Rushing to Reform, Finance Legislation May Do More Harm than Good

In a letter to the US Senate Committee on Banking yesterday, 21 trade groups representing the various dimensions of the mortgage finance business voiced concerns that current considerations on regulatory reform may be moving too quickly – without taking into account the potential adverse consequences these new mandates may render unto the economy-at-large. “There are serious concerns about the future viability of these markets given that the combined impact of legislative, regulatory and accounting changes could effectively shut down private lending and investing,” said Brendan Reilly an SVP of government relations at the Commercial Real Estate Finance Council (formerly the CMSA), one of the institutions that signed the letter. “Reforms cannot be made in a vacuum,” he adds. “There needs to be close examination of what these changes in totality mean for credit availability, jobs and the overall economy.” At the center of the reform, is the bill introduced by Sen. Christopher Dodd, (D-Conn.) one of two parties the letter is specifically addressed to, along with ranking member Sen. Richard Shelby (R-Ala.). The 5% risk retention section of the Dodd bill would require originators and securitizers to retain a percentage of every loan made, in order to keep some skin in the game. The reasoning behind this provision is that all parties remain tied to any losses and, therefore, hedge themselves against risk through greater transparency, underwriting, due diligence, etc. Over time, however, the trade groups warn this will limit lending capacity by constricting balance sheet activity. In the midst of the Dodd bill, new Financial Accounting Standards 166 and 167 are providing additional regulatory capital guidelines. From a standpoint of timing, the implementation of the standards now is straining an already highly-challenged structured credit market. One the letter claims is responsible for providing 40% of necessary funding in the country for the last 15 years. Currently, credit capacity remains constrained despite enormous borrower demand and significant loan maturities while asset values continue to decline in an economy of flagging employment and low business expansion. For example, the letter estimates that $1trn in commercial mortgage loans alone will mature in the next few years. Servicing these loans is vital to economic improvement, especially in the CMBS market, Reilly adds. “The CMBS market is critical to a recovery because the primary banking system does not have enough capacity to handle the upcoming CRE debt maturities,” he said. To back up their point of centralizing reform efforts, the letter to the Senate committee contains two notable quotes. Federal Reserve Gov. Elizabeth Duke, for example, observes that “as policymakers and others work to create a new framework for securitization, we need to be mindful of falling into the trap of letting either the accounting or regulatory capital drive us to the wrong model.” Followed by a quote from Comptroller of the Currency John Dugan who said, “if we do not appropriately calibrate and coordinate our actions, rather than reviving a healthy securitization market, we risk perpetuating its decline.” Neither quote is footnoted with the context in which it originated. The other trade groups listed as author are as follows:

  • American Bankers Association
  • American Hotel & Lodging Association
  • American Resort Development Association
  • American Securitization Forum
  • Associated General Contractors of America
  • Building Owners and Managers Association International
  • Certified Commercial Investment Member Institute (CCIM Institute)
  • Community Mortgage Banking Project
  • Institute of Real Estate Management
  • International Council of Shopping Centers
  • Loan Syndications and Trading Association
  • Mortgage Bankers Association
  • NAIOP, Commercial Real Estate Development Association
  • National Apartment Association
  • National Association of Real Estate Investment Trusts
  • National Assoc. of Real Estate Investment Managers
  • National Association of Home Builders
  • National Multi Housing Council
  • The Real Estate Roundtable
  • Securities Industry and Financial Markets Association

Write to Jacob Gaffney.

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