Policy Issues
Capital and Credit

Roundtable Remains Focused on Maintaining Reliable Credit Capacity, Capital Formations; Minimizing Regulatory Overreach; and Effective Risk Management Tools Vital to Liquidity   
 
  
  

2019 Policy Issues Snapshot
More detailed information on various Capital and Credit policy issues can be found in recent issues of Roundtable Weekly — our weekly policy eNewsletter that can searched by key word or phrase.  

The Roundtable's 2019 National Policy Agenda, also includes a section on Capital & Credit Policy.

Reforming the Government Sponsored Enterprises (GSEs)

RW_cover_2012

News on various credit and capital issues can be found in recent issues of Roundtable Weekly — our weekly policy eNewsletter that can searched by key word or phrase.

 Volcker Rule

Developing an Effective, Long-Term Terrorism Risk Insurance Program

 HVCRE

Reauthorizing the National Flood Insurance Program (NFIP); Expanding Private Markets

LIBOR Reform 

• House Subcommittee Examines Financial Crime; New Beneficial Ownership Rule Affects Real Estate

• Cannabis Policy: Real Estate and Banking Issues

CFIUS Reforms to Expand Review of Certain Real Estate Transactions

✓ Recent Developments:

⇒ 04/05/2019      Accounting;Capital and Credit;FASB
CAPITAL & CREDIT - April 5, 2019 - Roundtable Weekly 
Financial Accounting Standards Board (FASB) Rejects Bank Proposal on Loan Losses 

⇒ 03/29/2019      Fannie Mae;Freddie Mac;GSEs - Government Sponsored Entities
HOUSING FINANCE REFORM - March 29, 2019 - Roundtable Weekly 
Senate Banking Committee and President Trump Launch Efforts to Address Housing Finance Reform, Including GSEs 

⇒ 03/29/2019      Capital and Credit
CAPITAL & CREDIT – CANNABIS – March 29, 2019 - Roundtable Weekly 
House Committee Approves Bill Allowing Banks to Serve Legal Cannabis Businesses; Roundtable Urges Enactment 

⇒ 03/08/2019      Capital and Credit
CAPITAL & CREDIT - March 8, 2019 - Roundtable Weekly 
Business Coalition Urges Implementation Delay for FASB’s ‘Current Expected Credit Loss Accounting Standard’ (CECL) Pending Impact Analysis 

⇒ 03/01/2019      GSEs - Government Sponsored Entities
GSE REFORM - March 1, 2019 - Roundtable Weekly 
Industry Coalition Promotes GSE Reform Principles; Senate Banking Committee Advances New FHFA Director 

⇒ 02/08/2019      GSEs - Government Sponsored Entities
GSE REFORM - Feb. 8, 2019 - Roundtable Weekly 
Senate Banking Committee Releases Housing Finance Reform Outline; Real Estate Coalition Working to Establish GSE Reform Principles 

 

 

✓ Trump Economic Team Remains Focused on Economic Growth; Regulatory Reforms

The economy added a total of 312,000 jobs during the month of December – a stronger number than analysts predicted. 2018 was the best year for job creation since 2015, as the economy added 2.6 million jobs.

The U.S. economic expansion is now approaching its tenth year – the second longest on record – with the unemployment rate at the lowest since 2000.

Despite strong numbers from the U.S. economy, the stock market has been battered in recent months by fears of trade wars and global economic slowdown. A tumultuous government shut-down has raised additional concerns about the trajectory of the expansion.

 

 Reforming the Government Sponsored Enterprises (GSEs)    

Eleven years after GSEs Fannie Mae and Freddie Mac were put into conservatorship, the U.S. housing finance system has still not been reformed.

       •      GSE reform remains a top priority for the Trump Administration, Senate Banking Committee Chair Mike Crapo (R-ID) and House Financial Services Committee Chairwoman Maxine Waters (D-CA).

       •      Chairman Crapo recently held two days of hearings on his three-page housing reform outline but has yet to release draft legislation. Crapo stated, “My priorities are to establish stronger levels of taxpayer protection, preserve the 30-year fixed rate mortgage, increase competition among mortgage guarantors, and promote access to affordable housing.”

       •      Crapo’s framework calls for turning the GSEs into private guarantors while allowing for other private guarantors to compete with the mortgage giants, using Ginnie Mae to provide a government backstop.

       •      Chairman Crapo’s proposal would create a permanent, sustainable new housing finance system that:

               •      Reduces the systemic, too-big-to-fail risk posed by the current duopoly of mortgage guarantors

               •      Preserves existing infrastructure in the housing finance system that works well, while significantly increasing the role of private risk-bearing capital

               •      Establishes several new layers of protection between mortgage credit risk and taxpayers

               •      Ensures a level playing field for originators of all sizes and types, while also locking in uniform, responsible underwriting standards

               •      Promotes broad accessibility to mortgage credit, including in underserved markets

       •      The White House also released a housing reform fact sheet announcing the framework of a plan to "promote competition in the housing finance market and protect taxpayer dollars" while helping "more Americans fulfill their goal of buying a home".

       •      The White House also released a Memorandum on Federal Housing Finance Reform directing the Secretary of the Treasury and other “relevant agencies” to develop a “Treasury Housing Reform Plan” to achieve the following housing reform goals:

               •      Ending the conservatorships of the GSEs upon the completion of specified reforms;

               •      Facilitating competition in the housing finance market;

               •      Establishing regulation of the GSEs that safeguards their safety and soundness and minimizes the risks they pose to the financial stability of the United States; and

               •      Providing that the Federal Government is properly compensated for any explicit or implicit support it provides to the GSEs or the secondary housing finance market.

       •      Further, the memorandum specifies that each reform included in the Treasury Plan must be designated as either a “legislative” or an “administrative” reform.  For each "administrative" reform that could be implemented without congressional action, the Treasury is directed to include a timeline for implementation.

       •      Housing finance reform must appropriately balance taxpayer protections with the need to establish an efficient marketplace that can provide strong and sustained mortgage liquidity in single family and multifamily markets – as well as affordable housing.

       •      The Roundtable encourages lawmakers to build upon successful risk sharing mechanisms and products by employing the existing multifamily finance structures being utilized by Fannie Mae and Freddie Mac.

 

✓ Developing an Effective, Long-Term Terrorism Risk Insurance Program

The Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) is scheduled to sunset on Dec. 31, 2020.

Terrorism continues to pose a clear and present danger to our nation and to the American economy. Originally enacted in 2002, in response to the failure of insurance markets to offer terrorism risk coverage to commercial policyholders, the Terrorism Risk Insurance Act (TRIA) was extended in 2005, 2007 and again in 2015 – following a 12-day lapse when Congress failed to complete their work on reauthorization at the end of 2014.

TRIA is essential for commercial real estate as lenders require “all risk” insurance coverage – including terrorism coverage – to cover the risk of loss to the collateral. At virtually no cost to the taxpayer, TRIA has allowed our economy to move forward even in the face of terrorist threats.

The Treasury’s Federal Insurance Office (FIO) released a report The Effectiveness of the Terrorism Risk Insurance Program in June 2018 that concludes:

  • The Program generally has been effective in making terrorism risk insurance available and affordable in the insurance marketplace.
  • Treasury has not observed any aspects of the Program (either based upon the collected data or operation of the Program generally) that have had the effect of discouraging or impeding insurers from providing P&C insurance in general, or coverage for acts of terrorism specifically.
  • The Program serves as an important backstop to workers’ compensation insurance, given that under state law, workers’ compensation insurance must cover terrorism risk, is not subject to limits of liability, and cannot exclude causes of loss posing extreme aggregation risks.
  • Treasury’s estimate of total earned premiums for terrorism risk insurance from 2003 to 2017 is approximately $37.6 billion (excepting captive insurers), which is between 1 and 2 percent of the total premiums earned in the TRIP-eligible lines of insurance during that period.

Working with the FIO, the TRIA Advisory Committee on Risk-Sharing Mechanisms (ACRSM), the insurance industry, and Congressional policymakers, The Roundtable is focused on developing an effective, long-term approach for a federal terrorism risk insurance program.

Such a long-term program should enable policyholders to secure the terrorism risk coverage they need without facing periodic renewals by the federal government.

 

 

✓ Volcker 3.0 Being Considered by Fed

The Federal Reserve and other U.S. financial regulatory agencies proposed a revision to the 964-page Volcker rule in 2018 – one of the most controversial rules developed under the Dodd-Frank Act went into effect in 2013.

The nearly 400-page proposal, known as Volcker 2.0, has not been well received by the financial services industry, and no decision has yet been made about adopting the 2018 scheme.  To address industry concerns, regulators are reportedly considering another rewrite, known as Volcker 3.0.

Fed Chairman Jerome Powell said regulators aim “to replace overly complex and inefficient requirements with a more streamlined set of requirements.”

In a 2012 comment letter to Federal Reserve and other financial regulatory agencies, the Roundtable raised concerns about the unintended consequences of the Volcker Rule that could "negatively impact liquidity and capital formation in commercial real estate".

 

 ✓ Roundtable Comments on Recently Enacted HVCRE Rule Revision
President Trump signed the bipartisan Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155) into law on May 24, 2018.  This measure would help “right-size” regulations on regional banks and relax restrictions on parts of the banking industry – representing the most significant changes to Dodd-Frank since its enactment in 2010.

The Real Estate Roundtable’s support for a federal proposal that would implement modified capital rules for High Volatility Commercial Real Estate (HVCRE) loan exposures is detailed in a Nov. 26 comment letter to three banking agencies.  The measure is expected to add up to $120 billion in CRE lending capacity.

The Agencies — tasked with developing a rule consistent with Section 214 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155) to clarify the capital treatment of HVCRE Acquisition, Development, or Construction (ADC) loans — invited comments on their Notice of Proposed Rulemaking.

The measure will help clarify and promote sustainable acquisition, development and construction and lending by addressing key deficiencies in the agencies’ current and proposed regulations governing the criteria for HVCRE or HVADC loans. It provides for the following modifications and clarifications:

• The 15% equity requirement would be revised to expressly include contributed land/property at the appreciated land value as determined by a FIRREA appraisal and bank review (versus the cost basis under the current rule).
• Clarifies that loans made to acquire existing property with rental income and/or do cosmetic upgrades and other improvements don't trigger the capital penalty.
• A new exemption would be added to the HVCRE rule covering acquisition/refinancing loans for performing income producing properties.
• Allows borrowers to use internally generated capital in the project and, once the development/construction risk period has passed, outside the project, rather than forcing them to refinance the loan (possibly away from the original lender).
• All ADC loans made prior to January 2015 would be grandfathered and would not have to satisfy current HVCRE exemption criteria.
• Banks would able to withdraw HVCRE status prior to the end of an ADC loan’s term.

As stated in the comment letter, the implementation proposal "more realistically aligns the requirements for HVCRE loans on commercial real estate projects with the actual periods of development or construction risk." 

The letter also notes that when the final proposal is implemented, it "will aid economic growth and job creation, while maintaining adequate capital levels to manage the risks associated with ADC lending."

 

 ✓ Improving and Reauthorizing the National Flood Insurance Program (NFIP); Securing a Commercial Opt-Out Provision
The NFIP was scheduled to sunset in 2018, but the program was temporarily extended until May 31, 2019 under one of the 10 short -term extensions Congress has approved since 2017.

As policymakers continue to debate potential changes and improvements to the program, their challenge is to find a balance between improving the financial solvency of the program, reducing taxpayer exposure and addressing affordability concerns.

The House is expected to attach a short- term NFIP extension to the supplemental funding bill, extending the program through Sept. 30, 2019.  This will give the House time to markup its package and avert the May 31 deadline.  The House Financial Services Committee is expected to markup NFIP reform bills on April 30 and work to pass a flood package through the House as a stand-alone.

On March 13, House Financial Services Committee Chairwoman Maxine Waters (D-CA) held a hearing to discuss a package of four draft bills intended to address the future of the National Flood Insurance Program (NFIP).  The hearings focused on the challenges of  flooding and sea level rise fueled by climate change and righting the underwater program. Witnesses discussed the importance of proper planning to proactively reduce risk and increase resilience of vulnerable communities.

The four draft bills that were discussed  would, among other things, renew the NFIP until Sept. 30, 2024; forgive the NFIP’s remaining $20 billion debt and boost funding for mapping, floodplain management, and mitigation for homes, businesses and infrastructure.

Meanwhile, the Trump Administration plans to overhaul government-subsidized flood insurance, in a sweeping proposal that could raise rates on more expensive properties and those in higher-risk areas that would take effect on Oct. 1, 2020.

Federal Emergency Management Agency (FEMA), which runs the NFIP, said the plan would start assessing properties individually according to several variables – including hurricane rainfall, coastal surges and the distance to a body of water – rather than applying one formula across an entire flood zone when assessing flood risk and contract cost.

As part of the proposal, the government would also factor in the replacement cost of the home, which could push up premiums for homeowners with higher-valued properties and decrease those with lower-cost homes.
The Administration is also pressing for Congress to take bold steps to reduce the complexity of the program and strengthen the NFIP’s financial framework so that the program can continue helping individuals and communities take the critical step of securing flood insurance.

The level of damage from the 2017 hurricanes makes it clear that FEMA needs a holistic plan to ready the nation for managing the cost of catastrophic flooding under the NFIP. Floods are the most common and most destructive natural disaster in the U.S., and there is limited private market capacity. NFIP coverage is available for homeowners, renters and small businesses.

Reauthorization of the NFIP is important for residential markets, overall natural catastrophe insurance market capacity and the broader economy. However, under the NFIP, commercial property flood insurance limits are low – $500,000 per building and $500,000 for its contents.  NFIP has approximately 5 million total properties; only 6.7 percent are commercial.  Nearly 70% of NFIP is devoted to single-family homes; 20% for condominiums.  In the total program, 80% pay actuarial sound rates; in the commercial space, only 60% pay actuarial sound rates.

Lenders typically require this base NFIP coverage, and commercial owners must purchase Supplemental Excess Flood Insurance for coverage above the NFIP limits.  The NFIP's low commercial limits make it problematic for most commercial owners.  As a result, we have been seeking a voluntary exemption for mandatory NFIP coverage if property owners have flood coverage from commercial insurers.

By permitting certain private issue insurance policies to satisfy the NFIP’s “mandatory purchase requirement” for properties in flood plains financed by loans from federally guaranteed institutions, commercial property owners would have the ability to “opt-out” of mandatory NFIP commercial coverage if they have adequate private coverage outside the NFIP program to cover financed assets.

The Roundtable and its partner associations support a long-term reauthorization and improvements of the NFIP that help property owners and renters prepare for and recover from future flood losses. Given the low coverage amounts provided to commercial properties, it is important to permit larger commercial loans to be exempted from the mandatory NFIP purchase requirements.

 

   ✓ LIBOR Reform

With the London Interbank Offer Rate (LIBOR) index rate set to expire at the end of 2021, regulators are working to develop an alternative reference rate. In the U.S., the Fed’s Alternative Reference Rates Committee (ARRC) is coordinating this process.

The Federal Reserve Bank of New York in April 2018, began publishing an alternative U.S. benchmark to work alongside LIBOR.  The Secured Overnight Financing Rate (SOFR) is seen as more reliable, as it is based on interest rates in the U.S. market for repurchase agreements instead of LIBOR's estimated quotes by bankers in the relatively thin interbank loan market.

LIBOR's credibility was badly undermined a decade ago by a rate-manipulation scandal. These illegal actions damaged the public's trust in LIBOR, financial markets and institutions. The United Kingdom’s Financial Conduct Authority (FCA), which regulates LIBOR, announced last year that it will phase out the global borrowing index by 2021.

RECPAC has formed a LIBOR Working Group to address this challenge and work toward the development and implementation of an effective, new replacement benchmark that does not impair liquidity, needlessly increase borrowing costs or cause market disruptions. Importantly, we also want to work to minimize the need for making modifications to existing loan documents.

The Working Group is also addressing concerns about the potential tax consequences of changing the benchmark in a variety of financial instruments and have submitted a comment letter to the U.S. Treasury requesting clarification.

 

   ✓ House Subcommittee Examines Financial Crime; New Beneficial Ownership Rule Affects Real Estate

The House Subcommittee on National Security, International Development, and Monetary Policy held a hearing entitled, “Promoting Corporate Transparency: Examining Legislative Proposals to Detect and Deter Financial Crime” on March 13, 2019 to examine three draft legislative proposals.  The draft legislation focused on limiting klepocratic crime, tightening money laundering rules and increasing transparency.

One bill would revise federal Bank Secrecy Act (BSA) and anti-money laundering laws (AML).  Title II is intended to close a number of loopholes in the current BSA-AML regime.  Sec. 215 of the Title addresses a perceived real-estate ‘loophole’ that facilitates the transfer of residential and commercial real estate through anonymous shell companies, by expanding FinCEN’s Geographic Targeting Orders (GTO), which require beneficial ownership information for certain opaque real-estate transfers, to also include commercial real estate and in-kind transactions.

This latest action follows last year’s enactment of a rule from the Financial Crimes Enforcement Network (FinCEN) – “Customer Due Diligence Requirements for Financial Institutions” (the CDD Rule) – that amends BSA regulations to improve financial transparency and prevent criminals and terrorists from misusing companies to disguise their illicit activities and launder their ill-gotten gains.

The CDD Rules adds a new requirement for these covered financial institutions to identify and verify the identity the natural persons (known as beneficial owners) of legal entity customers who own, control, and profit from companies when those companies open accounts.  The rule’s intent is to assist authorities in counteracting money laundering, tax evasion, and other financial crimes.

While we support efforts to eliminate terrorism financing and money laundering, we remain concerned about the cost of imposing additional beneficial ownership reporting requirements on non-bank businesses—especially small businesses—and the extent to which these provisions could impair capital formation and threaten important privacy protections.
 
The Real Estate Roundtable supports efforts to promote economically responsible commercial real estate lending that reflects sound underwriting and risk management practices, and rational pricing of economic risk.  We continue to urge policymakers to take action that encourages stable valuations, enhanced transparency and sensible underwriting, and support efforts to establish appropriate systemic safeguards—all key factors for a reliable credit system.

   ✓ Cannabis Policy: Real Estate and Banking

  • 47 states and DC currently legalize marijuana to varying degrees.  Yet use, possession, and sale remains illegal under federal law.
  • Real estate owners, lessors, brokers, and financiers need certainty when they transact with legitimate cannabis-related businesses (CRBs).
  • The bipartisan SAFE Banking Act (H.R. 1595) is a good first step.  It passed the House Financial Services Committee on March 28.  The full House is expected to pass it in the coming weeks.  Prospects in the Republican-controlled Senate are less certain.
  • H.R. 1595 would eliminate the need for CRBs to operate on a cash basis, bring them into the banking system, and allow them to obtain accounts and credit cards.
  • Commercial property owners would get a safe harbor if they lease space to a CRB, and their mortgages cannot be subject to corrective action by a bank.
  • For fuller real estate business protections, Congress should pass other legislation to clarify that state-compliant marijuana transactions are not illegal federal “trafficking” and do not result in unlawful proceeds under money laundering statutes.

 

   ✓ CFIUS Reforms to Expand Review of Certain Real Estate Transactions

The Foreign Investment Risk Review Modernization Act (FIRRMA) was signed into law by President Trump on August 13, 2018. FIRRMA reforms and modernizes the Committee on Foreign Investment in the United States (CFIUS) review process and represents the first update to the CFIUS statute in more than a decade. CFIUS is a U.S. interagency committee that conducts national security reviews of foreign investment.

The measure was part of the National Defense Authorization Act for Fiscal Year 2019 (NDAA) – a compromise $717 billion defense policy bill aimed at building up the military and blunting Chinese foreign investment – which includes language that may affect some foreign purchases and leases of real estate near military and other strategic facilities.

FIRMMA expands the review authority of CFIUS to review national security implications of transactions that could result in control of a U.S. business by a foreign person and to block transactions or impose measures to mitigate any threats to U.S. security.

FIRRMA also expands the list of covered transactions to include some foreign purchases and leases of real estate near military and other strategic facilities.  Responding to concerns raised by The Roundtable and other industry groups, language is also included that exempts real estate located in an 'urbanized area' from the criteria of a covered transaction.  The Census defines an urbanized area as one comprising more than 50,000 people.  The real estate provision contained in Title II, Sec. 201 includes the carve-out for properties in an "urbanized area":

"The purchase or lease by, or concession to, a foreign person of private or public real estate that— is located in the United States and is, or is in close proximity to a United States military installation; or itself, or is located at and will function as part of, an air or sea port; is not a single housing unit, as defined by the Bureau of the Census; is not in an urbanized area, as set forth by the Bureau of the Census in its most recent census, except as otherwise prescribed by the Committee in regulations in consultation with the Secretary of Defense; and meets such other criteria as the Committee  prescribes by regulation."

China’s 13th Five-Year Plan seeks to create new Chinese competitors that pose threats to U.S.

CFIUS recently ordered Chinese conglomerate HNA Group Co., Ltd to sell its majority stake in a 21-story Manhattan building whose tenants include a police precinct assigned to protect Trump Tower.

 

 

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The Real Estate Roundtable supports efforts to promote economically responsible commercial real estate lending that reflects sound underwriting and risk management practices, and rational pricing of economic risk. We continue to urge policymakers to take action that encourages stable valuations, enhanced transparency and sensible underwriting, and support efforts to establish appropriate systemic safeguards — all key factors for a reliable credit system.

(For more information, please email info@rer.org or call 202-639-8400.  For weekly updates on key policy issues affecting commercial real estate, see our eNewsletter  Roundtable Weekly

The Real Estate Capital Policy Advisory Committee (RECPAC) is co-chaired by Dennis Lopez (QuadReal Property Group), Mark Myers (Wells Fargo) and Diana Reid (PNC Real Estate).   RECPAC consists of principal members from a broad spectrum of real estate investment, ownership and financial services companies. 

For additional information on RECPAC issues, please contact Clifton (Chip) E. Rodgers, Jr., Senior Vice President, The Real Estate Roundtable, at (202) 639-8400.

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