Fed responds to calls to save CRE debt markets from the brink of disaster – Trade Observer


Yesterday, Capital of the colony President and CEO Thomas barracks wrote a blog post on Medium that warned of an imminent collapse in the commercial mortgage market if the government did not act immediately to support space, which has suffered the economic fallout from the novel coronavirus outbreak.

This morning, an hour and a half before the opening bell of the market, the Federal Reserve announced a new push to make available a series of lending facilities that would respond to the call against the current liquidity crisis that threatens the economy at large. The move was in line with the aggressive posture the Fed has taken in its response to the economic damage caused by the novel coronavirus.

Barrack’s Sunday post largely underscored the need for liquidity and more flexibility for commercial real estate mortgage providers – primarily non-bank lenders – as they are on the verge of bottoming out. He wrote that “we must provide a menu of full financial subsidies, regulatory relief, forbearances, liquidity support and timeouts for the monetary obligations of the American people who are told to stop their means of subsistence in order to save the lives of others and possibly their own. “

Barrack noted that it is imperative that the market try to avoid a widespread rush of “margin calls and other ‘mark-to-market’ measures for a period of time as part of entire home loan repurchase agreements and Commercial Mortgage Backed Securities (CMBS). that lenders rely on to provide liquidity in the market. This will allow mortgage REITs and debt funds to restructure mortgages with their borrowers, which in turn will give their borrowers the leeway they need to operate their businesses and align their residential and commercial leases with them. the current climate to enable businesses to preserve millions of jobs.

Last night, and before the Fed’s stimulus announcement this morning, Commercial real estate financing advice (CREFFC) general manager Lisa Pendergast sent a letter to the Fed chairman Jerome Powell, Federal Reserve Bank of New York President and CEO John C. Williams, Federal Housing Finance Agency director (FHFA) Marc Calabria and Secretary of the Treasury Steve Mnuchin who listed several urgent stimulus needs for CRE mortgage markets – both agency and private label markets – and urged immediate emergency support.

CREFC called for loan purchase ceilings for state-sponsored enterprises (GSEs) – Fannie Mae and Freddie mac previously set ceilings of around $ 80 billion for 2020 – to be lifted temporarily and he also called for the reinstatement of the 2008 Term Asset Backed Loan Facility (TALF) to “prevent a worsening of the economy [and] capital markets crisis as we battle an unprecedented medical crisis, ”among other measures. The Fed’s response on Monday allayed many concerns.

As of this morning, there were 35,325 confirmed cases of the novel coronavirus in the United States, up from more than 12,000 at the start of last week, as tests became more readily available and accessible in some areas, according to data compiled by Johns Hopkins University.

What started as a public health crisis is now on the verge of turning into a full-fledged financial crisis, hence the Fed’s immediate action today to avoid any solvency dilemma.

In just a matter of weeks, the novel coronavirus wiped out a 10-year streak of still positive and somewhat predictable business and economic real estate fundamentals, such as job gains and fluctuations in interest rates.

The result has stifled cash flow and left many borrowers with no choice but to seek immediate help from their respective lenders. Foreign macroeconomic circumstances, such as continued job losses affecting key CRE sectors and the price of oil craters and putting pressure on $ 6.3 billion in existing CMBS debt, have added to the burden borne by companies. capital markets.

The Fed said in a statement this morning, following its action, that it had “become clear that our economy will face serious disruption … Aggressive efforts must be made in the public and private sectors to limit losses jobs and incomes and to promote a rapid recovery once the disruptions have subsided.

Even today, the American Hospitality and Accommodation Association (AHLA) released a report, citing data compiled by Oxford economy, which predicted that 44% of hotel workers across the country have already lost or will lose their jobs in the coming weeks due to the damage caused by the stoppage of travel around the world.

Last week, AHLA officials and hospitality industry executives met President Donald Trump, Vice President Mike Pence and members of Congress to discuss the gravity of their situation and how it can be addressed through measures such as support for retain employees and access low-interest loans to provide much-needed liquidity to small businesses, which make up 66% of the hotel space, according to AHLA.

Avoiding a credit crunch is essential to stem any possible escalation of the current recession, which could create a prolonged economic recession. As for the impact commercial real estate could have on a recession, this is a market currently valued at around $ 6.3 trillion and supported by $ 4.4 trillion in debt, according to information from CREFC.

“If these institutions are not allowed to maintain the flexibility and patience to undertake the loan restructuring efforts that will be critical to weathering the COVID-19 crisis, loan repayment demands are likely to escalate to a level systemic, triggering a domino effect on the borrower. by default, ”Barrack wrote. “A market collapse of this magnitude would have catastrophic effects on the US economy.”


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