Tag: The Fed

The Roundtable and Nareit Request Expansion of The Fed’s “Main Street” Lending Programs to Prevent Further Disruption to CRE Markets

Posted on by Trey Jackson
Facade on the Federal Reserve Building in Washington DC

The scope of the Federal Reserve’s “Main Street” Lending Programs should be expanded to forestall further disruption and economic dislocations in commercial real estate, according to an April 22 letter sent to Treasury Secretary Steven Mnuchin and Fed Chairman Jay Powell from The Real Estate Roundtable and Nareit. 

  • This week’s letter requests specific changes to the Fed’s Main Street New Loan Facility (MSNLF) and Main Street Expanded Loan Facility (MSELF), both established on April 9.
  • The April 22 letter emphasizes that real estate borrowers, owners and managers now face existential challenges.  The letter states, “At a time when Main Street needs credit, it cannot get it because the secondary markets that provide liquidity to Main Street lenders are clogged.”
     
  • The Roundtable and Nareit urge specific changes to enable CRE borrowers to access the Main Street New Loan Facility (MSNLF) and Main Street Expanded Loan Facility (MSELF).  The joint letter addresses (1) Underwriting/ Leverage Limitations/ Loan Size, (2) Distributions/ REITs (3) Loan Terms (4) Applicable Interest Rate Index and (5) Program Timing.
  • Previous industry letters to the Fed on March 24 and April 14 addressed the need to broaden the range of a separate credit facility – the Term Asset Backed Securities Facility (TALF).  Those letters requested that TALF eligible collateral include both outstanding (legacy) CMBS, commercial mortgage loans and newly issued collateralized loan obligations.  On April 9, the Fed confirmed that the TALF would be expanded to include triple-A rated legacy non-agency CMBS and loans.
  • Since then, as rental income has diminished, conditions in the commercial real estate sector have deteriorated further, causing real estate credit and capital markets to stall.  Therefore, it is important for the Main Street credit facilities to help bring renewed liquidity to commercial and multifamily real estate. 
  • The CARES Act permits financially stressed tenants in properties financed by federally backed loans to postpone rent payments, while several states and municipalities are currently considering additional measures to afford tenants rent forbearance. 

As the Treasury and Fed continue to take positive actions benefiting liquidity for the nation’s economy, the Main Street Lending Programs can be enhanced to support commercial real estate. 

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Industry Requests TALF Expansion to Include a Broader Range of Commercial Real Estate Assets, CMBS; Congressional Efforts Seek to Address Pandemic Business Interruption Insurance Policies

Posted on by Trey Jackson

U.S. Capitol Dome with flag

Six real estate industry organizations, including The Real Estate Roundtable, wrote to federal regulators on April 14 to communicate the urgent and growing need to include a wider range of investment grade commercial real estate debt instruments in the Fed’s Term Asset-Backed Securities Loan Facility (TALF) credit facility. Currently, TALF eligible collateral is limited to triple-A rated tranches of outstanding (legacy) commercial mortgage backed securities (CMBS), commercial mortgage loans and newly issued collateralized loan obligations.  (TALF letter, April 14)

  • The TALF, previously used during the 2008 financial crisis, was relaunched on March 23 in response to the Covid-19 crisis to “enable the issuance of asset-backed securities (ABS) backed by student loans, auto loans, credit card loans, loans guaranteed by the Small Business Administration (SBA), and certain other assets.”  (Fed news release, March 23)
  • Immediately after the TALF was relaunched, an industry coalition on March 24 urged the Federal Reserve, Treasury, and Federal Housing Finance Agency to expand the TALF to include non-agency CMBS – including legacy private-label conduit and single-asset single borrower (SASB) assets. The coalition, which includes The Roundtable, stated the inclusion of private-label assets would stabilize asset prices and shore up the balance sheets of market participants.  (Joint Industry letter, March 24)
  • On April 9, the Federal Reserve announced that it would broaden the range of TALF eligible collateral to include triple-A rated tranches of both outstanding (legacy) CMBS, commercial mortgage loans and newly issued collateralized loan obligations. However, the updated term sheet excludes single-asset single borrower (SASB) CMBS and commercial real estate collateralized loan obligations (CRE CLOs).
  • According to the April 14 letter, “Commercial and multifamily real estate assets that were perfectly healthy just weeks ago now face massive stress and a wave of payment and covenant defaults. As the economy shuts down and American workers face massive layoffs, it is now clear that many tenants will not be able to meet their debt obligations. This will soon cascade through the over $4 trillion commercial real estate debt market and exponentially increase the pressure on the financial system.”

To bolster the health of the CMBS market, the industry coalition recommends the following investment grade instruments be added as eligible TALF assets:

  • Legacy and new issuance, investment grade, non-agency CMBS;
  • Investment grade Agency Credit Risk Transfer (CRT) securities;
  • Legacy and new issuance Single-Asset, Single-Borrower (SASB) CMBS;
  • Commercial real estate (CRE) collateralized loan obligations (CLOs); and
  • U.S. commercial real estate (CRE) first mortgage loans (which have capital charges equivalent to investment grade/NAIC CM 1 and 2 and loans in good standing, or can obtain a rating agency letter confirming that the pledged loan is rated at least single-A).

The coalition letter explains that a broader, deeper, and more effective TALF would complement and minimize the direct lending that will be required of the Federal Reserve’s other credit facilities, which are supported by the $454 billion provided under the CARES Act.

The coalition also notes that expansion of the TALF’s scope and the Fed’s further support of the highly illiquid non-bank financial sector would forestall further disruption and economic dislocations in the commercial real estate sector.

Pandemic Risk Insurance Coverage

Two preliminary legislative proposals in Congress seek to address increasing requests for the property and casualty industry to extend business interruption (BI) insurance policies to cover pandemic risk related claims – and the general lack of pandemic risk commercial insurance availability.

  • A recent effort in the House led by Rep. Carolyn Maloney (D-NY) seeks to develop the Pandemic Risk Insurance Act of 2020 (PRIA), which would create the Pandemic Risk Reinsurance Program. PRIA would seek to create “a system of shared public and private compensation for business interruption losses resulting from future pandemics or public health emergencies.”  (Rep. Maloney Dear Colleague letter, April 10 Roundtable Weekly)
  • Rep. Maloney’s pandemic program would be prospective – not retrospective.  “Like the Terrorism Risk Insurance Act (TRIA), the federal government would serve as a backstop to maintain marketplace stability and to share the burden alongside private industry,” according to Maloney.
  • In the Senate, Sen. Steve Daines (R-MT) is working on a broader concept that is both retrospective and prospective.  Known as the  Workplace Recovery Act, the measure would provide direct retrospective reimbursement through a Federal Automated Security Trust program to every business for operating losses, limited to 90% of past revenues.
  • The Senate proposal would also establish a new government-funded business interruption insurance add-on for every privately administered commercial insurance plan to protect against future national pandemics.
  • The National Association of Insurance Commissioners issued a statement recently warning that such efforts “would create substantial solvency risks for the sector, significantly undermine the ability of insurers to pay other types of claims, and potentially exacerbate the negative financial and economic impacts the country is currently experiencing.” (NAIC statement, March 25)

As with terrorism risk insurance, The Roundtable is working with policymakers and stakeholders to help develop an effective risk insurance program that addresses the economic impact of the current pandemic crisis and provides the economy with the coverage it needs to deal with future pandemic risks. 

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Central Banks Expand Liquidity As Coronovirus Economic Toll Expands; Trump Meets With Hotel CEOs

Posted on by Trey Jackson

Fed Reserve WikiCommons x475

The Federal Reserve and central banks around the world conducted urgent large-scale interventions in capital markets this week to ease strains on economies and investors as the economic toll of the coronavirus expanded dramatically in the U.S.

  • The Fed, the Bank of England, the European Central Bank and central banks in Asia pumped large amounts of liquidity into markets, cut benchmark interest rates and engaged in new bond-buying programs to help arrest the sudden drop in business activity and increase in unemployment rates.  (Wall Street Journal, March 20 and Fed news releases)
  • Fed Chairman Jay Powell said on Sunday, “We are prepared to use our full range of tools to support the flow of credit to households and businesses.”  (Reuters, March 15 and Washington Post, March 20)
  • Additionally, the central bank announced an effort to improve the liquidity of U.S. dollar swaps by increasing the frequency of 7-day maturity operations from weekly to daily – done in coordination with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank (Fed Press release)
  • The Fed also announced the creation of numerous lending facilities to backstop the credit market, including the:
    • Money Market Mutual Fund Liquidity Facility (Fed Press release) 
  • To support the issuance of more debt by states and cities in the coming weeks and months, the Fed today announced an expansion of its asset purchases to include municipal bonds – through the Money Market Mutual Fund Liquidity Facility. (Fed Press release).
  • Market interventions by other nations this week included The European Central Bank (ECB), which on March 18 launched an €750 billion ($820 billion) emergency private and public bond program.  Today, Christine Lagarde, President of the ECB, addressed the program’s specifics and other actions the ECB will take.  “We are fully prepared to increase the size of our asset purchase programmes and adjust their composition, by as much as necessary and for as long as needed. We will explore all options and all contingencies to support the economy through this shock,” Lagarde said.  (ECB Blog, March 20)

Hotels and Malls Hit By Coronavirus Economic Shocks

The economic shockwaves of the coronavirus pandemic are quickly affecting operations of major U.S. hotel chains and other aspects of the commercial real estate industry.

  • CEOs of Marriott, Hilton, Hyatt and other chains met Tuesday with President Donald Trump to describe the virus’ impact.
  • Former Roundtable Chairman and Hilton Worldwide CEO Chris Nassetta told the president that Hilton plans to temporarily suspend operations at most of its hotels located in major U.S. cities – and that he expects global occupancy rates to fall to as low as 10%.   (View meeting of Hotel CEOs and President Trump, with transcript, on C-Span)
  • Nassetta added that in Hilton’s 100-year history, it has never closed a hotel except for remodeling or demolition.  “I’ve been doing this for 35 years. Never seen anything like it,” Nassetta told Trump.
  • At the meeting’s conclusion, United States Travel Association President Roger Dow told President Trump, “I would like to put together what everyone has said here.  The numbers are $355 billion is what we’re going to lose, 4.6 million employees will be out of work, and we’re predicting unemployment will go to 6.3 percent.  So, it’s now — it’s serious.” (C-Span video and transcript)
  • Another CRE sector deeply affected by the outbreak is retail.  On March 18, Simon Property Group announced it would temporarily close all of its retail properties, including Malls, Premium Outlets and Mills in the U.S until March 28 to address the spread of COVID-19.  (Simon statement)

The Roundtable is in contact with its membership to assess the widespread repercussions of the crisis and will report its findings to policymakers to help formulate targeted policies to combat the pandemic.

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Fed Poised to Raise Interest Rates Amid Growing Concerns About Escalating Trade Disputes

Posted on by Trey Jackson

Federal Reserve policymakers this week signaled they are likely to raise interest rates next month, after releasing minutes of their most recent Federal Open Market Committee (FOMC) meeting showing growing concerns over the economic repercussions from escalating trade disputes. 

Fed Chairman Jerome Powell today delivered remarks on “Monetary Policy in a Changing Economy” at the Federal Reserve Bank of Kansas City’s annual economic symposium .  (reference:  Powell’s speech, Aug. 24)  

  • Fed Chairman Jerome Powell today delivered remarks on “Monetary Policy in a Changing Economy” at the Federal Reserve Bank of Kansas City’s annual economic symposium .  Powell said the Fed faces two major risks of “moving too fast and needlessly shortening the expansion, versus moving too slowly and risking a destabilizing overheating.  I see the current path of gradually raising interest rates as the FOMC approach to taking seriously both of these risks.”  ( Powell’s speech , Aug. 24)   
  • As central bankers and economists gathered this week for the symposium, Kansas City Fed President Esther George yesterday told Bloomberg Television, “My own forecast is that it will be appropriate to raise rates a couple more times this year.”  Dallas Fed President Robert Kaplan added in a CNBC interview that he sees three or four rate increases necessary over the next nine to 12 months.  
  • FOMC members are aiming to set interest rates to a “neutral” setting — one that neither spurs nor slows economic growth.  Powell’s comments at today’s symposium come after his testimony before the Senate Banking Committee last month, when he stated, “With a strong job market, inflation close to our objective, and the risks to the outlook roughly balanced, the FOMC believes that – for now – the best way forward is to keep gradually raising the federal funds rate,” (Roundtable Weekly, July 20)  
  • Regarding commercial real estate, the FOMC’s meeting minutes released Wednesday show “CRE loans at banks maintained solid growth over the past several quarters, with growth shared across all three major CRE loan categories.”

    • FOMC minutes show growing concern among monetary policymakers over how trade disputes could pose a threat to economic growth.

  • The minutes also show growing concern among monetary policymakers over how trade disputes could pose a threat to economic growth.  “All participants pointed to ongoing trade disagreements and proposed trade measures as an important source of uncertainty and risks.  Participants observed that if a large-scale and prolonged dispute over trade policies developed, there would likely be adverse effects on business sentiment, investment spending, and employment,” according to the  Fed’s minutes.  
  • “Moreover, wide-ranging tariff increases would also reduce the purchasing power of U.S. households.  Further negative effects in such a scenario could include reductions in productivity and disruptions of supply chains,” the minutes continue.  
  • Yesterday, the U.S. and China started implementation of 25 percent tariffs on $16 billion worth of each other’s goods, according to Reuters.  The negative economic impact of tariffs on each state is the focus of a recent U.S. Chamber of Commerce analysis.  (Politico’s Morning Money, Aug. 23)  
  • Commenting on last week’s Q3 Real Estate Roundtable Economic Sentiment Index, Roundtable President and CEO Jeffrey DeBoer noted, “Looking to future market conditions, industry executives are noting uncertainties regarding the November midterm elections and growing interest rate and international trade concerns.  Policymakers must stay focused on developing pro-growth policies that continue to benefit the overall economy and spur job growth.” 

The FOMC’s next meeting is scheduled for Sept. 25-26.  Former Fed Governor Kevin Warsh (2006 to 2011) will address Roundtable members on Sept. 26 during The Roundtable’s Fall Meeting in Washington, DC.