and having this panel--
is about weathering the storm and having institutions standing
when things turn, whether it is 18 months or 36 months or
whatever it might be, so that we can continue to have
competition among the banks in this country and opportunities
for small businesses to work with local bankers. That is the
bottom line for me, because it is those small businesses that
are going to put a lot of people back to work.
And, with that, I will yield back to my friend from Idaho.
Mr. Minnick. I thank the gentleman.
Does the ranking member--
Mr. Bachus. I have an article from the American Banker, and
I would ask unanimous consent--this is by George LeMaistre,
dated Friday, July 23rd, entitled, ``Viewpoint: Give Gulf Banks
a Break on Property Appraisals''--I would like to submit for
the record.
Mr. Minnick. Without objection, it is so ordered.
With the ranking member's permission, I would like to ask
Mr. Lindsey one additional question.
Mr. Lindsey, in your earlier comments, you indicated that
this program should make the government money, not cost the
government money, so that it was the opposite of a bailout. You
also indicated that you thought that this was a temporary
problem.
Could you explain how the pricing of the program would lead
to starting the market but then it no longer being necessary in
a short period of time?
Mr. Lindsey. Sure. The program does have a 3-year sunset,
but I really think that it would be, hopefully, sparingly used.
And the reason is, that with the 200-basis-point or 2 percent
guarantee fee--and that is paid annually--the profit incentive
for the free market to step in and take the government out of
that business is incredible. Two percent on a 10-year-type
program such as this, if that was the longest term we did, and
that is what I think it says in the bill--
Mr. Minnick. And you are in this market, so you are talking
from personal experience?
Mr. Lindsey. Yes. I was in it for a long, long time. And we
wrapped investment-grade risk to Triple A in the 1990's, and we
paid much less than 200 basis points for our wraps, for our
insurance to Triple A.
So I think it leaves so much room for the free market to
come in as the market stabilizes, that they will. And I
actually think that the bond market, right now, today, would
probably facilitate the private market being able to go ahead
and sell bonds into the marketplace without the guarantee. But
the marketplace is afraid that, in an accumulation period that
I talked about earlier, that the market dramatically changes
and that they can't sell bonds.
So what this does is it gives them an option to use the
guarantee program or place the bonds into the free market. And
that is obviously what I think most of the people on this panel
would hope, that the free market steps in and takes over this
market. Because a $25 billion program is not going to solve
this problem. So we need the free markets. We need this to
jump-start the free markets, and that is what it is designed to
do.
So I think it is pure profit incentive that gets this
program into the hands of the private industry.
Mr. Minnick. And if I--I can't remember whether Mr. Daniel
or Mr. Panasci analogized this program to what happened in the
early days of the TALF program, where the program did, in fact,
jump-start the market and then the free market took over and it
was no longer guaranteed. Is that--whomever made that comment.
Mr. DiAngelo. Yes, that is correct. That program was
announced, and it got used less and less every month, and,
finally, it evaporated.
Mr. Minnick. And you would envision that would be the case
for this program, as well?
Mr. DiAngelo. Yes, based on Mr. Lindsey's observations
about the--
Mr. Minnick. And that was your experience as an attorney as
these markets got started, and you lived through that TALF
experience, as well? Is that correct?
Mr. DiAngelo. Yes. Exactly.
Mr. Minnick. Thank you.
Does the ranking member have any additional questions?
Mr. Bachus. No questions.
Mr. Minnick. Then the Chair would like very much to thank
all the members of the panel for being with us today. It takes
a lot of time and effort to come to Washington. We appreciate
your testimony. It was very prescient. And it will be available
to all the members of the committee and our staffs. So we
appreciate your insight into this very difficult issue.
The Chair notes that some members may have additional
questions for the panel which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 30 days for members to submit written questions to these
witnesses and to place their responses in the record.
This hearing is adjourned.
[Whereupon, at 12:00 p.m., the hearing was adjourned.]
A P P E N D I X
July 29, 2010
[GRAPHIC] [TIFF OMITTED] 61854.001
[GRAPHIC] [TIFF OMITTED] 61854.002
[GRAPHIC] [TIFF OMITTED] 61854.003
[GRAPHIC] [TIFF OMITTED] 61854.004
[GRAPHIC] [TIFF OMITTED] 61854.005
[GRAPHIC] [TIFF OMITTED] 61854.006
[GRAPHIC] [TIFF OMITTED] 61854.007
[GRAPHIC] [TIFF OMITTED] 61854.008
[GRAPHIC] [TIFF OMITTED] 61854.009
[GRAPHIC] [TIFF OMITTED] 61854.010
[GRAPHIC] [TIFF OMITTED] 61854.011
[GRAPHIC] [TIFF OMITTED] 61854.012
[GRAPHIC] [TIFF OMITTED] 61854.013
[GRAPHIC] [TIFF OMITTED] 61854.014
[GRAPHIC] [TIFF OMITTED] 61854.015
[GRAPHIC] [TIFF OMITTED] 61854.016
[GRAPHIC] [TIFF OMITTED] 61854.017
[GRAPHIC] [TIFF OMITTED] 61854.018
[GRAPHIC] [TIFF OMITTED] 61854.019
[GRAPHIC] [TIFF OMITTED] 61854.020
[GRAPHIC] [TIFF OMITTED] 61854.021
[GRAPHIC] [TIFF OMITTED] 61854.022
[GRAPHIC] [TIFF OMITTED] 61854.023
[GRAPHIC] [TIFF OMITTED] 61854.024
[GRAPHIC] [TIFF OMITTED] 61854.025
[GRAPHIC] [TIFF OMITTED] 61854.026
[GRAPHIC] [TIFF OMITTED] 61854.027
[GRAPHIC] [TIFF OMITTED] 61854.028
[GRAPHIC] [TIFF OMITTED] 61854.029
[GRAPHIC] [TIFF OMITTED] 61854.030
[GRAPHIC] [TIFF OMITTED] 61854.031
[GRAPHIC] [TIFF OMITTED] 61854.032
[GRAPHIC] [TIFF OMITTED] 61854.033
[GRAPHIC] [TIFF OMITTED] 61854.034
[GRAPHIC] [TIFF OMITTED] 61854.035
[GRAPHIC] [TIFF OMITTED] 61854.036
[GRAPHIC] [TIFF OMITTED] 61854.037
[GRAPHIC] [TIFF OMITTED] 61854.038
[GRAPHIC] [TIFF OMITTED] 61854.039
[GRAPHIC] [TIFF OMITTED] 61854.040
[GRAPHIC] [TIFF OMITTED] 61854.041
[GRAPHIC] [TIFF OMITTED] 61854.042
[GRAPHIC] [TIFF OMITTED] 61854.043
[GRAPHIC] [TIFF OMITTED] 61854.044
[GRAPHIC] [TIFF OMITTED] 61854.045
[GRAPHIC] [TIFF OMITTED] 61854.046
[GRAPHIC] [TIFF OMITTED] 61854.047
[GRAPHIC] [TIFF OMITTED] 61854.048
[GRAPHIC] [TIFF OMITTED] 61854.049
[GRAPHIC] [TIFF OMITTED] 61854.050
[GRAPHIC] [TIFF OMITTED] 61854.051
[GRAPHIC] [TIFF OMITTED] 61854.052
[GRAPHIC] [TIFF OMITTED] 61854.053
[GRAPHIC] [TIFF OMITTED] 61854.054
[GRAPHIC] [TIFF OMITTED] 61854.055
[GRAPHIC] [TIFF OMITTED] 61854.056
[GRAPHIC] [TIFF OMITTED] 61854.057
[GRAPHIC] [TIFF OMITTED] 61854.058
[GRAPHIC] [TIFF OMITTED] 61854.059