MBA Capital & Origination Council: Where Politics and Policy Meet the CRE Industry

Andrew Foster is Associate Vice President in MBA’s Commercial/Multifamily Group and is a regular contributor to MBA NewsLink and MBA Commercial/Multifamily NewsLink; he can be reached at afoster@mba.org or 202/557-2740.

MBA hosted a joint Origination Council and Capital Council call on August 4 highlighting pertinent issues and challenges facing the commercial real estate finance marketplace. Grandbridge Real Estate Capital Chairman of the Board and CEO Matt Rocco chairs the Origination Council and led the call.

[Editor’s Note: MBA nominated Matt Rocco in June to serve as MBA Vice Chair for the 2020-2021 fiscal year; his nomination will be voted on ahead of the MBA Annual Convention & Expo this October.]

View from Washington

Legislative Affairs, Tallman Johnson, Mortgage Bankers Association

Fiscal and monetary policy are today’s economic engines during COVID and in the recovery against the backdrop of fast approaching elections. What may or may not get done due to elections?

Clearly, the political landscape has turned upside down in some respects since February. Conventions coming this month and where things stand today, there are good odds of Senate control shifting to the Democrats. In terms of presidential election, if Biden were to win the election, a Democratic president will likely have strong incentive to step up regulatory efforts such as Dodd-Frank protections and Consumer Financial Protection Bureau efforts.

There exists the potential that the head of the CFPB would not finish the duration of their term. There could potentially be an aggressive campaign against housing discrimination right out of the gates and the potential exists for a slower plan to end conservatorship and a stronger focus on affordable housing. Assuming a Trump election victory, the expectation would be more of the same legislative and regulatory dynamics. 

Question: Can you provide commentary on expectations for any new relief bill from Washington?

[People are] somewhat bearish here on what Congress can do together on Phase IV, which is a follow-up to the CARES Act. An eviction moratorium and rental assistance are key priorities and challenges amongst various disagreements. Disagreement over funding for unemployment benefits as well as state and local support are top-line challenges. There is some division in the Republican caucus in the Senate, with some wanting smaller relief price tag than others.

Tweets and Trump Administration media focus on eviction situation has been noticeable over the past few weeks. The need for rental assistance is important and would seem to combine with unemployment benefits to take the need to evict tenants off the table. The challenge remains that the House and Senate proposals are trillions of dollars apart. Everything remains fluid and we’re hoping for some additional insight in the next few days.

Political Affairs, Alden Knowlton, Mortgage Bankers Association

The backdrop consists of primary elections and soon the general elections, heavily impacted by pandemic situation. There are limited in-person interactions typical of campaigning and [the pandemic] expands the necessity of vote-by-mail. Example of New York primaries shows that increasing use of vote-by-mail can slow the result tallying process. Some potential administrative hurdles exist for changing elections process in some jurisdictions as well. One prime example is the Iowa Caucus challenges earlier in the year, which were well publicized. 

A lot of voters may cast their votes in advance due to the pandemic, which has the potential to blunt any late development or “October surprise” that could impact results closer to the election. Interestingly, Republicans may shy away from vote-by-mail whereas Democrats are using this option much more. Again, voting by mail could lead to potential delays, litigation, etc. Colorado and Florida have strong vote-by-mail programs in place while some states do not.   

The Mortgage Action Alliance (MAA) is MBA’s grassroots network and an important place to stay up to speed on legislative and regulatory updates that matter to the real estate finance industry. It is an important tool to provide legislators feedback as issues that matter to the industry arise. Getting feedback from practitioners and constituents–those closest to the impacted businesses–is an important tool in MBA’s toolkit and member benefit that everyone should consider taking advantage of.

Capital Source Updates: Hilary Provinse, Berkadia; Gregg Gerken, TD Bank; Patrick Mattson, KKR; Jack Gay, Nuveen Real Estate; Jeffrey Staffeldt, Pacific Life

GSEs–The agencies are fulfilling their role of providing liquidity and stability to the multifamily market in a challenging 2020 market environment. Market activity has picked up over the last several weeks. There is some evidence of listings on the property sales side, which is a good sign. Historically low interest rates on the Treasury side are supportive of new multifamily business. Reported number of approximately 1.5-2 billion per week of applications per agency.

Treasury floors are in place depending on the term of the loan. There is more aggressiveness on workforce housing and affordable [housing] for both agencies as well as on the green program from Fannie Mae. Quoting some without a Treasury floor. Floating-rate transition from LIBOR to SOFR is another key focus. Only quoting SOFR deals in August at Freddie Mac. Derivatives market has not developed yet so that will be a challenge for developing capacity for interest rate caps.

There is a continued reliance on debt service reserves as a structural feature to manage economic uncertainty (6 to 18 months depending on leverage and term). Extremely low delinquencies on rental housing given unemployment benefits but continuing to cautiously underwrite for new loans. Proposed Capital Rule is outstanding for comment–revision to 2018 proposed rule. Impacts to pricing of multifamily loans and amount of capital to be held by GSEs. 

Banks–Activity picked up somewhat in the last six weeks after an extended shut down. [There were] challenges on the regulatory front and various capital review requirements and valuation concerns. Most surveys indicate tightened credit standards. Recession readiness playbook created toward the beginning of the year as a regulatory exercise was never expected to be put to use in the context of a pandemic. Appraisal accuracy is a real challenge with few comps and real-time market data.

The impact of government relief has been positive; however, how much of it will continue? What will the impact of the winddown be on the ability of businesses to continue to fund operations? What is the path forward for renters without government support? Commercial real estate lending is holding its own from second quarter earnings announcements. The “arms race” to stockpile reserves for loan losses, forbearance, etc. Anecdotal reports of the first 90-day forbearance cycle, with less than 15 percent requesting a second extension, bodes well for loan performance and portfolio. Banks have much stronger balance sheets than during the last downturn.

CMBS–A good barometer for the health of market and originators. Triple-A spreads flat or declining is good times for the CMBS market’s ability to transaction and function. Widening spreads makes it difficult to make money. [There has been a] steady climb back from March and April. Demand from investors in securities is there; however, there is less transaction activity, which negatively impacts volume everywhere. What can get financed in this market is another challenge. Retail is a tough proposition in both the conduit and the single-asset single-borrower spaces. The investor appetite is not there. Hospitality is a slightly different story. There is some activity in the single-asset single-borrower market, but not in conduit space. Investors are favoring extended-stay type product over resorts, which is the opposite of what has historically been the case. Expect market to pick up in the fall with some increased activity.

Debt Funds—Debt funds are a bifurcated space. A much thinner market than one would expect. Private vs. public debt funds bifurcation. It’s a challenge to raise capital for public companies. Inward focus on the asset management and building liquidity, less active in the market. For private capital there has been much more activity. Have some drawdown capital so not all of these market participants need to fundraise in current environment to lend. More participation than public players. Price discovery issues impacting all capital sources and mixed with the Fed’s role. 

Insurance companies–Markets are pumped with liquidity. Unlevered lenders are getting aggressive attempting to win deals. Corporate bond spreads have come in and mortgage spreads are following them. Expectation of foreign capital seeking a home in U.S. There is a lack of interest in hotel and retail loans. [Insurance companies are] chasing apartments, industrial and select office deals with significant credit. Some student housing. Competition with agencies and banks. [Insurance companies are] behind in allocation with plenty of investable cash.

• New life company fixed- and floating-rate loans closed through May 2020 totaled $14.9 billion across 869 properties, a 32 percent decrease in dollar volume over the prior year-to-date.
• Large life company loan originations ($50 million-plus) closed through May 2020 totaled $7.3 billion across 74 properties, a 44 percent decrease in dollar volume over the prior year-to-date.
• Multifamily accounted for 40 percent of volume, office accounted for 21 percent of volume, industrial accounted for 19 percent of volume and retail accounted for 11 percent of volume.
• In May 2020, loan volume totaled only $1.1 billion across 102 properties, a 77 percent decrease in dollar volume compared to May 2019.
• The year-to-date average spread across all loans was approximately 200 basis points, but that doesn’t reflect where we’re at today given the drop in the 10-year Treasury from 188 basis points in January to 52 basis points today.