[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
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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

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