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SMALL BUSINESS ACCESS TO CAPITAL: 

CHALLENGES PRESENTED BY COMMERCIAL 

REAL ESTATE 

ROUNDTABLE 

BEFORE THE

COMMITTEE ON SMALL BUSINESS 

AND ENTREPRENEURSHIP 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

NOVEMBER 17, 2010 

Printed for the Committee on Small Business and Entrepreneurship 

( 

Available via the World Wide Web: http://www.fdsys.gov 
(II) 

COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP 

ONE HUNDRED ELEVENTH CONGRESS 

MARY L. LANDRIEU, Louisiana, Chair 

OLYMPIA J. SNOWE, Maine, Ranking Member 

JOHN F. KERRY, Massachusetts 

CARL LEVIN, Michigan 

TOM HARKIN, Iowa 

JOSEPH I. LIEBERMAN, Connecticut 

MARIA CANTWELL, Washington 

EVAN BAYH, Indiana 

MARK L. PRYOR, Arkansas 

BENJAMIN L. CARDIN, Maryland 

JEANNE SHAHEEN, New Hampshire 

KAY R. HAGAN, North Carolina 

CHRISTOPHER S. BOND, Missouri 

DAVID VITTER, Louisiana 

JOHN THUNE, South Dakota 

MICHAEL B. ENZI, Wyoming 

JOHNNY ISAKSON, Georgia 

ROGER F. WICKER, Mississippi 

JAMES E. RISCH, Idaho 

DONALD R. CRAVINS, JR., Democratic Staff Director and Chief Counsel 

WALLACE K. HSUEH, Republican Staff Director 
(III) 

C O N T E N T S 

OPENING STATEMENTS

Page 

Landrieu, Hon. Mary L., Chair, and a U.S. Senator from Louisiana .................. 1 

Hagan, Hon. Kay R., a U.S. Senator from North Carolina .................................. 10 

WITNESSES

Askew, Bill, Senior Policy Advisor, Financial Services Roundtable .................... 3 

Arbury, Jim, Senior Vice President of Government Affairs, the National Multi 

Housing Council and National Apartment Association .................................... 3 

Sight, Dan, Vice President, Reece Commercial, Kansas City, MO ...................... 4 

De Boer, Jeff, President, The Real Estate Roundtable, Washington, DC ........... 4 

Innaurato, Frank, Managing Director, CMBS Analytical Services and Surveillance at Realpoint ................................................................................................ 4 

David, Stephen, President/CEO, People’s Bank, New Roads, LA ........................ 5 

Paul, Ron, Chairman, Eagle Bank ......................................................................... 5 

Minnick, Hon. Walter, a U.S. Representative from Idaho ................................... 5 

Giller, David, Democratic Counsel, Committee on Small Business and Entrepreneurship ........................................................................................................... 19 

Lucas, Chris, Republican Counsel, Committee on Small Business and Entrepreneurship ........................................................................................................... 26 

McWilliams, Jelena, Republican Senior Counsel, Committee on Small Business and Entrepreneurship ................................................................................. 26 

ALPHABETICAL LISTING AND APPENDIX MATERIAL SUBMITTED

Arbury, Jim 

Testimony .......................................................................................................... 3 

Prepared statement .......................................................................................... 40 

Askew, Bill 

Testimony .......................................................................................................... 3 

Bevis, Brewster B. 

Letter dated November 16, 2010, to Senators Landrieu and Snowe ........... 60 

David, Stephen 

Testimony .......................................................................................................... 5 

De Boer, Jeff 

Testimony .......................................................................................................... 4 

Prepared statement .......................................................................................... 52 

Giller, David 

Tesimony ........................................................................................................... 19 

Hagan, Hon. Kay R. 

Opening statement ........................................................................................... 10 

Innaurato, Frank 

Tesimony ........................................................................................................... 4 

Landrieu, Hon. Mary L. 

Opening statement ........................................................................................... 1 

Lucas, Chris 

Testimony .......................................................................................................... 26 

McWilliams, Jelena 

Testimony .......................................................................................................... 26 

Minnick, Hon. Walter 

Testimony .......................................................................................................... 5 

Paul, Ron 

Testimony .......................................................................................................... 5 
Page

IV 

Sight, Dan 

Testimony .......................................................................................................... 4 

Snowe, Hon. Olympia J. 

Prepared statement .......................................................................................... 38 
(1) 

SMALL BUSINESS ACCESS TO CAPITAL: 

CHALLENGES PRESENTED BY COMMERCIAL 

REAL ESTATE 

WEDNESDAY, NOVEMBER 17, 2010 

UNITED STATES SENATE, 

COMMITTEE ON SMALL BUSINESS

AND ENTREPRENEURSHIP, 

Washington, DC. 

The Committee met, pursuant to notice, at 10:19 a.m., in Room 

SD–428A, Russell Senate Office Building, Hon. Mary L. Landrieu, 

Chair of the Committee, presiding. 

Present: Senators Landrieu and Hagan. 

Staff present: David Gillers, Chris Lucas, and Jelena 

McWilliams. 

OPENING STATEMENT OF HON. MARY L. LANDRIEU, CHAIR, 

AND A U.S. SENATOR FROM LOUISIANA 

Chair LANDRIEU. Good morning and welcome all of you to the 

Small Business Access to Capital: Challenges Presented by Commercial Real Estate market and other issues that may come up at 

our roundtable. This is about our 12th roundtable that we have 

conducted since I have been chair of the Committee and I find 

them to be extremely helpful in flushing out some important ideas, 

emerging issues, and potentially emerging solutions that can be 

crafted either by this Committee in legislation or other Committees 

of the Congress that have jurisdiction over aspects of these topics. 

I am very appreciative of you all taking the time to come and share 

your thoughts about it. 

Let me give a brief opening statement in a more informal fashion, and then I would like each of you to introduce yourself as we 

begin. I am going to be with you until about 11:00. There are three 

votes that have been called, and the staff will conduct the final 30 

minutes or so of the roundtable themselves. 

Right before the election, we passed a groundbreaking small 

business jobs bill last year that addressed some of the credit concerns facing small businesses. I am proud to have had a leading 

role in that effort, and hopefully many aspects of that bill, as it is 

put into place, will become clear to the country on how effective 

and important it is. 

However, there are several issues that remain unsolved, and one 

of them is the commercial real estate market, loans associated with 

it, and evaluation of commercial property. 
2 

Every small business has to be housed somewhere. Some small 

businesses are in garages. Some small businesses are in kitchens. 

Some small businesses operate out of automobiles, but many of 

them have some commercial connection. They either own the building they are in or they are leasing the building they are in; and 

so small businesses all over America, and there are 27 million of 

them, have a real interest on how this issue is going to get resolved 

and work out. 

We are very honored to have Congressman Minnick with us who 

is a leading expert from the House and has his own legislation. He 

has been gracious to join us this morning to give us some of his 

thoughts. 

As some of you may be aware, the commercial real estate problem has been looming in the background since 2008. During discussions on Wall Street reform and the financial crisis, many suggested that an impending crisis in commercial real estate was 

around the corner. 

With more pressing aspects of the economy requiring our immediate attention, the commercial real estate issue has been largely 

left untouched. Approximately $1.4 trillion of commercial real estate debt is coming due in 2013. To give you context, that is about 

half of all outstanding commercial real estate which, according to 

the Federal Reserve, is $3.2 trillion. 

We have a chart that shows this. If you will hold it up so people 

can actually see it, it is basically a tsunami of maturing commercial real estate debt and virtually no way out there to refinance. 

Even more pressing according to the Federal Reserve, about $338 

billion is on the books of our community banks. This Committee is 

keeping a very close eye on our community banks not as regulators 

or oversight which we do not have jurisdiction in this Committee 

but we think of our community banks as partners for small business lending. 

Community banks like yours, Stephen, out in the New Roads 

area in Louisiana that know your customers and know your clients 

and are in a position to really help get credit out there and capital 

to small businesses that need to grow and expand. 

So we are very concerned, the Small Business Committee. We 

have already started work on this issue. In our small business jobs 

bill which the President signed into law six weeks ago, we tried to 

get at this problem by allowing refinancing of owner-occupied commercial real estate debt through the SBA 405 loan program. 

However, it is limited in its size and scope. It is capped at $7.5 

billion, while we have just established that small banks are holding 

$338 billion coming due in 2013. So while it is a step, it is a very 

small step in this direction. We were happy to take it but much 

more needs to be done. 

While I strongly believe the refinancing program is critical and 

necessary, I do not believe it will solve the entire problem. Because 

the financial melt down of 2008 required our full and immediate 

attention, the problem with commercial real estate debt has largely 

been ignored. 

Now that we have passed the Wall Street reform bill, it is time 

to turn to assessing and identifying commercial real estate prob-
3 

lems. How is commercial real estate connected to small business 

lending? I have gone over that. 

I hosted a Small Business Jobs Summit in Louisiana last month. 

Over 400 small businesses attended with the same message. Many 

of them still were looking for loans, some were looking for opportunities to finance out some of the important debt they were carrying. 

Small businesses across America, as I said, either rent or own 

their own small business space. There seems to be very limited financing available for new construction and development loans. Approximately 7 percent of American jobs, that is nine million jobs, 

are tied directly to the commercial real estate market. This includes small construction companies, janitorial services, heating 

and cooling companies, landscaping companies, leasing companies 

to name a few, and might I say, many of them are small businesses. 

That is why this Committee is interested and we are going to 

continue to promote and advocate for small business everywhere 

for their expansion, identifying rules and regulations that limit 

their growth, and identifying Federal policies that might be counterproductive in trying to work our way to a better atmosphere for 

small businesses in America. 

I have said over and over again this recession is ending. There 

is a recovery underway, but the recovery needs to be connected to 

jobs and it is going to be small businesses of America that create 

those jobs. This Committee wants to plow through and clear some 

paths for that to happen. 

I am aware of the small business bank failures or community 

bank failures that are taking place so we have got to be careful. 

There are over 800 banks on the FDIC watch list out of a total of 

7,800 nationally. 

As of yesterday there have already been 146 bank failures alone 

this year with more expected. Last year there were 140 total in the 

whole year so we are already at 146 into the third quarter, I guess, 

or last quarter of this year. 

Finally, because thousands of community banks know that in the 

next three years their borrowers will not be able to refinance their 

commercial real estate loans, they want to understandably protect 

themselves from the possibility of failure. 

As a result they are growing even more risk-averse about lending. We are already seeing some banks hold back even more from 

making loans. 

Now I know many of you want to jump straight into discussing 

how to solve the problem. But first things first. Let us go to introductions, and then we will open up for questions and opportunities. 

William, we will start with you. 

Mr. ASKEW. Senator Landrieu, I am Bill Askew, a senior policy 

advisor from the Financial Services Roundtable. It is an trade organization supporting the hundred largest financial institutions in 

America, and I commend you for having this meeting today and for 

your focus on the commercial real estate sector. It is a very important process. 

Chair LANDRIEU. Thank you, Bill. 

Mr. ARBURY. Madam, I am Jim Arbury, senior vice president of 

government affairs for the National Multi Housing Council and Na-
4 

tional Apartment Association. The National Multi Housing Council 

represents the larger principal officers of multi-family properties 

and the National Apartment Association’s number of State affiliates. All told we represent about 6 million apartment units around 

the country. I really want to commend you also for all of the work 

that you have done on Katrina, and post-Katrina, and all of those 

problems. It has been phenomenal. Thank you very much. 

Chair LANDRIEU. Thank you. It is still a work in progress. 

Dan. 

Mr. SIGHT. Chairwoman Landrieu, thank you for inviting me 

here today. My name is Dan Sight. I am the vice president of Reece 

Commercial in Kansas City, Missouri, and I like to call myself a 

street broker. I have been active in selling and leasing commercial 

real estate my entire career. I am here presenting the National Association Realtors. I am the 2011 chair of the Commercial Committee for NAR. I want to commend you for your insight into the 

situation that we are facing as commercial real estate investors, 

brokers, and owners around the country. And we are here to try 

to help you with the National Association of Realtors to come up 

with solutions that will help our members and help your members 

as well. 

Chair LANDRIEU. Thank you, Dan. We so appreciate you all holding your annual meeting in New Orleans. I hope everybody had a 

good time. I was unable to attend the festivities myself, but I know 

that you all were there and we really appreciate it. 

Mr. SIGHT. You are welcome. 

Chair LANDRIEU. Jeff. 

Mr. DE BOER. Senator, thank you. Jeff De Boer. I am president 

of The Real Estate Roundtable here in Washington, D.C. The 

roundtable, as you know, represents the CEOs and chair people of 

the top 130 publicly-held and privately-owned real estate entities 

across the country. We collectively represent about 5 billion square 

feet of developed property that is valued around a trillion dollars. 

We have about one and a half million apartment units and about 

one and a half million hotel spaces. I look forward to the discussion. I do want to congratulate you on the bill that was done this 

fall on small business lending. I acknowledge and agree with what 

you said that it is a small step but it is a good step and a positive 

step. And congratulations on beginning the process here. Thank 

you. 

Chair LANDRIEU. Thank you. 

Frank. 

Mr. INNAURATO. First I want to say I am Frank Innaurato, managing director of CMBS analytical services and surveillance at 

Realpoint which is an NRSRO out of Horsham, Pennsylvania. We 

are one of the relatively new NRSROs to the business, having been 

designated in the few last years. But since roughly 2000, 2001 we 

have been doing research and surveillance on all of the commercial 

mortgage-backed securities out there and active in the market. 

So we very much have a pulse and finger on the market and how 

things have changed very dramatically over the last few years 

within commercial real estate, and ironically in looking at the tsunami of maturity and the refinancing problems, we are very much 

concerned with where things will be coming in the next few years 
5 

especially into the next year 2011 relative to not only the CMBS 

market but the markets overall as a whole. 

To just kind of give you an idea if you are not familiar with what 

we do, we have roughly 225 institutional clients that use our services primarily for research, surveillance, and rating products. 

I want to thank you for the opportunity to be a part of such a 

panel here. While we are not a direct kind of piece to the puzzle 

as many of you might be, we feel we are very much an indirect 

piece to understanding what is going on in the market. So I thank 

you, Madam Chairman. 

Chair LANDRIEU. And you yourself are a small business, right, 

Frank? 

Mr. INNAURATO. Yes, we are. Yes, we are. 

Chair LANDRIEU. How many people do you have working? 

Mr. INNAURATO. We are only a 35- to 45-person shop out of 

Horsham, Pennsylvania, doing surveillance on roughly 700 CMBS 

securities on a monthly basis so we are doing a lot with a little. 

Chair LANDRIEU. Good job. 

Stephen. 

Mr. DAVID. My name is Stephen David. I am president/CEO of People’s Bank in New Roads, Louisiana, a small $150 million bank, 

about 35 miles northwest of Baton Rouge. I appreciate the invitation. I am glad to be here. Also I want to note because I do not 

know if it will come in in the discussion but the SBA program and 

reduction in fees, and increase in the guarantee has made a big difference in allowing us to continue to make loans that otherwise we 

would not have been able to make. 

Chair LANDRIEU. Thank you, Stephen. 

Ron. 

Mr. PAUL. Thank you, Chairwoman. I am Ron Paul. I have only 

daughters, no sons. 

Chair LANDRIEU. Good. Just kidding. 

Mr. PAUL. I am chairman of Eagle Bank, a $2 billion bank in the 

Washington metropolitan area that specializes in small businesses. 

We have a significant concentration in real estate but a very wellpositioned, well-capitalized profitable bank. 

Chair LANDRIEU. Thank you. 

Congressman. 

Representative MINNICK. I am Walt Minnick, Congressman from 

Idaho and member of the House Financial Services Committee. 

Chair LANDRIEU. Thank you. I would like to begin now, if we 

could, with Congressman Minnick and allow each of you to expand 

on maybe three minutes, four minutes each about one or two points 

that you really want us to understand relative to this commercial 

market and the tsunami that is likely to occur and potential actions that Congress could take either, of course, through this Committee or the Banking Committee or other Committees that potentially have jurisdiction over some pieces of this. 

From those of you who could speak at it from a perspective of 

either a small business that you are yourself or from a perspective 

of small business would actually really help us to bring some of 

these issues more clearly into focus. 

Walt Minnick has been probably the leading voice in Congress on 

trying to find a solution to this particular problem. He served with 
6 

distinction for many years in the House and has developed quite 

an expertise on this subject. I am happy to have invited him and 

very appreciative that he would give us some time this morning to 

come and share with us some of the outcomes of his work. 

Congressman, we will begin with you. 

Representative MINNICK. Thank you, Madam Chair. 

In 2007 the value of all commercial real estate in the United 

States was $5 trillion. Today it is approximately $3 trillion. There 

is roughly $3.32 trillion as illustrated in that chart in debt against 

these assets, much of it held by the Nation’s commercial banks. 

This 40 percent decline in value has been caused by the ongoing 

financial crisis, a deep recession, and sharply restricted sources of 

credit for commercial real estate investments. Unfortunately the 

Nation’s 8,000 community banks are much more exposed to commercial real estate than larger financial institutions whose business is much more diversified. 

Small business which, as you know, creates most of the new jobs 

in America relies primarily on local community banks for credit. If 

the capital of these banks becomes impaired because of losses from 

commercial real estate, small business cannot expand and the recession becomes deeper and longer. 

Worse yet as commercial real estate values continue to spiral 

downward and bad loans are written down or foreclosed, as many 

as 2,000 smaller banks could fail over the next several years. This 

could cost the FDIC, and indirectly the taxpayers, in excess of half 

a trillion dollars by some estimates, more than the net cost of 

TARP and the savings and loan bailout combined. 

Without available credit, transactions in some markets currently 

reflect declines of up to 60 to 80 percent from 2007 valuation levels, 

and as the bottom feeders rush in, there is more trouble on the horizon. As investors buy up troubled assets at steep discounts, they 

immediately reduce rents to eliminate vacancy and create cash 

flows. 

While this strategy works for the new investors and distressed 

assets, it creates major problems for current real estate investors 

as they battle tenant relocation and a much higher cost structure 

than their new competitors. This leads ultimately to more distressed real estate and a new round of forced closures. 

The losses from commercial real estate have been slow materializing because of the long-term nature of commercial real estate 

leases. But make no mistake, these losses are coming. If commercial real estate credit markets are not stabilized, the losses could 

potentially be greater than the total capitalization of the U.S. 

banking system. 

This could trigger both an avalanche of bank failures and the 

much talked about second dip in the recession with renewed economic hardship for small businesses and all Americans. 

So what do we do about this looming real estate crisis? Like you, 

I do not believe in subsidies or bailouts for banks or commercial 

real estate investors. I do believe the Treasury and the Federal Reserve should provide a backstop program that assures market credit is available for all well underwritten commercial real estate 

loans. 
7 

Instead of being the lender of first choice because of low subsidized interest rates and easier or reduced underwriting standards, the Federal Government could and should facilitate credit for 

well underwritten loans. In doing so, the taxpayer would be fairly 

compensated with substantial profits. 

I have introduced bipartisan legislation in the House of Representatives to deal with this in a way that will save many of our 

smaller banks and make, not cost, the taxpayer money. Essentially 

what my bill would do is create an analog for commercial real estate that is similar to what Fannie and Freddie do for residential 

real estate. 

It would allow large financial institutions to aggregate at current 

value existing commercial real estate loans and then to package 

them and to get a third-party guarantee, excuse me, get a rating 

from a rating agency which rating agencies can now be sued for 

negligence so it will be a good rating as investment grade and then 

to package these into a security and wrap them with a government 

loan and sell them into the market. 

The government loan guarantee would be available only at a 

hefty fee and the CBO has estimated that this program would not 

only provide credit to the market and a floor under commercial real 

estate values but also yield the taxpayer a net profit over the life 

of the program in excess of $1 billion. 

So it stabilizes the market. It provides credit to the market, and 

it makes the taxpayers money. This is a well needed analog which 

I am hopeful will be considered by you and your colleagues in the 

Senate, Madam Chairman. 

Chair LANDRIEU. Thank you, Congressman. 

I really appreciate the time and effort put into that innovative 

proposal, and I would like to get at sometime in the next hour 

some comments from various folks here about the pros and cons of 

an approach like that. We need to play the devil’s advocate as well 

because the minute you say like create something like Fannie Mae 

and Freddie Mac I think the antennas go up. People are very concerned about the track record of those organizations and their difficulties, although there are outstanding benefits that they have 

also provided for our Nation. That is food for thought. We will come 

back to that. 

Thank you for your presentation. 

Ron. 

Mr. PAUL. Thank you, Chairwoman Landrieu. As I mentioned 

earlier, I am chairman and chief executive officer of Eagle Bank, 

a well capitalized, very profitable $2 billion community bank, 

headquartered in nearby Bethesda, Maryland, specializing in loans 

to small businesses. 

While many other banks of various sizes have hunkered down, 

we have increased our loan portfolio. Loans are up 16 percent from 

a year ago. The Washington Business Journal recently recognized 

us as having made the greatest increase in overall loans in the 

Washington D.C. market. The Journal stated that Eagle Bank had 

the greatest increase in commercial real estate loans and the greatest increase in business loans over the same period. 

And we have not made the loans by sacrificing credit quality. 

Our ratio for nonperforming assets is 1.46. We are very proud of 
8 

the fact that over the last 12 years we have funded $23.5 billion 

in commercial real estate loans and have written off less than $2 

million. 

I have also been a real estate investor in office buildings and 

multifamily apartment buildings in metropolitan Washington, D.C., 

and around the country for the last three decades. As such, I have 

a unique perspective on the challenges facing the commercial real 

estate market today as both a lender and an investor. 

This Committee is well aware, as mentioned earlier, that there 

is approximately $3.2 trillion of commercial real estate debt in existence in the United States. Forty percent of that, or $1.4 trillion, 

is estimated to become due in the next three years. Of the $3.22 

trillion in outstanding loans, half is held by banks and another 25 

percent held by the CMBS market. 

One of the major issues we will all grapple with both with respect to loans held in portfolios as well as those loans maturing is 

the decline in value of real estate. We recognize that determining 

value is subjective and varies from appraiser to appraiser. It is not 

a mathematical calculation. 

Consider an office building that has a dozen tenants with leases 

at market rates and maturities spread over time, that is, picture 

a stabilized office building, its cash flow has been and is projected 

to continue to be more than sufficient to cover the debt service and 

operating expenses. That conclusion is the result of a mathematical 

computation. 

If I am the lender on that project, and I assure you that many 

loans in our portfolio match this description, I consider this a good 

loan. But also imagine that as a result of the CMBS markets 

evaporating and based on current regulatory standards, banks are 

not in a position to extend additional credit and buildings down the 

street are being foreclosed upon or handed back. An appraiser will 

use the value of one of those buildings now and it becomes a comparable sale for the building we just talked about. The appraised 

value on the stabilized project based on the loan to value ratio subjectively determined just went down by the appraiser’s perspective 

significantly. 

But remember the building’s cash flow is still more than sufficient to keep the current debt. The project is not in fault. 

I believe that Congress needs to address this issue to ensure that 

that performing loan continues to be treated as a performing loan. 

Projects that have a reasonable projection of continuing sufficient 

debt service coverage, that is, the borrower is projected to make 

each month’s payment, should not be classified credit unworthy. 

The question presented is whether loan to value ratio should be 

the basis for a loan becoming classified if the debt service coverage 

test is met. The issue needs to be examined with respect to both 

during the life of a loan and as the bank considers renewing it during this time of significant demand for extensions and issuance of 

new debt. 

This all assumes that the banks are in a position to make loans. 

Even if Congress solves the issue of keeping loans in performing 

status, for those of us in stronger markets, and Washington, D.C., 

is certainly one of those markets, and hopefully shortly there will 

be many more, the issue is different. 
9 

It is one of liquidity. We need to have the cash to make the 

loans. As you know, once a bank has capital, it can leverage that 

capital tenfold so $50 million in capital means you can lend $500 

million. 

But, and it is a big ‘‘but’’, you need to have the other $450 million in funds available. This issue was quantified by the loan to deposit ratio. Eagle Bank’s loan to deposit ratio is 97 percent. For 

every hundred dollars we have in funding, $97 is out the door already, excluding loans we have already committed but not yet 

funded. 

The American bankers published a list in September of the top 

banks nationally in terms of loan to deposit ratio. Eagle Bank, 

which recognizes its responsibility to lend, is proudly on it. It is 

going to be the strong markets and the strong banks that start 

pulling the country out of this economy and strong banks need liquidity to make new loans to small businesses along with commercial real estate. 

When a small business, say, a hardware store or a restaurant, 

comes to Eagle Bank and asks to increase its loans due to inventory or volume of business increasing, which is a good thing, the 

bank does not want to be in a position of have to say, sorry, we 

do not have the funds available even though your business underwrites. 

We need to come up with ways to increase liquidity for strong 

banks. Obviously increasing our deposits is the best way. The many 

alternatives for depositors to place the liquidity in markets other 

than banks such as credit unions hurts our ability to attract these 

core deposits. 

Additionally, the current cap with FDIC insurance coverage of 

$250,000 hurts community banks’ ability to bring in larger deposits. The cap inhibits individuals and entities from putting more of 

their cash into banks due to risk, and I mean real banks, not financial service companies like Goldman Sachs or AIG. They do not 

turn around and lend money to Main Street America. Community 

banks do. 

We must also examine and explore new ways to facilitating alternative means of funding for well capitalized, well managed banks. 

Our regulators annually rate banks. Congress should look at allowing highly rated banks to have access to alternative funding means 

such as borrowing programs at the Federal Reserve Banks or the 

Federal Home Loan Bank. 

I also might add, as Stephen mentioned, that we also request a 

waiver of SBA fees to be extended at the end of the year since we 

are just beginning to see a pickup in SBA lending. 

On behalf of Eagle Bank and community banks across the country, I thank you for the interest that this Committee has shown in 

the small businesses and commercial real estate and I thank you 

for allowing me to appear before you. I look forward to continuing 

this conversation with you this morning and in the future as you 

wish. Thank you. 

Chair LANDRIEU. Thank you. We are going to pause just for a 

minute, Stephen, before we get to you. I would like to take a couple 

of comments about the two or three or four speakers because in 
10 

their statement there were about four kinds of new big ideas that 

were thrown out. 

Any comments or questions that any of you have about some of 

the suggestions either made by the Congressman, I am sure some 

of you have reviewed his bill and his proposals prior to coming 

here. Some of your organizations might have already put out a 

statement or comment about the advantages or disadvantages of 

such a proposal. 

We are joined by Senator Hagan. Thank you so much, Senator. 

You have been an outstanding advocate for small businesses, and 

we really appreciate your being here. We just started and we are 

going around the room and we will come back to you. What is your 

time frame because we could acknowledge you now. 

Go right ahead. 

Senator HAGAN. We have votes coming up at 11:00 so I thank the 

Chairman for holding this hearing and I am extremely interested 

in it. North Carolina, it is all about jobs, jobs, jobs, access to capital 

to be sure that industry can stay in business and I am very interested to listen to what you all have to share with us today. Thank 

you. 

Chair LANDRIEU. Thank you. I think you will be very interested, 

and we both have to leave in about 20 minutes or so but to really 

hear some of the new emerging ideas that are coming forward, Senator Hagan, about trying to stabilize this commercial estate market 

which, as you know, our Committee does not have direct jurisdiction. But as it affects small business, we are taking a very aggressive posture because the outcome or the way that the country decides to move forward hopefully as opposed to just standing still 

and running around in a circle I am hoping we will move forward 

in some direction, will have a direct impact on the 27 million small 

businesses out there. 

All of them need office or either own office space or are affected 

by the values of the commercial buildings next door. It really is just 

a corner stone of this market and a corner stone of our potential. 

I see that fragile recovery under way. As you and I know, it is not 

as strong as we would like. 

We had two presentations by the Congressman and Mr. Paul. I 

would really like comments. Jeffrey, would you start us off, and 

when you all want to speak, just set your name card up like this 

so I can recognize you or just give me a signal. Thank you. 

Mr. DE BOER. Thank you for this hearing, and I guess I would 

say that these two opening statements really crystallize three of 

the most important issues here, one being the CMBS market. We 

have got to figure out a way to get that going again. It is showing 

some sort of nascent signs of life. 

It is going to run about $12- to 15 billion this year. That is off 

a peak of around $230 billion in 2007. We do not necessarily need 

to get back to 230 but we need to get greater than the 12 or 15 

we are going to do here. The Congressman put forward some ideas. 

There are other things out there but certainly that is number one. 

This issue about value is a very troubling issue because it is almost like you are asking people to describe a color that they have 

never seen, and I say that because you want value to be determined out there but yet there are no transactions. 
11 

Typically values are determined when there is a willing buyer 

and a willing seller. There are distressed sellers and there are opportunistic buyers. So we do not have a color that we can really 

see to describe. 

So this whole issue about what is value is really an odd component out there, and I think it is very important what Mr. Paul 

brought up about that. 

Finally, just the other very important thing is this issue of banks 

liquidity. I think, you know, the point about you can lend ten times 

your capital. Most small banks or regional banks, I would suggest, 

are ill-liquid because they have already lent in many cases, now 

there are exceptions, but they have already lent up to their ability 

to lead. 

Then you say, well, how do they create more liquidity? Well, they 

create liquidity by selling assets. But if they sell assets, they are 

going to sell assets at a loss. So for every dollar of loss that they 

sell they correspondingly will have to reduce capital. So it is a 

Catch-22 that is going where banks want to become more liquid. 

In fact, they are becoming less able to lend. 

And the final point that I would say that obviously, I mean, 

these banks are embedded with commercial real estate loans, traditional commercial real estate loans. But they are also embedded 

with small businesses who use their real estate as collateral to 

make the loans. 

These asset values are down 25 to 35 to 50 percent in some markets. Now, in some places they are coming back, and the big public 

REITs are accessing capital and the big private owners in gateway 

cities are getting a little more liquid, but Main Street is not at all. 

So you go and you want to get a loan and your collateral value 

is down substantially. The bank is already embedded with all of 

this stuff. The regulators will come in and say do not make any 

more loans on this type of asset plus the banks themselves will be 

fearful of making these loans. 

So these are very complex, inter-related. We have got some ideas 

in addition to what Mr. Minnick suggested. These are the key 

things. How do we get the CMBS market? How do we increase 

bank liquidity? How do we have a better sense of value to make 

sure that the metrics work? 

You talk about the SBA system working because it has the flexibility out there now that local bankers used to have but do not 

have today. I will stop with that. I think I have gone on enough. 

Chair LANDRIEU. Excellent crystallization of these points, and we 

really appreciate it. That is what these roundtables are, you know, 

the format is meant to do. 

Jim, did you have a comment? 

Mr. ARBURY. Yes. I would like to, first of all, echo what Jeff said 

but also what the congressman said. Multi-family, we have the 

great benefit of having GSE available, GSE lending available to us. 

We have had a great track record, unlike the single-family, I mean, 

we have not cost the taxpayer a dime. 

And properly underwritten with, you know, good money in the 

game. You know, we have done very well, and the taxpayer is not 

at risk. But that going forward, even though all the demographics 

are in our favor, we have got about a hundred to a hundred fifty 
12 

billion of maturing debt coming due in the next year or so, more 

than that in the next couple of years. We have $872 billion total debt outstanding of which about a 

third is owned by the GSEs. The big uncertainty and the big risk 

going forward is if the government pulls the plug on the GSEs suddenly or way too early, there will be, we will be right in here in 

the whole mix with the rest of the commercial in terms of problems 

with foreclosures and what will happen going forward. 

Chair LANDRIEU. Bill. 

Mr. ASKEW. I will not repeat what Jeff said on CMBS but I do 

agree that restarting the CMBS is one of the key issues here. I 

want to reference your chart up there because I think your chart 

is the most important chart in this room and it says everything we 

can say about commercial real estate. 

Chair LANDRIEU. Compliments to whoever. Did you all present 

this? The Real Estate Roundtable. We have to give credit where 

credit is due. 

Mr. ASKEW. The size of the role of maturities is clearly the issue 

in CRE, and it is the issue we have got to face down and we have 

to do something about. 

The CMBS market has shown signs of life as Jeff says but it is 

not back, and we need it back. And so I think the issue is more 

of existing debt and how we are going to refinance that debt as it 

matures. That is the issue we have to face and that is the issue 

we have to deal with. 

And another thing that you said, Ron, about performing loans 

going to non-performers. There needs to be some changes and some 

consistency in the way that the local examiners are interpreting 

interagency guidance. 

The guidance came out in October. It actually helped it seemed 

for a while but now there is too much in differences in the way that 

guidance is being interpreted. So I think those are two of the key 

issues. 

And I just throw in the third issue as accounting policy right now 

that has thrown all of this into confusion, FASB 166, 167, and then 

Dodd-Frank had set some clear guidelines on risk retention which, 

if we can follow through on how the bill was set up, I think we 

could get clarity and this will work. 

But the FDIC has come out right now with safe harbor explanation and then SEC has got some guidance, reg A and B, that 

throws some confusion; and so the market is confused right now 

and it could slow down what was starting to be a restart of CMBS. 

So we need clarity. 

Chair LANDRIEU. Hopefully it will not be that difficult to clarify 

this interim guidance. Several people have suggested that, and I 

think that is important. It may be easier said than done but we 

will see. 

Let us go now to you, Stephen David, and we would love to have 

your opening statement. 

Mr. DAVID. Thank you, Senator. 

I almost want to say it is verbatim what Ron had to say so I will 

just sort of try to expand on that. 

The appraisal market right now is that we have appraisers who 

are in fear of their own shadow. That has been a large problem for 
13 

us and it brings us to problems with regulators because when they 

do an appraisal, we are finding that they are not realistic values. 

We recently had a sheriff’s sale; and that is, in Louisiana on a 

foreclosure, the method of getting back the property. It goes to an 

open bid process. The property has to be appraised by someone appointed by the sheriff and we also have it appraised. In this particular example, the property appraised for $224,000. 

We knew the property, thought it had a substantially larger value 

on it. We took it back, we bought it back at the sale, had it reappraised by a different appraiser who appraised it for $226,000. 

Within three days I had three offers over $300,000 for the property 

and sold it for $327,000. 

So the realistic part of what has happened with appraisal is they 

have always been, in my opinion, subjective. They are becoming 

more and more subjective. That plays into what issues we have 

now from a regulatory standpoint is we have loans that are coming 

up for renewal and are being pushed to get new appraisals. 

We know what happens if we get a new appraisal. We are immediately going to be underwater and then we will be facing a substandard classification. 

Or we have someone who wants to build something, commercial 

real estate. It could be spec houses or strip centers, things that we 

deal with in smaller towns and cities. And the appraisal is going 

to come in at less than what it is going to cost to do the project, 

cash flows no longer being the driving factor but market value 

being the driving factor. 

So that is a problem from a regulatory standpoint as well as the 

position it puts us in with the appraisals. 

Additionally, capital is an issue. Particularly in smaller community banks, to use that word. As we look and see which banks are 

being closed, it is very clear they are all community-bank size, 

banks that are being closed. So there is what we call the three C’s 

of lending now. It is capital, compliance, and cost. 

We do not have a definition of what is enough capital. They will 

tell you only it is sufficient or it is not sufficient but never a number. Well, the more capital has put a burden on banks of what is 

available to lend. The cost and compliance cost, they are also, as 

you said, it is ten times what we can lend. In my small bank $150 

million. In the last three years our compliance costs went from just 

over $10,000 a year to over $250,000 a year. Our cost of FDIC insurance premiums went from $17,000 a year to $220,000 a year 

this year. So we are talking about in excess of $500,000 which multiplied times ten is $5 million. 

That is a large number for a bank our size and those are the dilemmas that we are facing in trying. We are a high loan to deposit. 

We are a loan-driven bank, have always been and hope to remain 

a loan-driven bank. 

I will tell you that our loan to deposit ratio has decreased from 

120 percent to 100 percent in the last 12 to 18 months, and not 

so much from inability to find loans; it is inability to make loans 

that otherwise we would have made. Thank you. 

Chair LANDRIEU. Thank you, and I really appreciate it. 

Mr. David and I had many conversations as the Banking Committee was doing its work. He was very instrumental in giving me 
14 

some information that I tried to pass on to the Banking Committee 

about the effects of raising some of these fees on the small banks 

out there. 

I mean, if you are a billion dollar bank, those fees are pocket 

change. But if you are a $150 million bank, and I do not know how 

many banks, Senator Hagan, in the country that are, you know, 

small but they are in small places and they are doing good work 

in those places on Main Streets far away from this beltway that 

need our attention and need out support. 

So I am going to be looking at this fee issue. Stephen shared 

those numbers with me before so I have heard them before. That 

is why I am not shocked this morning. But it is just in my view 

unconscionable. I will just say that. 

It is just unconscionable for fees to be raised that much on that 

kind of institution. I am going to do everything I can to eliminate 

them or reduce them. 

Go ahead, Frank. 

Mr. INNAURATO. Thank you again, Chairwoman. I want to really 

thank everyone for the opportunity today to participate in this 

hearing. 

Just to give you a little bit more background on Realpoint, obviously being the only NRSRO or Nationally Recognized Statistical 

Rating Organization in the room, we specialize in the structured finance market and specifically doing a lot of conversation about this 

CMBS market. We have earned our bread and butter and expertise 

focusing on commercial mortgage backed securities. 

Currently more than roughly 225 institutional investment firms 

subscribe to Realpoint, and we pride ourselves on our trusted ratings analysis of approximately $788 billion of outstanding CMBS 

which not only includes domestic CMBS but some of the agency 

portfolios, Canadian portfolios and the like. 

At Realpoint on a monthly basis we closely monitor all current 

commercial mortgage-backed security transactions in the United 

States which is close to 700 transactions on a monthly basis. This 

consists of in-depth monthly ratings reports of these securities, analytical performance studies, watch list reports, alerts, and other 

information about all the rated securities or underlying collateral 

for that security such as the property level reports. 

In terms of general market direction, we can report that, while 

commercial real estate loan defaults have slowed recently, they 

have not stopped altogether; and we really feel that the market will 

continue to show signs of distress going into the 2011 potentially 

bottoming out in 2011 and show signs of recovery in 2012. 

I do have some statics that I really wanted to share with everyone in the room relative to what we are seeing through the end of 

the third quarter within CMBS. 

Through September 2010, the delinquent unpaid balance for 

CMBS continue to exhibit moderate monthly growth, having increased by an additional $800 million in one month up to $62.2 billion. 

So I note through many of the charts that we are seeing just the 

size and the volume of loans that we are being concerned about not 

only through distress on your own balance sheets but within CMBS 
15 

specifically. If I had a chart or a graph it is almost a straight line 

of continued growth. 

In the last few months you have seen some tempering off and 

some slowdown. But some of that has really been fueled by increased liquidations. Due to the decrease in value of some many 

properties, loans that are being worked out and liquidated in this 

market are experiencing average loss severities anywhere from 50 

to 60 percent on their original loan balance. 

For the last few months of this year, just to give you an idea, 

from January through June 2010 average growth per month of new 

delinquent loans within CMBS was averaging $3 billion a month. 

So a substantial growth in the early part of the year has moderately tapered off a little bit in the last few months. 

Despite ongoing loan liquidations reporting on a monthly basis, 

modifications or resolutions of distressed loans, the 90-day delinquent foreclosure or RAO within CMBS as a whole continue to 

grow on a monthly basis. They grew by another $1.2 billion from 

the previous month after falling for the first time in almost three 

years from July to August 2010. 

So again not only new delinquencies but the level of delinquencies is being reached in CMBS loans going from 30 days to 60 

days to 90 days. And in cases where they have been unable to negotiate some type of a workout or related scenario with the asset 

manager or specialist within special servicing to work out these 

loans, borrowers have been left in many cases just simply to default on their loan and hope that some kind of modification or resolution can be reached. 

Overall putting some more percentages and fuel on the fire, the 

delinquent unpaid balance for CMBS alone was up over 96 percent 

from September 2010 through, excuse me, in one year from 2009 

through 2010. So nearly 100 percent growth from the only $32 billion of delinquent unpaid balance that was reported back in 2009. 

Overall this reflects 28 times the low point for CMBS delinquency. Back in March of 2007 when the markets were still performing and the growth of aggressive lending, underwriting, and 

new issuance within CMBS delinquency was as low as $2.2 billion. 

So when I present numbers that are as high as $62 plus billion 

you can see the magnitude within CMBS and how voracious the 

growth has been in such a short time. 

Chair LANDRIEU. You used the word ‘‘growth’’ you mean ‘‘increase.’’ 

Mr. INNAURATO. Increase. 

Chair LANDRIEU. Growth is a positive word. This is not positive. 

Mr. INNAURATO. Yes. In this case it is increase, very much so. I 

am glad you clarified that. Yes. 

Chair LANDRIEU. An increase in delinquencies is not a good 

thing. 

Mr. INNAURATO. No, not at all. In many cases the increase in delinquency that you are seeing as well is fueled by loans that initially claimed imminent default where on the small commercial 

banking side, borrowers pick up the phone and place a call and say, 

is there something we can do, is there something we can work out 

so that I do not default on my loan. 
16 

Within the commercial mortgage-backed securities world that is 

imminent default. So the lenders, the masters servicers and special 

servicers are left with an otherwise performing loan but a borrower 

who now realizes due to decline in values and decline in the performance of their underlying market, they are raising their hand 

and saying, can I get a modification, can I get a re-work because 

my property values are down anywhere from 30 to 50 percent in 

a given market. My cash flow is not where I hoped it to be. So I 

might need a modification. So they threaten imminent default, and 

immediately a loan is transferred to an asset manager. 

In that realm of managers, special servicing, putting some more 

numbers on it just to give you an idea, this is considered special 

servicing within CMBS. The number of loans with special servicing 

was 4700 and close to $92 billion of loans that were requesting 

some form of workout status of which only $62 billion was delinquent. So that left another $30 plus billion of loans that were still current in payment but looking for some kind of modification, maturity extension, new interest rate, new terms, based on the problems 

they were foreseeing. 

We have talked a lot about the impact of value declines and the 

like, and I thought one of the numbers that I would share with you 

is that year-to-date through September 2010 within the CMBS 

market, $5.5 billion of loans have been worked out within CMBS 

but at an average loss severity of over 50 percent, meaning that 

loans that were originated at a higher value and a higher, low 

LTV, higher valuation, higher UPB are losing nearly half of their 

dollar amount in today’s workout scenario. $5.5 billion loan workouts just in the first nine months within 

CMBS is the highest that has ever been realized in the history of 

CMBS. This is legacy CMBS. These are deals that were originated 

mostly during the peak of the market, from 2005 through 2008, 

mid year, and most of the delinquency and the problems that we 

are seeing in the market today are coming from the aggressive underwriting and lending that went on during that time. 

In addition to all these loans, though, however Realpoint through 

its surveillance efforts continues to monitor daily many watchlisted 

loans, loans that remain current in payments but have been transferred to special servicing. I have highlighted a lot of that. 

But in our opinion many of these loans may ultimately default 

again, not just loans that have already asked debt relief but loans 

that we have not seen default yet. 

An interesting point to kind of add something to some of the previous conversations is with CMBS most of the traditional loans and 

deals, much higher balance in unpaid, is for the individual loans. 

Whereas if you were a $3 to 5 million loan, you would not refinance into a new deal especially if the conduit markets were dead. 

You are just not going to get into that type of universe right now. 

The deals that are being produced and the new CMBS deals that 

are coming to market, very well underwritten, highly scrutinized, 

but you are seeing higher balance loans still within these transactions, not to the extent of the 2007 or 2008 deals but traditionally when loans got to a smaller level they would refinance through 

a community bank. This is a big problem within CMBS right now. 
17 

A large portion of what you are seeing by way of the maturity risk 

that is coming due is because many of these loans that have amortized down, many of these loans that have done nothing that Mr. 

Paul said performed from the day one until now. They have paid 

their debt service. They have consistently had a good DSCR, debt 

service covered ratio, maintain a high level of occupancy, but there 

is no one willing to lend. 

So they are left to either ask the CMBS world for an extension, 

a modification, or default and turned over the keys after doing 

nothing for five to ten years but pay on their loan. 

Chair LANDRIEU. That will make people very angry, and we are 

going to try to avoid that because they are angry enough. So we 

are looking for some solutions and if you wrap up in 30 seconds so 

we can call on the others and throw out maybe one solution that 

you might see or do you think that anything Mr. Minnick or Mr. 

Paul or Mr. David said might work in your view? 

Mr. INNAURATO. Definitely. 2010 we have seen the re-emergence 

of the secondary or conduit market, not to the levels that we hoped 

to see in volume and size. But as of mid November there had been 

six conduit deals placed or in the process of being placed which is 

very very good. 

Really our suggestion is we feel at Realpoint that we were not 

part of the problem. We want to be part of the solution. Being relatively new to the rating of new issuance CMBS, I think we very 

much agree that with quality on the writing and with the right 

packaging of these loans that this CMBS market can be revitalized. 

However, there has to be a willingness to lend. There has to be 

the availability of capital. There has to be quality underwriting but 

there also has to be investors willing to purchase the CMBS in the 

secondary market. 

So it is one thing, two pieces of the pie really need to come together for it all to work. 

Chair LANDRIEU. We hope your experience will be valuable to us 

in crafting a solution. 

Jeffrey, we will do this real quick. 

Mr. DE BOER. I guess I sort of said the key points earlier. But 

just if you wanted to get a couple of solutions on the table in addition to what Mr. Minnick has put forward, some people talk about 

this liquidity and the losses the banks have. Maybe a solution here 

would be to allow or an idea would be to allow banks to amortize 

the losses on the sale of these assets over a seven- or 10-year period rather than recognize them immediately. That might encourage some of these assets to move. 

The key thing, you have to clear the bank balance sheet of toxic 

assets. You have to create more equity into the system, both for the 

lenders and for the borrowers. And, you know, you have to encourage risk taking. 

The bottom line here is, you know, all of this, look, we went into 

this problem with commercial real estate relatively in balance. 

Okay. Supply and demand was relatively in balance meaning, you 

know, there was not huge vacancy rates for office, not large vacancy rates for retail or multifamily or anything else. 

Why is there a problem now? Because the demand has fallen off. 

Why has the demand fallen off? It is not a secret. There are no 
18 

jobs. And so the key to this whole thing—really we can talk about 

a lot of esoteric things. But as you well know, jobs. We need a solid 

program to encourage jobs. 

And like I said, on the equity side, look, lenders need more equity. There are a lot of people sitting on the sidelines that want to 

put equity in. Some of these happened to be configured in private 

equity funds. 

Now, I understand private equity is a negative word up here for 

some reason and with the regulators, but the fact of the matter is 

they have got capital. They would like to invest in institutions, and 

there are regulations that inhibit their ability to do that. 

On the borrowers’ side of things, look, these people, many of 

these borrowers are out of equity because they originally bought an 

asset for $100. They put $70 of debt on it. The asset is now worth 

$60. Their equity is gone. They have been hanging on because the 

interest rate environment is low; and so even though their vacancy 

rates have increased, they have been able to perform under the 

loan. 

They are running out of juice. So they need equity investment either from the private world here in the United States, domestic 

people, or also from foreign investors. We have talked about how 

we could reduce the tariff for global capital to come into the U.S. 

real estate markets under this FIRPTA thing. And Senator Hatch 

and Senator Menendez and others are looking at that. 

One final thing. Any time I am up here, you know, the main 

thing is, boy, do not do anything that would encourage risk taking 

or further put a boot on real estate as it is trying to recover here, 

and institutions trying to recover. 

That gets into this carried interest debate that we do not need 

to talk much about it. But the bottom line there is this would be 

a severe impediment to a lot of very small real estate partnerships 

that are struggling to hang onto their properties and suddenly 

their tax laws are going to be changed many times retroactively. 

So I just say let us find the way to increase liquidity. Let us find 

a way to bring in some equity and let us not, for god sakes, make 

things worse for struggling partnerships across the country. 

Chair LANDRIEU. Excellent points. Any comments? I will have to 

turn it over to David. I have five minutes left in the vote and it 

takes me about five minutes to walk to where I have to vote. So 

I am going to leave in just a minute. And I will turn this over to 

David. 

Bill. 

Mr. ASKEW. If I could just add a comment to Stephen’s and Jeffrey’s. 

Chair LANDRIEU. Go ahead. 

Mr. ASKEW. On the fee issue, it is not just small banks. It is not 

just community banks. Fees are impacting all of the banking system. And if you look at the FDIC, just take that one item for a 

minute, if you look at the assessment last year, they added $15 billion to the industry. It took out all of the industry’s profit, the entire financial industry’s profit last year just going back to that 

fund. 
19 

So those fees. And then you add on the burden of the regulatory 

reform that we are going to have to follow, those fees are significant in this process so I just want to second that point. 

Chair LANDRIEU. Thank you for clarifying that. 

I am going to turn it over to David. He is going to conduct this 

for another 10 or 15 minutes. This has been extremely helpful. Obviously we are not going to find the solution this morning. 

But I would like, Congressman, for you to add a few points as 

we close because I think that there have been several good suggestions and solutions put forward, and we are going to continue to 

work on this issue and present our findings not only to the staff 

here but to staffs on other committees as well because there is 

some urgency about this and we need to push this issue very hard 

through the lame duck, through the beginning of the next Congress 

so we can get something together and out there that would be helpful and supportive. 

I turn it over to David. And thank you all. 

Mr. GILLER. Thank you, Senator. 

One crucial point, and perhaps, Mr. Paul, Mr. David, Mr. Askew 

can speak to, is to clarify why this issue, why the challenge of commercial real estate affects banks across the board. So even healthy, 

profitable, strong banks such as yourselves are dealing with this 

issue as well. I think it is an important issue to clarify. Commercial 

real estate is not an issue for everyone but it is not limited to, let 

us say, weaker banks. I would just like to clarify why this is such 

an issue even for the strong, healthy banks such as yourselves. 

Mr. PAUL. Thank you, David. 

I think the position that Eagle Bank and I think most community banks would have is that most banks in today’s world are substantially concentrated in real estate. Certainly in the Washington 

metropolitan area real estate is not a very popular word. 

The fact of the matter is if I could sit with a piece of real estate 

that has a first trust that nobody could take away from me, that 

is a whole lot more security than receivables or other inventory 

that could disappear very easily. 

The real question in my mind comes down to how we resolve this 

loan to value side so it is not forcing banks to write down a very 

subjective evaluation. I still, as I mentioned in my testimony, am 

a firm believer that for an interim period, consideration should be 

given as to valuations being focused on debt service coverage, as 

Stephen mentioned, as opposed to a very subjective loan to value. 

The issue as it is relates to banks, how it affects banks is that 

clearly a well capitalized bank, if they are forced to write down 

that phantom loss which is again that subjective loss, now all of 

a sudden takes a very well capitalized bank and puts them into a 

potentially much weaker capitalized bank. 

That also, obviously, prohibits the future lending. And as the 

economy gets stronger, it is the community banks that are going 

to get us out of this. With all due respect to a lot of people around 

this table, we are at $2 billion. I define community banks at really 

$10 billion and under. I think those are the banks that are going 

to jumpstart this economy because it is all about jobs. 
20 

And when the restaurant needs that loan, it is going to be a community bank that makes that loan to be able to support their employee growth. 

So I do believe that the 8000 community banks that we have are 

in serious jeopardy even if they are extremely well capitalized if we 

do not focus on this loan value issue. Thank you. 

Mr. GILLER. Mr. Askew. 

Mr. ASKEW. David, I will add to that. I agree with his point but 

I will add to that. If you look at the market right now, it is a trifurcated market in commercial real estate. There are the larger assets that price is actually improving on a little bit right now, albeit 

a little bit. 

Then there is the distressed market which continues to fall. 

Those prices continue to fall. And then you have those assets in the 

small owner-occupied businesses that are just flat, and they are 

holding steady. 

If you look at the large banks, to your question, to your point, 

we have been through those stress tests. We have taken those hits. 

We are in the state of recovery so to speak from the commercial 

real estate side. 

But the issue is jobs. This whole issue with commercial real estate is 12 million jobs. I think it is more than that. This is just 

what we have identified. There is indirect support of jobs in the 

commercial real estate sector. If we do not get the jobs back, then 

we are going to go through this recession slower than we should. 

Those jobs impact all of us. I do not care which bank you are in. 

I do not care how big you are or how small you are, you cannot 

recover, you cannot get stronger unless the job market comes back. 

Mr. GILLER. Dan. 

Mr. SIGHT. Thank you, David. 

Again I am here representing the National Association of Realtors. Most of our realtors are small business oriented and 54 percent of our transactions are a half million dollars are less. So we 

have got two extremes of the market. We have the CMBS and then 

we have what the commercial realtors are doing with NAR. 

Our sales are down 80 percent from 2007, and as a result, 43 

percent of our commercial realtors have not completed a single 

sales transaction this year. 

According to our research at NAR, commercial real estate prices 

have plummeted as much as 45 percent from their peak. Let me 

take us back to Main Street as the Senator said. 

I have a project in Kansas City. It is a small office warehouse 

project. Around $900,000 project, multi-tenant, seven tenants. The 

thing was going great. Did a 20-year amortization, five-year balloon. Went through the five-year balloon. We are looking great. We 

are starting on a short amortization schedule. 

Two years ago crisis hit. So what am I doing as an investor? Just 

as I tell my clients, make a deal. My rents have come down. My 

job as an owner, as a broker as well, put somebody in there. So my 

rents have gone down, my vacancy has gone up. The cap rates that 

the appraisers are coming up with have gone up as well. 

That property has gone down in value, hopefully not as much as 

the 45 percent but arguably somewhere in that range. 
21 

I come back to Mr. Paul or Stephen in two years when my note 

comes due. What are they going to do with me? I have made my 

payments, never missed a payment. My partners and myself are 

well capitalized. What kind of push are you going to be on to renew 

that note. You are going to look at it and go, well, the value is 

down. How do we refinance that, which is a real issue. 

There are a lot of these projects like this all around America. A 

couple of things that NAR has proposed are term extensions so 

that these bankers are not penalized for me extending this loan. 

Let us let the market take care of itself. Let us create some jobs. 

Let us fill up our vacancies. Let us get our rents back up but let 

us renew that note. Let us not take it into my REO property. Let 

us keep it going. So we are a real advocate for term extensions that 

will not penalize our lenders. 

Another thing that we talked about is mortgage insurance for 

loans that are performing. There is an equity gap maybe between 

what they are valued at, what the loan is. Maybe we should look 

at some private mortgage insurance that could be paid for by the 

bank. It could be paid for by the borrower, mostly by the borrower. 

But to ensure that that money is there to keep the market moving 

and going. 

Something else we talked about, jobs. Lawrence Yun, our economist, did a presentation for us in May this year. 2007 everything 

was pretty rosy in commercial real estate. Sales were good. Market 

was good. We were just rolling along. Then when he started overlaying our job losses, it became really clear to me as a simple person what happened to the commercial real estate market. We lost 

jobs, do not have as much demand for office, do not have as much 

demand for retail, do not have as much demand for industrial. We 

really need something in this country to get people back to work 

that will help fill up our spaces and will help stabilize the values 

of commercial real estate. 

Mr. GILLER. Before we move on to the next question, does anyone 

else want to clarify? I think it is an important to clarify why the 

commercial real estate issue is not just a problem for underperforming banks, it affects all banks nationwide even strong, profitable performing banks. 

Mr. ARBURY. I think what we really have gotten into is sort of 

a valuation nightmare. I mean we went from a period prior to the 

bursting of the bubble where the big financial institutions refused 

to recognize that values have dropped and now we have gone the 

other way and now we have got values, whatever appraised values, 

based on the few sales that exist being way under what the discounted cash flow value is of a property. 

And so that leads to liquidity and you will never get jobs back, 

you will never get construction back, for example, multifamily. We 

have got a huge demand looming out there and we will never be 

able to meet it unless we get liquidity back. Valuation is a big 

problem. 

Mr. GILLER. In a minute I want to turn it over to my Republican 

counterparts to ask a few questions but I realize the two of you 

have not had an opportunity to present your opening statements. 

Would you like to do so now? 

Mr. ARBURY. I will do one minute. 
22 

Having been a former Senate staffer, I know not to go too long 

here. The news from multifamily is pretty good. I mean I can see 

growth, the growth being that occupancy is up. The demographics 

are out there. 

But I think that a number of financial institutions have gone 

from being risk managers to be risk-averse, and being risk-averse 

means you probably have to turn down just about every loan that 

comes to you, either forced on you by the regulators or by whatever 

financial position you are in at the time. 

Multifamily is the ultimate small business. 55 percent of apartment properties are owned by individuals. So there is great competition. But without liquidity, and we have got to get through this 

financial crisis, but without more financial liquidity we would just 

not be able to meet the demand going forward that is there because 

the demographics have definitely changed. And multifamily gives 

workers much more flexibility in terms of being able to move 

around the country to find a job as opposed to being stuck where 

they own something. 

I will stop right there. 

Mr. GILLER. I want for a moment to check back in with the Honorable Congressman Minnick to see whether you have any observations or comments on what has been discussed. 

Representative MINNICK. Well, the problems that affect banks of 

all sizes but are particularly acute for our smaller banks all involve 

capital liquidity or concentration or some interconnection of those 

three. And the problem of capital adequacy is exacerbated by declining asset values and that is the big problem when you have 

commercial real estate that is, was at one time worth $5 trillion 

and now is approaching less than $3 trillion. 

It seems to me the solutions on the capital side, there have been 

a lot of good ones that have come out in this forum, include term 

extensions for performing loans without an intermediate writedown even if the asset values are questionable. Acceptance of an 

MPV-based assets as opposed to, valuation as opposed to last distressed sale comps makes a lot of sense. 

The suggestions slightly more controversial in my mind that you 

allow the amortization of recognized losses certainly has merit particularly when it is coincident with a period to raise capital. It is 

easier to raise capital if you do not have to take an immediate 

write-down. 

I think one of the things we have not hit on as hard as we might 

is the problem of pro-cyclical regulation. We have the FDIC. Chairman Frank and I sent a letter to the regulators earlier this year, 

saying let us not use belt and suspenders regulation. Let us enforce. Just because you have had bad experience that does not 

mean you should pile on the pro-cyclical regulation. 

So all of those things affect capital adequacy, and in combination, 

can deal with the shortfall and make it possible to raise capital and 

save half of these 2- or 3000 banks that will be at risk. 

The other questions of the liquidity and concentration are addressed by jumpstarting the CMBS market, and several comments 

have been made that the CMBS market is coming back. But let us 

recognizes it is barely coming back. We are talking about $8 to 10 

billion this year as opposed to $207 billion before the crash, and 
23 

the properties involved are mostly large trophy properties. They 

are not Main Street properties. 

The problem is, I think everybody on this panel has remarked, 

is Main Street creates jobs. And small business relies on the Main 

Street banks for their capital. So if you want the smaller banks to 

have the liquidity, particularly if the regulators says they are over 

concentrated, you need something other than a distressed market 

to provide a way to sell property that they have their loan against 

whether it is performing or nonperforming. 

The bill that I have sponsored would jumpstart the CMBS mar- ket for the smaller properties, hopefully get back to that $2- or 300 

billion worth of capacity that we need to refinance this onslaught 

and do it in a way where the banks can sell it at fair value, not 

distressed value. 

And with respect to concentration, if the FDIC says you should 

be one to one and you are three to one or four to one, this gives 

you a way to reduce your concentration without having to stop, 

with impairing your capital and without having to cease making 

new loans. 

You can sell off the loans to get the proper concentration that the 

regulator specifies and then you can sell somewhere in order to get 

the liquidity to make the next loan. It seems to me in combination 

with all of these things we can, this is a catastrophe that is going 

to happen but it is entirely preventible if we take the right regulatory and legislative steps to do so. 

And I think the ideas coming out of this forum really provide the 

list of things that needs to be done by both regulators and the Congress over the next six to eight months. 

I would like to see it between now and the end of the year. 

Mr. GILLER. Just to follow up on one of those issues, the pro-cyclical nature of regulatory action and Mr. Askew mentioned this 

issue of the October 2009 guidance that all the regulators came out 

with, the prudent commercial loan workout guidance. And before 

your Committee, Chairman Bernanke said, yes, our examiners 

should be following this guidance. They should focus on values or 

cash flows and not values of the collateral. But we are hearing that 

every examiner in the field is sponsoring this. 

I know that you and Chairman Frank have requested a GAO 

study on that issue. If you could just talk a bit more about what 

has motivated that request for GAO study and what you are hearing about the regulators in the field. 

Representative MINNICK. No examiner ever got fired by being too 

tough on a financial institution. They only get a black mark on 

their job evaluation if an institution that they have accessed subsequently fails. 

So there is a natural human interest, when times are tough and 

examiners had a bad experience, to ensure that it does not happen 

on my watch again. So even though the regulators who come before 

congressional committees, both in person and in hearings, and say, 

yes, we are following these regulations. It is not pro-cyclical. We 

have not gotten tougher. That is not the experience that our bankers see the next time the examiners show up. 

So I am from Missouri with respect to whether or not this guidance is in fact. It sounds good when you hear it but on the ground 
24 

the experience is very different. I think that goes through to the 

ability of senior managers and regulators to enforce the idea that 

it is okay to take a few risks as an examiner because you do not 

want to cause ten banks to fail because of your regulatory assessment when, if you had more sensible regulation, one or none would 

fail. And that is the experience and the problem we have on the 

ground. It is ground truthing what we are told in testimony. 

Mr. DAVID. Just to comment, I think Jeffrey made a comment 

about a possible suggestion being writing things down over a period of time. We are dealing with capital appraisals, all of a subjective nature, and it appears time is an enemy. And with using 

things such as giving it time to write things down, use time as an 

ally because the values were here, they are here, they will go back 

up in time. So the more time that we are allowed to write down 

a property, the better the outcome will be because the economy will 

come back. How much time it will take or when that will be is certainly uncertain. 

If we are able to create more jobs, it will come back quicker. 

When that is done, then the total losses get cut substantially. So 

I think we need to find solutions where time is an ally, not an 

enemy. 

Mr. DE BOER. Just a couple quick points. You had asked, David, 

about why should healthy banks be concerned about this as opposed to a bank that is heavily laden with real estate losses or 

something like that. 

It reminds me of a time I sat next to a banker at a dinner and 

asked him how, I said you must be under stress. This was around 

early 2008. He said, oh, no. Life is good. We did not make any 

subprime loans. 

They quickly were under problems a short time later. So it is sort 

of a contagion. If your building next door is exactly the same as the 

building that you are in but it loses tenants and it loses value, you 

are going to lose value as well even if you are well-tenanted. It is 

a very contagious type of situation. 

As far as why are small banks more affected than larger banks, 

we talked about the stress test and so forth, smaller banks, this is 

the life blood for jobs in small business in local communities. 

The banks used to have the flexibility to work with local businesses to make sure that they had the credit to grow and create 

their businesses. A lot of these loans were not what might be called 

extensions, just strict extension of credit. 

I think these gentlemen would say they are an investment in the 

business plan of that borrower and they believe in that person. 

These business plans, because of what is happening in the macro 

economy, because of the loss of jobs and so forth, these business 

plans have now been put on hold. But that is all they have been 

put on in many cases. They have been put on hold. 

What has been suggested here is once you get the economy going 

and you get time, and time is an ally, these business plans will 

come back. I think it was suggested here in an example where, you 

know, you were going to do something and you put it on hold for 

a while. 
25 

This stuff will come back if you have time to allow it to do so. 

So I think some of this flexibility is very very important. It is a systemic problem that has been mentioned. 

I guess I would make one other point about the CMBS market. 

I am a big proponent of the CMBS market. I think it is a very important source of capital for commercial real estate and for the 

economy. 

I also do not believe that a lot of the small business loans are 

necessarily securitizeable or securitized loans. These are loans that, 

small business loans are more made on transitional assets. Again 

you are starting your business. You are starting to grow. You have 

not tenanted up your building yet and you need financing to get 

through. 

The securitized loans by and large are made on stabilized assets. 

They are made by the money center banks. They are made by life 

companies, the securitized lenders. They have a very important 

role to play but it is not this role. I think that is an important 

thing to just note for you, David. 

Mr. GILLER. I appreciate that. Just one quick one before you go 

on. 

For the purposes of this conversation, I think it is important to 

highlight the crucial role that the CMBS market does play for providing liquidity to the commercial real estate market. In general 

but again from our perspective for the Small Business Committee, 

for small business lending, yes, peripherally small business lending 

is affected by the CMBS market but really we are primarily focusing on the non-securitizeable loans, a couple hundred thousand dollars, a couple million dollars, 10, 15 million which, to your point, 

are not directly affected by the CMBS market. 

Mr. SIGHT. A couple of other things I wanted to mention. Yesterday I was at a lunch at a regional bank in Kansas City. They had 

their economist there and I met a gentleman who had a small manufacturing, not so small, 300 employees, growing the business. 

They make decals and all sorts of fun bumper stickers and things 

like that. 

I mentioned to him that I was coming up here. I said, how is 

your business? He goes it is good, and I go, well, are you hiring 

anybody? He goes, no. I said, do you plan to? He said not until I 

know what the playing field is. 

So I talked to him. I talked to other business owners. What are 

my health care costs going to be? Do not know what they are going 

to be. So I am worried about that. I am worried about government 

regulation. I do not know what the playing field is. I am not going 

to make business decisions on growing my company until I know 

where it is. 

That is one thing I wanted to make you all aware of. The other 

thing I wanted to mention is something that is very disturbing to 

myself and the National Association of Realtors of the change in 

FASB laws on lease accounting. 

I am sure you have looked at it and researched it. We cannot 

really find anything that is going to be very helpful to commercial 

real estate in that proposal. I know that is not something that the 

Senate can regulate or do a whole lot about. But I am really concerned about that issue about putting leases on balance sheets. 
26 

For my banker that I talk to about that he said that is great. 

We are going to put it on there as a liability. The lease then becomes an asset but in reality is it an asset? They are going to discount that asset. So it is going to muck up, if you will, a business 

owner’s financial statement. It is not good for commercial real estate in an already down situation. 

Mr. LUCAS. Thank you very much. Unfortunately Senator Snowe 

cannot make it today due to another commitment, but she is very 

engaged on the issue, extremely concerned, and thanks all of you 

for coming. 

One thing that really stuck in my head was something that Mr. 

David said when he talked about appraisers and how they are 

scared of their own shadow. I think we have a situation, and Congressman Minnick touched on it a little bit, where we have an 

issue with regulation and maybe over regulation. 

Is there something we can do to steel their spines when it comes 

to appraisals to prevent this sort of thing from occurring? Is that 

part of the solution you see to the problem in commercial real estate? 

Mr. PAUL. I am a firm believer for an interim period of time appraisers, if in fact that is going to be the gold standard, that the 

appraiser should be required to work off of the debt service coverage and not true valuation. 

What we are consistently hearing around this table is that the 

property that was valued at a million dollars and the cash flow is 

the exact same today as it was five years ago, there is no reason 

that an appraiser because there was a problem with the building 

next door should all of a sudden discount that the $600,000. 

It goes back to David’s earlier comment that when it goes from 

a million to 600,000, and that bank has to write off that 400,000, 

clearly that has an impact on what it is going to be able to do in 

the future in terms of additional lending. 

So by far, the debt service coverage should be the governing rule 

for a certain period of time, as Stephen says, to give us the opportunity of time to get through this crisis. Thank you. 

Ms. MCWILLIAMS. Would you recommend this be done only for 

performing loans that so far the debt to service coverage would be 

sufficient to cover the monthly loan payments? 

Mr. PAUL. Yes. I believe that if you can look at a performing 

building and accept the fact that there is no expected dramatic 

change in that cash flow so in other words you do not have a major 

tenant coming up for renewal in three months that if it can be 

demonstrated that that cash flow is projected to continue in the 

foreseeable future or certainly during this moratorium period that 

it be considered a performing asset and that would go, even current 

loans that are in the nonperforming standard should be reevaluated to be able to move to a performing standard. 

Mr. DAVID. I think another issue, and we just finished a safety 

and soundness exam, and what I am seeing in the field and hearing from other bankers also is, and one of the things that Dan alluded to, is when you try to reschedule the loan if it had been on 

a 15-year pay out, because income or rents are down, that you may 

want to go to a 20-year. Or if you allowed him to pay an interestonly payment, what we are seeing from the examiners is that has 
27 

immediately become a substandard loan whether the values are 

there or not. 

And so that is an issue that I just went through. I mean we literally finished a week ago with an FDIC safety and soundness 

exam. So that is an issue that needs to be addressed. 

Ms. MCWILLIAMS. If I can follow up on the question of bank examiners and the Federal regulations. From most parties that we 

spoke with, we heard that the 2009 guidance was actually very 

helpful and useful in this process, but the issue is that examiners 

on the ground are not following the guidance to a ‘‘T’’ for a number 

of reasons, as Representative Minnick outlined. 

Apparently what we are hearing is that the appraisals are playing a huge role in the inability of banks to refinance these loans, 

followed by the strict bank examining procedures on an ongoing 

basis. If the bank examiners were to follow the guidance to a ‘‘T’’, 

what portion or percentage of the problem would be eliminated? 

Mr. PAUL. A major, major, major part of the problem. We stress 

test our real estate portfolios by, on a quarterly basis, increasing 

our interest rates by 200 basis points and decreasing our rental income by 10 percent. And with that stress test, 90 percent of our 

portfolio continues to perform as negotiated in the loan documents. 

I wish that the regulators focused on that stress test as opposed 

to requiring appraisals to be done on a regular basis. The stress 

test in my mind is indicative of where the project is going in the 

future and, therefore, I should not be required to write down a loan 

if, in fact, the debt service coverage is being maintained and that 

stress test confirms that it will continue to be maintained. 

Mr. GILLER. Just on that issue I feel like we would be remiss if 

we did not quote Chairman Bernanke, who, in front of the House 

Financial Services Committee, the semi-annual monetary policy address to Congress, February 24th of this year, he stated, ‘‘We have 

issued guidance in commercial real estate which gives a number of 

ways of helping, for example, instructing banks to try to restructure troubled commercial real estate loans and making the point 

that commercial real estate loans should not be marked down because the collateral value has declined.’’ 

And this is the key line here. 

Quote, ‘‘It depends on the income from the property, not the collateral value.’’ 

This is precisely the issues you were talking about. It is precisely 

the issue that Chairman Bernanke refers to in the October 30th, 

2009 guidance. And for whatever reason, as Congressman Minnick 

has suggested, there is no consistent implementation of this guidance. 

Is anyone hearing that there is consistent implementation of this 

guidance on the ground? 

[Pause.] 

Okay. That is a fairly universally accepted truth. 

Mr. ASKEW. David, you may expand that to say, is there any consistent interpretation of the guidance, and that is what is lacking. 

They interpret it different ways. That is the problem. 

Mr. DE BOER. Bill, that is an interesting point in the sense of 

what this group might able to be assisting here is to underscore the 

thoughts and give more flesh, if you will, to the guidance so that 
28 

the examiners feel a more compelling case in what they are supposed to really do. It is a little murky. Although we think that language is clear, I think they have room for interpretation, and perhaps some underscoring or sharpening of that, polishing might be 

useful. 

Mr. PAUL. I think we all discussed the regulatory side of this and 

how the regulators are not following the quote that you just gave. 

But I believe going back to your point earlier, David, is that we 

really need to drill down to the small businesses and understand 

exactly what impact the current banking issue is with regard to 

small businesses. 

There is a chart that I hope everybody could read that looks at 

the loan to deposit ratio. On a national basis, we are at an 85 percent loan to deposit ratio. And for those bankers that have been 

around for a long time, that was pretty much the norm 20 years 

ago. That is where you wanted to be. 

If you look at the strong markets, you will see that Washington, 

D.C., as an example is 96 percent. So when the markets come back 

in the other areas, we are going to get back to that 96 percent area. 

In my opinion, from a regulatory perspective, that is not the 

place that anybody wants to be. I think it is not anecdotal that 

what Jim was talking about earlier that the strongest market is 

multifamily, and multifamily is as strong as it is because there is 

a place currently to be able to place that debt. If that disappears, 

that is going to be a major, major problem on the multifamily side. 

And I think what we are talking about is how do we find that same 

opportunity to create liquidity within the smaller size of loans, not 

only in the real estate side but on the overall business side. 

Mr. GILLER. Just to follow up on that and to steer it really back 

to this issue of small business lending, there are some numbers on 

the bank concentrations that I would just like to read. 

This issue does have a kind of disproportionate effect on the 

small banks and on small businesses. Dennis Lockhart, president 

of the Atlanta Fed, has spoken about this. You have got roughly 

4000 banks between a $100 million in assets to $10 billion. This 

community bank, not including under $100 million, and again this 

is out of about 7800 banks nationally. 

So on average these 4000 banks are considered by the regulators 

as being commercial real estate concentrated, which means that 

their commercial real estate holdings are about 300 percent, as you 

know, of tier one capital. 

Unfortunately for the small businesses, these 4000 or so banks 

with the high real estate concentrations also provide proportionally 

higher amounts of small business lending, so about 40 percent of 

small business lending in the country is through these smaller 

banks, the community banks. 

So just to focus the issue and kind of highlight why this is such 

a big issue, what happens to small business lending if these 4000 

community banks suffer in the next three years? I would like to get 

your sense of what the worst-case scenario is, best case scenario is, 

how many bank failures we are talking about, will this lead theoretically to a double dip recession, is it not that severe? 
29 

Just get your take generally in context, putting this in the context of greater kind of the financial crisis, how serious this issue 

is specifically for the small business owners. 

[Pause.] 

Mr. PAUL. I guess I win by default. 

I think the answer to that is that if, as we all sit around this 

table, is that it is clearly the small businesses that are going to 

jumpstart the economy and supply the funds to be able to build 

employment and growth. 

The concern that I have is whether it is a liquidity issue or it 

is a write down of capital because of the commercial real estate 

valuation side. It will impair the opportunities for us to make those 

loans to the restaurant or the manufacturer or whatever the case 

might be to when the economy comes back. 

I believe what will happen is that you are effectively tying both 

hands behind the economy’s back because if you do believe that it 

is the community banks that will provide that source of funding to 

allow the economy to grow but at the same time you are hitting 

the capital side, not providing the liquidity, how do you expect, in 

fact, that liquidity to go back into the small businesses. 

So I think it is a very dicey, risky position that we are in right 

now if we do not address my two biggest concerns being liquidity 

and valuations. 

Mr. GILLER. Thank you. I want to turn to Mr. Askew to get the 

Financial Services Roundtable perspective specifically on this issue 

of liquidity, scope of this problem, and what your folks are thinking 

about the issue. 

Mr. ASKEW. Okay. Clearly commercial real estate is a bigger 

issue in the smaller banks. That is a true statement. I want to go 

back to something that Jeffrey said about this CMBS that I want 

to kind of caution everybody about. 

Remember where the majority of your small business loans are 

still made. They are made in the larger banks. And remember 

where half of your commercial real estate is in those larger banks, 

or maybe a little bit higher. 

But the fact is when a CMBS, the way a commercial real estate 

property works, back to the idea of your property is performing and 

you have got your rents paying the cash flow, the property is cashflowing, if the property across town or in the same area or even 

close goes dark, what happens is it is a downward spiral because 

what they wind up doing is opening that up at half the rates of the 

other property. 

And so you wind up with bringing down, the leases move out of 

one property and they move into another, and it is a process where 

we all have to be in this together. 

We have to get this entire commercial real estate market well. 

I do not care which property type because we are in those same 

markets that the community, our community banks are in those 

markets. They are a third or a fourth or higher of that market so 

they are part of those local markets too. 

But the point about the economy, I do not think it is going to 

cause a double dip recession. I think Ben Bernanke and Tim 

Geithner and our people who are leading that have said they are 

not going to have special commercial real estate policy. They are 
30 

too smart that they are going to allow this to double dip this economy. They know a lot more than I do about it. 

But I do believe it is going to be a drag on the economy. I do believe that chart you had put up there shows what a drag it is going 

to be. If you let interest rates go up, right now interest rates are 

an all-time low. That is what is keeping, that is why the commercial real estate market is doing as well as it is and that is why you 

saw some improvement in prices earlier in the year. It is because 

of interest rates. 

But if those interest rates were to go up dramatically, then you 

would have a different story. It is going to be a drag on the economy but most important it is going to be a drag on jobs, David. 

And I am talking about jobs, not just jobs to fix the CRE. I am 

talking about jobs related to the CRE, jobs related to servicing commercial properties, jobs related to apartment buildings, jobs related 

to hotels. Those are the 12 million jobs I am talking about. 

So if that begins to answer your question. I think it is an issue 

for all of us to deal with. 

Mr. GILLER. I would love to assume that the Small Business 

Committee and the Senate have jurisdiction over monetary policy 

but no one in Congress does. Thank you. 

Mr. LUCAS. I do think that is a great point and it is very sad and 

tragic that we do not have jurisdiction over that but it helps inform 

us in terms of the policies we look to craft. 

So I just wanted to ask, Mr. Innaurato, as you are looking at rating the CMBS market generally speaking, are you looking at that 

as something that is a concern? If it does occur, which it looks like 

it might, what sort of damage could that do? And if anybody else 

generally wants to speak on that. 

Mr. INNAURATO. One of the problems that we see very easily, you 

have a performing loan. Let us say it has a debt service coverage 

ratio above 1.2, occupancy 85–90 percent. It has been cash flowing. 

Loses one of its tenants. Finds out that the tenant is gone because, 

as was described, the tenant went around the corner to a vacant 

property and got half the rent. 

The next thing you know there are co-tenancy clauses within the 

structure of the leasing, and more of the property goes downhill, 

and now within a six-month time frame, you had a property that 

was performing for the last five years is now underperforming. 

And because it originated in a lower cap rate environment, from 

a valuation standpoint based on even stabilized income, you had 

concerns about the value. Now you have substantial concerns about 

the value. 

I think overall from our perspective we have a delicate balance 

in trying to be conservative but not overly conservative because we 

are seeing transactions occur not only for distressed properties but 

willingness for your more savvy investors to step in and say we see 

the upside in this particular property, in this particular market 

and do not believe in the valuations that are being published for 

these properties today. 

Because of that, you are seeing what you would think would be 

unheard of cap rates being reported on some of the transactions. 

Properties changing hands as low as 3 to 4 percent on today’s in-
31 

come which is distressed but with the upside of growing in a more 

stabilized market. 

So from a ratings perspective, we are trying to say, for lack of 

a better term, stabilized, how we are approaching the nonperforming assets versus the assets that are really kind of on the edge 

because, in theory, anything that was originated from 2001 to 2008 

at a 6 percent cap rate even performing today, if I value it at an 

8 or 9 percent cap rate, you go from a 70 percent loan to value to 

over 100. 

So, in theory, if you were doing it just for book purposes you 

have a loss on every property that was originated during the peak 

of the market. 

I am speaking in generalities. One of the pieces of my testimony 

that I did not get a chance really to focus on I think that affects 

all the banks, whether of large scale or small scale, is the 

warehousing risk for a bank. 

Many of the small community banks that were available to do refinancing for loans that were coming out of CMBS or loans that 

had amortized over time or through relationship lending, granting 

an easy extension, the fear today is that, from a warehousing perspective, if I grant these terms today and something in my market 

a week later, a month later, causes an appraiser to come in and 

now say, well, you valued the asset here. We are now hitting at another 10 to 20 percent. None of the banks want to take on that 

risk. 

That is slowing down the resurgence in the CMBS market because of the warehousing risk of originating loans and not having 

the ability to immediately put them into a new securitization. 

Many of the deals that we have even looked at this year from a 

new issuance standpoint, that has been an issue. The investment 

banks do not want to sit and hold these loans for a long period of 

time because historically they have been used to originating them, 

putting them together, putting them into a CMBS. Move on to the 

next transaction. 

And I think for the community banks where more of that relationship lending went on, I think the fear is that we want to do 

more business but what is the impact a month from now, six 

months from now if, in this market, I do not have the liquidity I 

need to support your loan or I do not have the flexibility based on 

the limitations that are being presented to me to do so. 

So I kind of talked in a little bit of a circle to try and address 

all of them. From a pure ratings perspective on new issuance 

CMBS for us it really comes down to quality of underwriting. 

The aggressive lending that was prevalent during the peak of the 

market and the aggressive underwriting per se on what was 

termed pro forma loans, loans that you hoped would generate levels 

of cash flow through new tenancy there is no existence of that 

today. 

So unless you are bringing loans to the markets that are very 

stable and have shown low leverage, high tenancy, it is very hard 

to securitize today’s market. 

We are hoping that as we go into next year that the momentum 

that is starting to build will continue to grow and we will see more 

traditional conduits. 
32 

Ms. MCWILLIAMS. If I can just follow up on something you said 

and you repeated it from an earlier statement—that a number of 

these loans were based on very aggressive underwriting standards. 

Some of them should not have been made. 

The underwriting on commercial real estate loans is not as bad 

as on residential real estate and subprime, and we recognize that, 

but do you have any indication or data to support a statement that 

a certain percentage of these loans should be allowed to fail or default because they were not properly underwritten? 

Mr. INNAURATO. I do not have statistics to back up that statement per se. Oftentimes even our investor clients have been unable 

to identify throughout the legacy CMBS deal which loans were considered pro forma underwriting versus traditional underwriting. 

What we have tried to do in house is look at the loans that, say, 

for a period of time, say from 2004 to 2006, if this level of cash flow 

was consistent, and this level of performance was consistent, why, 

as part of the underwriting, did you expect it to go up 20 percent, 

and then why did you lend at that time, at 20 percent higher level 

expecting the growth? 

When the markets collapsed, as I alluded to a little bit, those 70 

percent loan to value immediately, almost overnight, became 100 

percent loan to value loans. So in this market, in my opinion, if 

more stabilization was presented to community banks and to larger 

banks and larger institutions to not be fearful that loans that are 

generating enough cash flow to cover their in-place debt service 

and in-place interest rates, especially with the support of a lower 

interest rate environment, if there was not that fear that they may 

be taking on a loan that could be requesting a modification or debt 

relief in the near-term, you would see more lending, you would see 

more securitization because if you attend any of the industry conferences that we are a part of, there is a lot of money still sitting 

on the sidelines from an investment standpoint that wants the 

CMBS market to return, maybe not to the levels we saw during the 

peak because we might not have to get to that level if the community banks can pick up the slack on the refinancing that is due to 

come. 

Ms. MCWILLIAMS. If I can just ask you one more question, what 

would represent a healthy CMBS market in your view? 

Mr. INNAURATO. A healthy CMBS market would probably be closer to what we saw from, say, 2001, pre 9/11 2001 through, say, 

2003 and 2004. They were averaging probably $50 to $75 billion 

issuance per year. 

It really was not until we got into 2005 through mid 2008 that 

you saw the lending get to such an aggressive standpoint that 

every month even for my business as it was, at the time again focusing on small business, we were a 35, 40 person shop and every 

day a new CMBS transaction was coming to market, that our investor clients were coming to us and saying, break down the real 

estate, tell me what is going on. 

But for a large period of time because the markets were good not 

everyone was concerned about the underlying real estate and the 

performance. As the market turned and more loans got into distress, a typical conduit loan or conduit deal of 150 to 200 loans, 

anywhere from $3 to $5 billion, if you start saying that 40 to 50 
33 

percent of that transaction is now in distress, the volume of work 

definitely picked up. 

I think that from a stabilized standpoint, our hope is to optimistically get to the level that we saw in the early 2000s. 

Mr. PAUL. One additional comment I want to make on that is 

many of the CMBS loans that were made were also made at incredibly low interest rates. So at some point at the peak of the market 

in 2006, 2007, it was not unusual to be able to get a 10-year CMBS 

loan at 80, 90 basis point over 10-year treasuries. 

I do not think anybody sitting around this table would make that 

type of a loan at the interest rate at this point. So should rates go 

up as somebody was mentioning earlier, when that loan does become up for renewal, there is a significant sensitivity that we have 

to look at because of the difference in the current interest rate environment versus what it was underwritten at. 

Ms. MCWILLIAMS. Would you say then that an improvement in 

the CMBS market would help even the community banks that keep 

the loans in their portfolio? 

Mr. PAUL. I could speak to Eagle Bank. Eagle Bank has an average commercial real estate loan of $1,312,000. That average loan 

is obviously not going to be a CMBS participant. So I go back to 

the two points. 

Obviously as we have grown, the loan requests that we had have 

gotten larger but I do not think that it is going to be those trophytype projects that are going to be brought to a community bank. 

They are not going to be the type of projects that, Dan, you mentioned earlier. It is a warehouse, we have some issues, can you help 

me, those are the type of projects that are going to be brought to 

a community bank. It is not the trophy projects that will go to the 

CMBS side. 

Mr. INNAURATO. Just for clarification, the majority of CMBS 

loans are under $10 million that are on the books today, and so not 

to confuse that all CMBS loans are large or huge loans. They are 

under $10 million, so just for clarity. 

Mr. DAVID. I think it is important to remember from a community banking standpoint, we are talking about CRE, by definition 

CRE, things that qualify. But I think it is real estate in general. 

A lot of the loans that the banking industry makes to its businesses are not CRE loans. 

When we talk about regulation and we talk about appraisals and 

all of those things and we talk about job creation, those are the 

issues that I face. Buying loan portfolios secured by real estate is 

probably close to 90 percent but maybe 40 percent of it is true commercial real estate. The other ones maybe a loan to a local grocer. 

That building and the property is the collateral but it is not a commercial real estate loan from a regulatory standpoint. 

I think it is important that we keep in mind that it is all real 

estate. For a lot of them it is their home that they may own, and 

that is what I will use as collateral to do the business. That is 

where the job creation comes from. It is not just commercial real 

estate but real estate in general. 

Mr. GILLER. And we are hearing that there is some confusion 

from a regulatory perspective on specifically those types of loans, 
34 

loans secured by commercial real estate but really it is a working 

capital loan. 

So it is not a real CRE loan but there is some confusion among 

the regulators who are classifying this as CRE. 

Mr. DAVID. That is happening because they gleaned their numbers straight from the call reports that are filed with the FDIC. 

They are looking and saying everything on that line item is commercial real estate so they are doing their formulas accordingly as 

that divided by the capital. If you are exceeding 300 percent or not, 

but not everything that is listed on that line is, by definition, commercial real estate. It is real estate to a commercial borrower. 

Mr. GILLER. Thank you. Just to wrap it up, we understand we 

have been discussing several issues. The main issue seems to be 

this valuation nightmare. There is downward pressure from the 

regulatory environment, downward pressure also from appraisers. 

Related to it or even a separate issue, there is this issue of liquidity for the smaller banks. That ties into the CMBS market. I 

guess an open question is for the smaller banks how directly they 

are impacted by the CMBS market, and if folks have final thoughts 

that you would like to leave us with, we can go around, and also 

we are going to be leaving the record open for about a week. If 

there are additional written statements or pieces of information or 

data that you would like to submit, it will be left open for another 

week. 

If there are folks who would like to leave us with some parting 

words of wisdom that we should bear in mind as we tried to address this. 

Mr. DE BOER. David, there were a lot of terrific points and this 

is a great discussion to have. It is very circular, is it not? I mean, 

it is jobs, values, credit, growth, jobs, and instead of focusing on 

any one of those, you have to focus on all of them. 

We have talked about the need to get jobs all across the economy, not just for community banks or for small businesses but for 

the macro economy. It is all interrelated. 

Your question about, you know, does the CMBS market directly 

benefit smaller banks? Maybe it does not but just like a healthy 

building is infected by an unhealthy building next door so to speak, 

if we can create more credit for the overall commercial real estate 

marketplace even with those assets that are CMBS quality but 

may not be of the size that Mr. Paul is doing, that will help the 

whole system. 

It is that whole circle that I think you need to think in terms 

of. How do we expand credit availability across the board and encourage entrepreneurship? How do we encourage jobs across the 

board? How do we work on this value issue across the board? 

Value is an interesting thing. We are talking about depressed 

values in this conversation but the reality is, as Frank mentioned, 

in parts of the marketplace there are almost irrational high values 

because there is a shortage of quality assets that are coming onto 

the marketplace in strong gateway type cities that are well leased. 

When those assets come on the marketplace, you have got this 

tremendous amount of capital waiting to play, and so they bid up 

the price, bid down to cap rate, and so we have this bifurcation 

that is going on that we talked a little bit back there. 
35 

Again there are no conclusions but I think this is a really good 

forum to get a discussion and maybe you have come up with some 

ideas that will help all of us. 

Mr. ASKEW. David, if I could just add that with that circular idea 

in mind which I agree with 100 percent, I will submit our white 

paper paperwork which I have given to you for the record because 

we did spend the last year with the trade organizations focused on 

commercial real estate builders and investors and banks and insurance companies and we did come up with 51 recommendations. 

This circle is going to take a lot of issues. I think we have covered, 

and I do not mean to sound like we have the answer to everything, 

but we did cover most of the issues that were discussed in this 

room today. So I will submit that for your gleaning and looking at, 

consideration. 

Mr. PAUL. Just as a last comment also, I truly appreciate the opportunity to do this. I think there has been a lot of great discussions. 

Bill, I hope that we can all get copies of that white paper because 

I think it would be very interesting. 

Just as a final comment, obviously I am a huge proponent of 

community banking and believe in the tremendous need of community banking. And my biggest concern right now is that if we do 

not react very quickly to the points that have been made today, I 

see a tremendous amount of transfer of wealth going from the community organizations, the strong community people that support 

the community and being shifted back into Wall Street. 

And I see if foreclosures continue with the huge 96 percent that 

you mentioned on the increase of the delinquencies and requests 

for the structuring of the CMBS market, if there is something that 

is not dramatically done, you will have a transfer of wealth back 

to Wall Street which is, I think, exactly where we started from 

which we are desperately trying to avoid reoccurring. 

I say that we have a limited period of time in order to address 

these issues and hopefully the community banking world can participate in helping that but not under the current circumstances. 

And again I thank you for the opportunity. 

Mr. ARBURY. I think if we stay in a risk-averse mode for much 

longer which I understand why we are there because of not being 

reasonable risk managers going into the bubble and through the 

bubble, it will be a long time coming out of this and what Ron just 

said will probably occur. But we have got to get back to reasonable 

risk management and away from being totally risk-averse which 

are two totally different things. 

Mr. SIGHT. Just to finish up, I think from a lender’s standpoint, 

from a borrower’s standpoint, from a realtor’s standpoint, from tenants’ standpoints, business standpoints, what would really help all 

of us is confidence from the government, confidence that the U.S. 

is still working, the world is still spinning, this is still a fantastic 

country to be in and to start a business, and we need that confidence from our leaders so that people are willing to go out and 

risk and to start new companies, to grow their companies, and that 

would, I think, really help all of us in this country. 

So thank you. 
36 

Mr. GILLER. Thank you all for participating. I know it is a weekday and so thank you so much for your time. 

We look forward to continuing to work with all of you and to continuing this conversation as new ideas or other thoughts come to 

you. We would like to talk about next steps on how now do we get 

around this problem. 

Thank you very much. 

[Whereupon, at 12:19 p.m., the roundtable was adjourned.] 
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