Economic Stimulus Package and Treasury Financial Stability Plan
Impact on Commercial Real Estate
April 23, 2009
Adrian A. Arriaga,CCIM,CIPS
2008 Chairman
NAR Commercial Legislative & Regulatory Policy Subcommittee
FEDERAL INITIATIVES TO ADDRESS CRISIS IN COMMERCIAL MARKETS
TALF
The Financial Stability Plan, announced by Treasury Secretary Timothy Geithner on February 10th, included a major expansion of the Term Asset-Backed Securities Loan Facility (TALF) to include commercial mortgage-backed securities (CMBS). The TALF had been announced in November 2008 to address the credit shortfall in the consumer (credit card), auto, student loan, and small business credit markets.
Originally, TALF was funded with $20 billion from Treasury’s Troubled Asset Recovery Program (TARP) that would support $200 billion in lending by the Federal Reserve Bank of New York to investors to purchase asset-backed securities. The Financial Stability Plan increased this amount to $200 billion, which would support up to $1 trillion in lending by the Federal Reserve Bank of New York to investors for purchases of asset-backed securities, including AAA-rated CMBS. Inclusion of CMBS in TALF is expected to help restore activity in the CMBS markets, which has been a major source of financing for commercial real estate.
Treasury’s decision to expand the initial reach of the TALF program to include CMBS is essential given the crisis situation currently facing the commercial real estate markets. The broader financial crisis has permeated through the world’s capital markets and has severely curtailed commercial lending activity. This problem is negatively impacting the $6 trillion commercial real estate market, which is financed in part through more than $3 trillion of debt. With virtually no CMBS market and hundreds of billions of dollars of commercial real estate loans expected to mature in 2009, current conditions indicate insufficient credit capacity to refinance this wave of loan maturities. With no liquidity, commercial borrowers face a growing challenge of refinancing maturing debt and the threat of rising delinquencies and foreclosures.
As a further measure to address the problem of banks' toxic assets and restore stability and confidence to the stalled credit markets, the Treasury and the Federal Reserve are creating a lending program that is targeted at the broken market for “legacy” securities tied to residential real estate, commercial real estate, and consumer credit.
Expansion of TALF for Legacy Securities
The intention is to incorporate this program into the previously announced TALF, which may total as much as $1 trillion. Through this expansion, non-recourse loans will be made available to investors to fund purchases of legacy securitization assets. Eligible assets are expected to include certain non-agency AAA rated residential mortgage-backed securities (“RMBS”), commercial mortgage-back securities (“CMBS”) and ABS. Borrowers will need to meet certain eligibility criteria. Detailed terms of the program (lending rates, loan sizes, etc) have not yet been released. As with securitizations backed by new originations of consumer and business credit already included in the TALF, the provision of leverage through this program should give investors greater confidence to purchase these assets, thus increasing market liquidity.
PPIP
The Treasury, utilizing funds from the original $700 billion Troubled Asset Relief Plan (TARP), will fund the PPIP. The PPIP will generate $500 billion in purchasing power to buy legacy assets – with the potential to expand to $1 trillion over time. The TARP funds from Treasury will be used to provide equity capital for new investment funds, matched with investments from private investors such as private equity and hedge funds. That public and private equity would be leveraged with credit from the Federal Deposit Insurance Corporation (FDIC), in the case of loan purchases, and the Federal Reserve’s Term Asset Backed Securities Loan Facililty (TALF), in the case of securities.
Mark-to-Market
The mark-to-market rules have prompted a groundswell of complaints from commercial real estate investors and lenders who say that the accounting policy has resulted in the devaluation of performing assets and forced companies to value the assets at fire-sale prices. To address this issue, the Capitol Markets Subcommittee of the House Financial Services Committee held a hearing on mark-to-market accounting on Thursday, March 12th. Representatives from the SEC and FASB came under fire from both Democrats and Republicans calling for an immediate investigation and adjustment of the FAS 157, the current mark-to-market rule. In discussing the effects of the interpretation of this fair value accounting rule on the balance sheets of lending institutions, both lawmakers and industry representatives called for clarification of the fair value guidelines in order to give better guidance to investors struggling to value assets in today's market conditions.
The Federal Accounting Standards Board (FASB) met quickly following the hearing and voted to provide additional guidance for entities seeking help in determining whether a "market for an asset is not active and when a price for a transaction is not distressed". Staff drafted and the
Federal Accounting Standards Board (FASB) met on Tuesday, March 17th, and approved the issuance of two proposed staff positions (FSPs) -
1. Proposed FAS 157-e, Determining Whether a Market Is Not Active and a Transaction Is Not Distressed
2. Proposed FSP FAS 115-a, FAS 124-a, and EITF 99-20-b, Recognition and Presentation of Other-Than-Temporary Impairments
On March 31st, a letter was submitted by NAR President Charles McMillan to the FASB in support of its draft guidelines to provide clarity and guidance to address problems with "mark-to-market" accounting. Marking the value of securities to market when the markets are dysfunctional has severely impaired liquidity in the commercial and residential mortgage markets, without accurately reflecting the value of the securities. There is widespread support for the FASB guidelines, which were officially approved at the April 2nd Board Meeting. Based on comment letters, the final FSP includes some revisions and further clarifications (details outlined at http://www.fasb.org/action/sbd040209.shtml ) |
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