success in refinancing with regional banks however this financing is likely to continue to deteriorate as problem loans in bank portfolios one common misconception in my view is the commercial real estate problem started in the us and somehow spread to banks and other commercial real estate finance and we believe that banks will once again prove to be the epicenter of commercial real estate loan problems when looking at commercial real estate exposure in banks one must distinguish between three categories of loans construction and development loans for commercial real estate loans and in aggregate banks have exposure to about five hundred fifty billion dollars in construction loans about one point one trillion dollars income or commercial real estate and one hundred fifty billion dollars in family loans by far the most problematic of these are construction loans which contain high proportions of both loans to home builders and condo construction loans furthermore exposure to construction loans as a percentage of total bank assets rises rapidly and as one moves from large money center banks are regional and local the four largest u s banks have an average exposure of less than two percent of total last the thirty first to one hundred largest banks have an average exposure of given the commercial real estate prices are already down thirty five to forty five percent on expected completion of the project the construction loan delinquency rates are currently artificially low due to interest but will likely rise dramatically within the next twelve months on construction loans are likely to be in excess  in terms of core commercial real estate the story is much the same at least qualitatively again exposures are much higher for regional and local banks than for the large the four largest banks have an average exposure of three to four percent for commercial real estate loans w be as large as those on the two thousand and five to two thousand and seven vintage which i expect will be in the twelve to fifteen percent range this would imply losses of at least one hundred twenty to one hundred fifty billion dollars on bank or commercial loan portfolios the problems facing commercial real estate today are severe and will likely take many years to work through there are no easy solutions however there are measures that can be taken that will help mitigate the we expect that over the coming three to five years the amount of capital from traditional sources banks insurance companies pension funds committed to financing commercial real estate will decline significantly is absolutely critical t in equity and need to rebalance loans that now is the time for congress to take a fresh look it's been two decades or more and just take a look at this and see whether there's a way to bring some of this equity that wants to come inside our would say is i don't think that it makes sense to apply these rules to real estate now whether it makes sense to apply the rules to other people i'm not in that business i don't know but for real estate to take the incentive motivation away from a general partner and increase their taxes by a hundred fifty percent as the carried interest proposal does will dramatically reduce the risk taking and then trap an oriole activities of real estate the final thing that i would say is at its core this proposal is a pro debt and equity proposal encourages people to get debt from banks as opposed to getting equity from equity partners and again in a world where there is a short supply of debt and a world where we are in liquidity i don't understand why we would now have a policy that would tell every partnership in america that to go out and get bank debt as opposed to equity debt back it is there is any a federal agency be responsible for making sure that underwriting standards in the commercial real estate sector are sound or is the assumption that the market will take care of any problems so in terms of broader underwriting across the marketplace i don't i do not i'm not aware of any but i do know out of the early ninety's as part of the sedition act there were real estate lending standards that were established for banking agencies do you think you'd be be helpful to have one federal agency responsible for underwriting standards do you think that would be that's what we did with the subprime crisis we came in with the underwriting standards and  i'm not aware that the board has taken a position on that thank you and looking at where the majority of defaults in this sector are where these loans originated in state or federally charted financial institutions in terms of the real estate loans and on banks books it's a mixture of mixture and given potential risk to tenants in apartment buildings should the proposed consumer financial protection agency be responsible for monitoring underwriting standards for these loans again i'm not sure we've taken to the federal reserve is taking a position on that i think the multifamily runs into where you're you do have a property that  leases out to individuals that that's the way that works there is a consumer aspect so let's look at some lessons from history during the s and l crisis in the late one nine hundred eighty s and early hundred ninety s commercial lending also experienced a severe contraction and can any of you comment on the effect that this contraction had ad especially in states like texas that were severely affected and are there lessons learned from the s and l crisis that would help us with the current crisis and how we could stop this from happening again anyone's comments well look obviously what happened in texas and some parts of the country following the commercial real estate collapse of the late eighty's early ninety's was devastating you know but there are a lot of reasons for that part of it is in the roots of the one nine hundred eighty s that had overly generous lending rules overly generous tax rules they were shut down abruptly then the regulators came in and clamped down too hard on the regulating lending policy and it shut the whole system down in the in the in the late eighty's early ninety's part of that was due to overbuilding too much supply was on that's not what we have here today and so while the recess was on senator brownback asked a similar question and we talked in terms of reinstate one thing that did come out of that debacle that was worthwhile was a move to a more transparent and public ownership of both debt and equity in commercial real estate and we need that again we need securitization to come back in a new more safe way and you raise some very positive questions that need answers about new underwriting and so forth but the point is to get this stuff moving back in a new world and sounder footing yes mr park i just wanted to make one comment  to improve the situation as we go forward and that there are today quite a number of proposed regulations which pose a significant threat to securitization some of them some of which s and bankruptcy's across our country and the impact of defaults or bankruptcies of commercial real estate mortgage holders beyond tenets of these commercial buildings are there risks to renters in multifamily dwelling units of losing electricity in the heat of the summer or lack of maintenance during a period of time before a new mortgage holder could be filed and what about ten it's an office buildings and retail malls if there is a default or a bankruptcy what happens are they booted out to you what happens anyone well so far certainly on the commercial side in the retail world it's been although there has been a large retail on or that's gone into bankruptcy but that is it's been more likely that the retailers themselves are having difficulty i don't know of any cases so far in the multifamily area where tenants have had their electricity or water disrupted because of problems by the owner and i would share your concern and hope that that does not be a result that we see that's not a good good outcome i again i don't know of anything anything  anything like that any other comment on my time is expired mr brady thank you i'm convinced when the reasons we continue to have capital sitting on the sidelines and we've not yet restored confidence in the economy is that the commercial real estate crisis is viewed as other issues that will drop here soon in the next year or two and which is again why i am so grateful for the chairwoman be holding this hearing you know we pointed out earlier that that half of all of our commercial real estate capital comes from banks regional local corps comes from the c m b s and then the rest from insurers and pension funds so clearly  top two tiers appraisals seem like an arcane issue to discuss but when in the practical stand point when people are trying to roll over their notes it's really critical but two dynamics i see today one we have a pro cyclical bias in our prices when the market's going up prices look around a limb come they tend to value way that artificially high for years to come sort of encouraging the cycle continue in a tough situation like we have today the opposite o rs where basically they look at lower emilee incomes extrapolated for far too many years and you've got our fishy low prices in values and the regulators today in my view are discounting those appraisals even further making tougher again either for those to come up with massive equity to meet massive calls or or basically to be denied loans and again my question would be from current congressional standpoint without micromanaging the shoe appraisals is there another approach that can be taken that normalizes rental income or market income of commercial properties that would  more of a true picture of the value of these as as people go into rollover their notes mcguinn they tend to be five year cycles for the regular banks ten year cycles but the mortgage backed securities you know should we as congress should be we be looking at what approach could we take to try to get a truer value of appraisal that would not exacerbate the problem we have today and i would open up the panel members certainly this kind of cash flow model would help that problem that use that you speak to mr brady is serious especially right now in the refinancing situation it's also it's also bad when it comes to just new financing but the fact of the matter is that when it appear and i'm a former praiser so i understand the methodology a little bit probably i would tell you that appraisers i think have a little bit of a conundrum themselves right now to the extent that they look at what's happening around them they try to estimate what's going to happen as it relates to cash flow they see a building go a little bit dark so they they get worried that that might go further dark and it almost felt it almost self p itself so if they don't begin to look at for instance discounted cash flow if they if they don't take and i don't think i don't mean to say that they should take an optimistic attitude when they do an appraisal that creates a false value that doesn't exist but i think if they take if they continue to take a pessimistic attitude with a little bit of a problem it drives a values down which just exacerbates everything else we've talked about today whether congress should step in and telling appraiser how to do praises is a different issue i don't think that's the right thing and i will be submitting additional statements and questions for the record and mr campbell will have to be the fat last one to speak because we need to move on out of this room for the next a committee meeting and you are recognized for five minutes an apologize i know some of the other questions if i'm asking something that's been asked already but the first question i have generally for the panel is a number of people deep in the commercial real estate market that i have spoken to have said the interesting we use the same analogy at least three different ones use and say that we are in the third inning if this were a baseball game the we're in the third inning of a crisis if you will with in commercial real estate and the c m b s this has a long time to go we're just now it's only over the past twelve months that we've seen severe stress and rents and vacancies prices declining and delinquency shooting up we know from peaks historical experience that that commercial real estate performance lags economic activity with a twelve to eighteen month lag so now maybe we're somewhere between the first and the second inning we're definitely not in the third inning i mean is there anyone who believes we're in the fourth inning or beyond then all right so we've got we've got a ways to go next question i think for mr greenlee mr parker what if we do nothing here what if there is no activity from congress or the government whatsoever and this situation runs its course its natural course what what is the effect of that what's the economic effect the broader macro effect on banks on whoever what what effect do you see well in terms of the exposures in the banking system it's roughly about one point eight trillion dollars as what banks hold in terms of commercial real estate so there's a continued decline stress test the cap process recently to look at the one thousand largest we looked at exposures there to make sure they had enough capital and reserves absorb those losses over that in the stress test if you factored in running its course then so i guess i take your question to mean what would what is the what would be out the difference in outcomes be between going through this process with poorly or ill functioning financing markets versus one where we my  question is simply trying to get to to explain better to us that oftentimes the m b a s commercial this all seems very abstract and so to try and say what's what's the fact on the financial system on the banking system on employment on anything that you know those sorts of things out there that are less abstract right well i think that the the effect would be will be much more severe if we do not have a and a most important what it what is if and i know sometimes people hate this question but i mean if there is the the single most important thing we could do it would have the most impact in softening the  effect we're going to have through the next eight innings of this of this process what would that be increase liquidity get more liquidity in the marketplace find a way to get the money to the banks and before this committee earlier and he testified that there were potential pitfalls in putting the p p ip program in the tower together and he basically made the point that he was concerned that taxpayers will