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COMMERCIAL REAL ESTATE: A CHICAGO 

PERSPECTIVE ON CURRENT MARKET 

CHALLENGES AND POSSIBLE RESPONSES 

FIELD HEARING 

BEFORE THE

SUBCOMMITTEE ON 

OVERSIGHT AND INVESTIGATIONS 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

MAY 17, 2010 

Printed for the use of the Committee on Financial Services 

Serial No. 111–136 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

CHARLES WILSON, Ohio 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

BILL FOSTER, Illinois 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

TRAVIS CHILDERS, Mississippi 

WALT MINNICK, Idaho 

JOHN ADLER, New Jersey 

MARY JO KILROY, Ohio 

STEVE DRIEHAUS, Ohio 

SUZANNE KOSMAS, Florida 

ALAN GRAYSON, Florida 

JIM HIMES, Connecticut 

GARY PETERS, Michigan 

DAN MAFFEI, New York 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

BILL POSEY, Florida 

LYNN JENKINS, Kansas 

CHRISTOPHER LEE, New York 

ERIK PAULSEN, Minnesota 

LEONARD LANCE, New Jersey 

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III) 

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

DENNIS MOORE, Kansas, Chairman 

STEPHEN F. LYNCH, Massachusetts 

RON KLEIN, Florida 

JACKIE SPEIER, California 

GWEN MOORE, Wisconsin 

JOHN ADLER, New Jersey 

MARY JO KILROY, Ohio 

STEVE DRIEHAUS, Ohio 

ALAN GRAYSON, Florida 

JUDY BIGGERT, Illinois 

PATRICK T. MCHENRY, North Carolina 

RON PAUL, Texas 

MICHELE BACHMANN, Minnesota 

CHRISTOPHER LEE, New York 

ERIK PAULSEN, Minnesota 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

May 17, 2010 ..................................................................................................... 1 

Appendix: 

May 17, 2010 ..................................................................................................... 55 

WITNESSES 

MONDAY, MAY 17, 2010 

Askew, William E., Senior Policy Advisor, The Financial Services Roundtable 9 

Born, Kent, Senior Managing Director, PPM America, on behalf of the CRE 

Finance Council .................................................................................................... 42 

Borzak, Peter, Principal, Pine Tree Commercial Realty, on behalf of the 

International Council of Shopping Centers ........................................................ 7 

Cohen, Bruce R., CEO, Wrightwood Capital, on behalf of the Real Estate 

Roundtable ............................................................................................................ 44 

Cosenza, G. Joseph, Vice Chairman and Director of the Inland Real Estate 

Group, Inc., and President, Inland Real Estate Acquisitions, Inc., on behalf 

of the National Association of Realtors and the Illinois Association of Realtors ........................................................................................................................ 8 

Dubberly, Paula, Associate Director, Division of Corporation Finance, U.S. 

Securities and Exchange Commission ................................................................ 39 

Hough, Thomas W., CEO and Chairman, Carrollton Bank, on behalf of the 

Illinois Bankers Association ................................................................................ 11 

Lemieux, Cathy, Senior Vice President, Federal Reserve Bank of Chicago ....... 28 

Lowe, M. Anthony, Regional Director, Division of Supervision and Consumer 

Protection, Chicago Regional Office, Federal Deposit Insurance Corporation 25 

McKee, Daniel T., Central Regional Director, Office of Thrift Supervision ........ 27 

Ohlendorf, Greg M., President and CEO, First Community Bank and Trust, 

on behalf of the Independent Community Bankers of America and the 

Community Bankers Association of Illinois ....................................................... 12 

Otto, Bert A., Deputy Comptroller, Central District, Office of the Comptroller 

of the Currency ..................................................................................................... 26 

Sellers, Leslie, President, Appraisal Institute ...................................................... 41 

Stoklosa, Kevin, Assistant Technical Director, Financial Accounting Standards Board ............................................................................................................ 40 

APPENDIX 

Prepared statements: 

Askew, William E. ............................................................................................ 56 

Born, Kent ......................................................................................................... 65 

Borzak, Peter .................................................................................................... 79 

Cohen, Bruce R. ................................................................................................ 85 

Cosenza, G. Joseph ........................................................................................... 97 

Dubberly, Paula ................................................................................................ 105 

Hough, Thomas W. ........................................................................................... 118 

Lemieux, Cathy ................................................................................................. 122 

Lowe, M. Anthony ............................................................................................ 136 

McKee, Daniel T. .............................................................................................. 153 

Ohlendorf, Greg M. ........................................................................................... 158 

Otto, Bert A. ...................................................................................................... 172 

Sellers, Leslie .................................................................................................... 184 

Stoklosa, Kevin ................................................................................................. 193 

Page

VI 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Moore, Hon. Dennis: 

Written responses to questions submitted to Cathy Lemieux ...................... 197 

(1) 

COMMERCIAL REAL ESTATE: A CHICAGO 

PERSPECTIVE ON CURRENT MARKET 

CHALLENGES AND POSSIBLE RESPONSES 

Monday, May 17, 2010 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON OVERSIGHT

AND INVESTIGATIONS, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 1 p.m., in room 

2525, Dirksen Federal Courthouse, 219 South Dearborn Street, 

Chicago, Illinois, Hon. Dennis Moore [chairman of the subcommittee] presiding. 

Members present: Representatives Moore and Biggert. 

Also present: Representatives Bean, Foster, and Gutierrez. 

Chairman MOORE OF KANSAS. Everybody is here so we’re going 

to start a little bit early, just a couple of minutes early. 

This field hearing of the Subcommittee on Oversight and Investigations of the House Financial Services Committee will come to 

order. 

Our hearing today is entitled, ‘‘Commercial Real Estate: A Chicago Perspective on Current Market Challenges and Possible Responses.’’ This is our 13th O&I hearing this Congress and our third 

field hearing. 

Before we begin with opening statements, I want to take a moment of personal privilege to first thank Ranking Member Judy 

Biggert for asking that we come to Chicago to focus on this important issue of commercial real estate. Thank you very much, Judy. 

Congress can learn more about the particular issues or challenges when we get out of Washington and hear directly from local 

business leaders, financial institutions, and regulators on the 

ground as we will today. 

I also want to thank Ranking Member Biggert and Full Committee Ranking Member Spencer Bachus’ staff, Nicole Austin and 

Jason Goggins, for their good efforts and for working closely with 

my staff, not only on this field hearing, but on all of the O&I hearings we have held to date. 

And I want to thank the people of Chicago for welcoming us, especially Chief Judge James F. Holderman of the Northern District 

of Illinois for letting us borrow his courtroom this afternoon. 

We will begin this hearing with members’ opening statements, 

up to 10 minutes per side, and then we will hear testimony from 

our witnesses for each witness panel. Members will have up to 5 

2 

minutes to question our witnesses. The Chair advises our witnesses 

to please keep your opening statements to 3 minutes to keep things 

moving so we can get to members’ questions. Also, any unanswered 

questions can always be followed up in writing for the record. 

Without objection, all members’ opening statements will be made 

a part of the record, and I want to recognize myself for an opening 

statement. 

Commercial real estate continues to be an area of deep concern 

as we work to support a strong economic recovery, not only in Chicago, but throughout our country. The Congressional Oversight 

Panel’s February report received a lot of attention as they wrote, 

‘‘between 2010 and 2014, about $1.4 trillion in commercial real estate loans will reach the end of their terms. Nearly half are at 

present ‘underwater.’ Commercial property values have fallen more 

than 40 percent since the beginning of 2007. A significant wave of 

commercial mortgage defaults would trigger economic damage that 

could touch the lives of nearly every American.’’ 

We must look at this problem from all angles. Lending 

securitization, asset valuation, regulation, and so on, and so I look 

forward to the observations that our witnesses will share with us 

today. 

I now recognize for 5 minutes the ranking member of the subcommittee, my colleague representing the 13th District of Illinois, 

Ranking Member Judy Biggert. 

Mrs. BIGGERT. Chairman Moore, thank you, and welcome to Chicago. Last September, I asked Chairman Frank, our Financial 

Services Chairman to hold a hearing on commercial real estate. 

Chairman Moore, thank you for scheduling this important hearing and for coming here to Chicago to chair it. And I thank my Illinois colleagues—Representatives Gutierrez, Bean, and Foster—for 

joining us. I also want to thank Chief Judge Holderman as well as 

his staff, for kindly allowing us to use this courtroom today. And 

I thank many of our local witnesses for sharing their expertise with 

us. 

I’m very disappointed that the Department of the Treasury could 

not spare even one staff member to testify on such an important 

topic, but we’ll move on. And we’re here to address an increasingly 

problematic sector over our economy—that is the commercial real 

estate market or CRE market. Chicago is home to key leaders in 

all aspects of commercial real estate, including acquisitions, appraisals, mortgage lending, and securitization, to name a few. 

In 2009, we lost more jobs here than in any other metropolitan 

region in the country. This March, unemployment in Illinois increased to 11.5, percent which is above the national average of 9.9 

percent in April. 

With businesses downsizing or shutting their doors, and workers 

being laid off, taxes increasing, and regulatory and market uncertainty on the rise, we can anticipate additional residential foreclosures, followed by commercial building vacancies. 

During the first quarter of 2010, CRE mortgage delinquencies in 

Chicago exceeded the national average, rising to 6.7 percent. Illinois banks continue to fail; last Friday, it was Midwest Bank and 

Trust Company. Last month, seven banks went under, including 

our own State Treasurer’s family bank. Excessive concentrations in 

3 

certain types of risky commercial real estate loans and even loans 

to criminals played a role. Where were the regulators? 

We must address the causes of the turmoil in the CRE market 

and remove barriers to market recovery. Will we need an Act of 

Congress? Regulatory action? What about ideas that voluntarily 

can be implemented by market participants? For example, can 

banks simply extend the terms of a loan until market prices recover? I think it will take an all-of-the-above approach, but our ultimate goal should be to keep out of the equation any additional 

taxpayers’ bailouts. 

Taxpayers backed the $700 billion TARP program and the bailouts of Fannie Mae and Freddie Mac to the tune of $145 billion as 

of last week. And if the FHA or FDIC insurance funds are depleted, taxpayers may be asked to front for those as well. 

In my view, it’s high time that the Federal Government permanently exit the ‘‘too-big-to-fail’’ bailout business, and instead enact 

effective financial reforms to reestablish market discipline and 

transparency. And instead of shipping new taxes from Illinois to 

Washington for bureaucrats to spend on a new agency or programs, 

we should hold regulators accountable for doing their job and allowing small business entrepreneurs to retain and invest more of 

their money in their own businesses. 

We need to break down the barriers to recovery. For example, 

right away, Congress should infuse small businesses with capital 

and give them certainty for short- and long-term planning so that 

businesses can expand and create jobs. Congress should extend for 

more than 1 year the increased section 179 expensing limits; for 

2010, the 5-year net operating loss carry back; and accelerated depreciation. 

In addition, this week, the House should reject any bill that more 

than doubles the tax on carried interest. It would be a big mistake 

and devastating for Chicago if Congress increases taxes that would 

severely curtail investment in real estate. With more cash flow instead of tax flow, small businesses can and will expand, create jobs, 

and get our economy back on track. 

Regulators could gain a sense of urgency and make a serious effort to fix the foundational accounting problems in the commercial 

real estate market before it’s too late. 

Since February 2009, I have been asking Federal Reserve Chairman Bernanke, as well as other regulators, to address issues like 

this. The response in Washington is that the issues are being addressed, but here in Chicago, in Illinois, that’s not what our constituents are reporting. Regulators have issued guidance after guidance after guidance, but it’s vague and meaningless without clear 

and consistent execution by the examiners on the ground. 

Examiners should not force banks to devalue performing loans. 

That’s so counterproductive. Just because, in the run-up to the crisis, they underreacted by failing to stem commercial real estate 

loan concentrations in some community banks, that should not 

mean that they now must overreact. Nor should examiners instill 

unfounded fear in our community bankers. This is having a ripple 

effect, worsening the credit crunch and forestalling economic recovery. 

4 

Today, it’s critically important that we examine the trends here 

in Chicago, explore the causes behind the collapse, and find solutions—be they regulatory, statutory, or voluntary among industry 

participation—to restore the flow of credit so they can restore productivity to our commercial properties. We don’t need stall tactics. 

We need solutions. Some banks will fail and some loans and securities will go bad, but I’m confident that many will succeed. By recognizing and breaking down existing barriers to stability in commercial real estate, we can put Chicago firmly back on the road to economic recovery and get unemployed Illinoisans back to work. 

I look forward to working with my colleagues on solutions. I look 

forward to hearing from today’s witnesses. And again, thank you, 

Chairman Moore, and I yield back. 

Chairman MOORE OF KANSAS. My thanks to the ranking member 

for her statement. The Chair now recognizes for 3 minutes Congressman Luis Gutierrez, the chairman of the Financial Institutions Subcommittee, who represents the Fourth District of Illinois 

and chairs our Democratic Task Force on Commercial Real Estate. 

You are recognized for 3 minutes. 

Mr. GUTIERREZ. Thank you so much. First of all, I have to say 

to everybody, you’re going to miss Chairman Moore. We came together in 1993 to Congress, and I’m unhappy that you’re leaving, 

and I’m saddened. Your shoes will be hard to fill; they’re very 

large. 

Judy Biggert, thank you so much for your concern and your effort and for working so closely with all of your colleagues. I would 

say more nice things about you, but I don’t want them to be used 

against you in the coming election, so I’ll share some things in private with you later on. 

Yes, it’s coming. And as Chairman Moore has indicated, they 

have asked me to head up a task force in the Subcommittee on Financial Institutions. We’re getting ideas. And so the testimony 

today will be used as part of that task force information and putting legislative work before the Congress of the United States. 

And why do I say it’s a tsunami? Because here’s what’s going to 

happen. You have $3.4 trillion. That’s what the commercial real estate market is worth, and $1.4 trillion of it comes due in the next 

5 years. That means somebody has to get a new loan, refinance, restructure. If we’re having such a hard time today getting banks to 

lend people money, what would make us think that in the next 5 

years, commercial real estate, which is doing so poorly, is simply 

going to all get renegotiated? 

I want to remind everybody how close this is and evidence about 

how real it is and something that maybe most people can understand here in Chicago. I had a hearing, and we had the owner of 

Mr. Beef, over on Orleans. If you haven’t had one, you should. It’s 

a Chicago institution and interesting and ironic, Midwest Bank 

which just closed last Friday, taken over by the FDIC, told Mr. 

Beef they were calling in his loan. Not that Mr. Beef isn’t profitable, you can go there any day. They did it because they said they 

had to call in his loan because the amount of money that was extended to him on the real estate and the value of that real estate 

were not on par. That’s just one example. 

5 

So the place that you go shop for your clothes, the place you go 

to eat, the place you go to buy books, the local business maybe 

where your kids get tutoring, all of those local businesses, even 

though they’re thriving and doing as well as Mr. Beef is doing, that 

doesn’t mean the bank isn’t going to call in the loan and possibly 

then close down the business. And we all know that in Chicago, we 

have businesses with apartments on top of them. 

Lastly, let me just say this just to show you what’s going to happen. Twenty percent of the loans today in the Chicago area, land 

loans, are not performing, 20 percent today. That’s stuff that really 

hasn’t even been built or even opened up yet. Now take that into 

consideration when you think of the $1.4 trillion and you begin to 

see the scope of this. 

So I thank Chairman Moore for calling this hearing and I thank 

Judy Biggert for encouraging the committee to come here to Chicago because I want to make sure that as we develop the legislation, and legislation will be developed to counteract this, that Chicago is taken into consideration. 

Thank you very much, Mr. Chairman. 

Chairman MOORE OF KANSAS. Thank you, sir. I next recognize 

for 3 minutes Congresswoman Melissa Bean, who represents Illinois’ 8th District. She’s the co-chair of the New Democratic Financial Services Task Force and brings 2 decades of business experience with her to Congress. Congresswoman Bean, please. 

Ms. BEAN. Thank you, Mr. Chairman, and I would also like to 

thank Congresswoman Biggert, ranking member on the subcommittee, for holding this important hearing. And Mr. Chairman, 

thank you for traveling from Kansas, your District. It goes without 

saying that you’re not in Kansas any more. You’re here in the big 

city and we appreciate having a local hearing so we can get perspective from those who are in the industry and can bring a Chicago metropolitan perspective to these hearings. 

I have long been concerned with the problems we’re facing in 

commercial real estate. If left unaddressed, I fear our current economic recovery could be delayed or even reversed. While in the 

Wall Street reforms that we have already passed through the 

House and we’re waiting to get back from the Senate, we did address mortgage reform on the residential side, and there is a risk 

retention component that applies to commercial lending as well, 

but we didn’t really get as beat on the commercial side. 

As other members have just stated, according to the Congressional Oversight Panel Report on CRE, $1.4 trillion of loans will 

come due in the next 4 years. Half of these are currently underwater. In Illinois, the delinquency rate for commercial mortgages is 

6.8 percent, which is more than 1 percent higher than the national 

average. 

Further troubling, the delinquency rate for local construction and 

land loans in the Chicago area is 25.7 percent. While economic indicators are improving, delinquency rates in the commercial real 

estate space continue to rise. 

The problems in the commercial real estate market don’t just impact the investors and developers of commercial real estate, but 

many of our community banks who hold these loans. As community 

banks write off losses in their commercial real estate portfolio, this 

6 

limits the amount of new loans that they can make. As we have 

seen recently in Illinois, many community banks are overexposed 

to commercial real estate and have already been closed by the 

FDIC. 

With hundreds of banks around the country on the FDIC’s watch 

list, addressing this problem is of critical importance. The way I 

see it, there are several questions we need to answer. 

First, how do we deal with the performing but underwater commercial real estate loans that are coming due at banks that are unable or unwilling refinance? 

Second, how do we strike the proper balance of prudent regulation of banks and the risk they have on their balance sheets with 

an appropriate flexibility to address exacerbated market conditions? 

Third, how do we restart the securitization market for commercial real estate loans and enable smaller institutions to take advantage of securitization, to add much needed liquidity in the market? 

Finally, how do we make sure banks are able to offer loans to 

creditworthy borrowers who need a commercial real estate loan? 

If the answer to these questions requires legislation, I believe the 

committee should seek to do so in a matter that effectively addresses the problems in the market while minimizing the risk and cost 

to taxpayers. 

Thank you, and I yield back. 

Chairman MOORE OF KANSAS. Thank you. Finally, the Chair will 

recognize for 3 minutes Congressman Bill Foster, who represents 

Illinois’ 14th District, and has brought his scientific and business 

background to great use in the House Financial Services Committee. 

Mr. FOSTER. I would like to thank my colleagues for arranging 

this hearing and to echo thanks to Chief Judge Holderman for allowing us to use this wonderful venue. 

It strikes me that the keys to this problem to the extent that it 

can actually be solved are first to let the market separate those 

firms and projects which can actually be saved from those that cannot. There has been a certain amount of misallocation of capital in 

the last several years. When I look at shopping centers built out 

in the middle of developments which were not built, these will represent stranded investments for the next decade, and it is a mistake to struggle to try to keep these. They will be dark for the next 

decade and that’s just the way it is. 

On the other hand, there’s a fraction of businesses that are viable, do have a good cash flow and viable business model, and these 

are the ones that we should concentrate on and save. We must provide incentives to bring private equity off of the sidelines and into 

the business to save this. 

My office is working specifically on a proposal to incentivize mezzanine financing. There are a number of other proposals working 

their way through Congress and through the Administration and I 

will be very interested in seeing the reaction of our witnesses to 

these various proposals. 

I think also where appropriate, we may want to consider methods of providing regulatory capital relief to small banks, heavily 

committed, heavily invested in commercial real estate. That is a 

7 

very dangerous game to play and we could be in a situation where 

we’re causing trouble downstream, but the fraction of their investment in commercial real estate that is really not at risk maybe 

should not be fully counted in the normal way that we count investments in commercial real estate in their capital requirements. 

I look forward to hearing the reactions of all of our witnesses to 

these various proposals and I yield back the rest of my time. 

Chairman MOORE OF KANSAS. Thank you, sir. I am pleased to introduce our first witness panel: Mr. Peter Borzak, principal, Pine 

Tree Commercial Realty, testifying on behalf of the International 

Council of Shopping Centers; Mr. Joseph ‘‘Cosenza,’’ is that pronounced correctly, sir? 

Mr. COSENZA. Yes. 

Chairman MOORE OF KANSAS. —vice chairman and director of 

The Inland Real Estate Group, and president, Inland Real Estate 

Acquisitions, testifying on behalf of the National Association of Realtors and the Illinois Association of Realtors; Mr. William Askew, 

senior policy advisor, The Financial Services Roundtable; Mr. 

Thomas Hough, CEO and chairman, Carrollton Bank, testifying on 

behalf of the Illinois Bankers Association; Mr. Greg Ohlendorf, 

president and CEO, First Community Bank and Trust, testifying 

on behalf of the Independent Community Bankers of America, and 

the Community Bankers Association of Illinois. 

Without objection, your written statements will be made a part 

of the record. You will each have 3 minutes to summarize your 

statements and touch on the key messages you would like to share 

with the panel up here. 

Mr. Borzak, sir, you are recognized for 3 minutes. 

STATEMENT OF PETER BORZAK, PRINCIPAL, PINE TREE COMMERCIAL REALTY, ON BEHALF OF THE INTERNATIONAL 

COUNCIL OF SHOPPING CENTERS 

Mr. BORZAK. Thank you. I would like to thank you all for holding 

this hearing and considering these issues that are facing our industry. My name is Peter Borzak, and I’m representing the International Council of Shopping Centers, also known as ICSC, which 

is the dominant trade organization for the retail real estate industry. ICSC boats over 55,000 members in 92 countries worldwide. 

My company, Pinetree Commercial Realty, is based in suburban 

Chicago. We have been in business since 1995 and have developed 

or acquired 56 shopping centers. 

As you know, this cycle was not caused by the commercial real 

estate industry, but was rather caused by residential real estate 

lending and the mislabeling of securitized debt. However, the resulting financial market meltdown caused prices of commercial real 

estate to drop on average 30 to 40 percent which is now continuing 

to pose threats to the commercial real estate industry, the banking 

sector, and the economy in general. 

Although there is capital coming into the commercial real estate 

industry, that capital right now is targeting only premium properties in a handful of the largest markets in the metropolitan 

United States. 

8 

Commercial real estate is a capital-intensive industry and there 

are a couple of things that Congress can do to try to keep commercial real estate from posing a greater threat to the economy. 

Number one, please do not pass the increased tax on carried interest. This tax is not meant to target the commercial real estate 

industry and it is not meant to correct a problem in our industry. 

Rather than a scalpel, Congress is proposing using a bazooka to address the carried interest issue in the financial sector and it will 

cause devastating effects for local operators who provide jobs and 

the majority of the real estate across this country. Carried interest 

helps alignment and carried interest is subordinate, generally, to 

returns on cash investments. Enacting this legislation will drive 

commercial real estate prices down even further and cause further 

job loss. 

Number two, from my experience, local regulators seem to be trying to work with local and regional banks to help them through 

this difficult period. However, Washington seems intent on forcing 

consolidation and putting more banks out of business. There seems 

to be a huge double standard in dealing with the money center 

banks that are considered ‘‘too-big-to-fail’’ and the local banks that 

are considered too small to matter. As these small banks are shuttered, so are the thousands of relationships with local real estate 

operators, retailers, and local business people. 

Local and regional banks provide most of the real estate and 

small business loans in our country and losing those relationships 

will cost us in lost jobs, lost businesses, and greater consolidation. 

Both of these issues are truly ‘‘Main Street’’ issues that will have 

a direct impact on employment and economic recovery. There’s obviously a lot more detail that can be provided on these issues when 

time is not a factor. 

Thank you again for holding these hearings and considering the 

needs of the commercial real estate industry. 

[The prepared statement of Mr. Borzak can be found on page 79 

of the appendix.] 

Chairman MOORE OF KANSAS. Thank you, Mr. Borzak. 

Mr. Cosenza, you are recognized for 3 minutes. 

STATEMENT OF G. JOSEPH COSENZA, VICE CHAIRMAN AND 

DIRECTOR OF THE INLAND REAL ESTATE GROUP, INC., AND 

PRESIDENT, INLAND REAL ESTATE ACQUISITIONS, INC., ON 

BEHALF OF THE NATIONAL ASSOCIATION OF REALTORS 

AND THE ILLINOIS ASSOCIATION OF REALTORS 

Mr. COSENZA. Chairman Moore, Ranking Member Biggert, and 

Representatives Gutierrez, Bean, and Foster, thank you for inviting me to testify. My name is Joe Cosenza, and I have been a Realtor for 42 years. I am vice chairman and one of the four original 

school teachers who started and own the Inland Real Estate Group 

here in Oak Brook, Illinois, along with my partners Dan Goodwin, 

Bob Baum, and Bob Parks, who are all still working today. 

Since 1968, I have directly overseen the purchase for Inland of over $32 billion of income-producing properties. We have 1,400 employees. 

I am here today to testify on behalf of more than 1.1 million Realtors who are engaged in all aspects of the real estate transaction. 

9 

Today, I will present six proposals that we believe will improve the 

struggling commercial real estate industry which supports 9 million jobs in every sector of our economy. While none of these can 

solve the crisis alone, together, they can contribute to the recovery. 

First, we believe the most effective means of improving the cash 

flow on property is to allow new investors to accelerate depreciation 

from 39 years down to 15 years. This is a proposal that my company, Inland, would certainly invest in because all new money goes 

to pay down existing debt and to improvements on the property. 

Second, we support the increasing the cap on credit union business lending from the current 12 percent up to 25 percent of total 

assets. H.R. 3380, introduced by Representatives Kanjorski and 

Royce, would accomplish this goal and we urge the passage of this 

bill. This will put fresh money into the system at no cost to the 

Federal Government. 

Third, we propose developing a short-term mortgage insurance 

program to cover the difference between today’s current value and 

the debt until the market recovers. It would be limited to performing properties that are viable for the long term. 

Fourth, Realtors recommend that the Federal Reserve Board provide term extensions for loans on properties that can support their 

current debt. This is a winning situation for banks and owners and 

requires no legislative action. 

Fifth, we propose that Congress and the Federal Reserve extend 

the TALF program through the end of 2010 that addresses the 

massive shortfalls in the market. Requirements must be loosened 

so that more investors will participate. 

Finally, sixth, we need to increase small business lending. Applications must be easier to complete. We also recommend the 

waiving of the fees and raising loan limits for both SBA 7A and 

504 loans, and particularly 504 loans to be used for refinancing. 

In conclusion, the National Association of Realtors believes it is 

critical for Congress and regulators to act now. We thank the subcommittee for this chance to provide input. I welcome any questions. 

[The prepared statement of Mr. Cosenza can be found on page 

97 of the appendix.] 

Chairman MOORE OF KANSAS. Thank you, sir. 

Mr. Askew, you are recognized, sir, for 5 minutes. 

STATEMENT OF WILLIAM E. ASKEW, SENIOR POLICY ADVISOR, 

THE FINANCIAL SERVICES ROUNDTABLE 

Mr. ASKEW. Commercial real estate is a $5 trillion industry. 

Banks and commercial mortgage-backed securities are the largest 

sources of credit for CRE. 

Revitalizing the CMBS market is critical; $1.4 trillion in U.S. 

real estate loans are maturing between 2010 and 2014, and without a liquid secondary market, these loans will have trouble refinancing, putting more pressure on already depressed real estate 

valuations. 

The Roundtable formed a commercial real estate coalition to develop ideas to support the CRE industry. The coalition includes 

leading industry practitioners and other trade associations, many 

of them on your witness list. 

10 

The coalition set three goals to guide its deliberations: first, to 

restore confidence in the commercial real estate sector; second, to 

maintain regulatory compliance while balancing the need for additional lending; and third, to restart the commercial mortgagebacked securities market for long-term financing. 

Last month in the Roundtable and Coalition, the Coalition published a White Paper entitled, ‘‘Recapitalizing Commercial Real Estate: A Roadmap to Recovery.’’ We have 51 recommendations to 

meet these goals. 

The recommendations represent a holistic approach, as there is 

no one silver bullet to solve the problems facing the market. I have 

submitted the full paper with my written testimony and I’ll now 

highly just a couple of the key recommendations. 

First, utilize securitization to restart the CMBS market for longterm financing. The restart of the securitizations will be key to the 

economic recovery. In the absence of a CMBS market or other viable secondary market solutions, there’s a financing void for commercial mortgage loans. Left unfilled, this lack of financing will 

further exacerbate the downward pressure on the commercial real 

estate values. 

We encourage policymakers to continue to consider the unique 

characteristics of asset classes when adopting risk retention proposals and avoid one-size-fits-all legislation which may hurt borrowers and investors alike. Additionally, we urge policymakers to 

avoid unintended consequences in creating new rules. For example, 

FAS 166 and 167 rules, combined with a risk retention mandate 

and changes in risk-based capital could virtually halt new 

securitizations. 

Second, extend TALF to inject liquidity and confidence in the 

CMBS market. The CMBS TALF was developed to inject liquidity 

and confidence into the market by encouraging the securitization of 

privately originated loans in important asset classes to consumers 

and businesses. The program is set to expire and an extension is 

vital to the market. 

TALF has been helpful in tightening spreads and encouraging 

certain new CMBS issuance. However, a crucial next step in market liquidity is the issuance of a new multi-borrower pooled ‘‘conduit’’ CMBS in order to provide the capacity necessary to satisfy 

the enormous volume of maturing loans and borrower demand. 

We recommend that Treasury utilize the TALF program as a direct and temporary solution to address the absence of a private-sector hedging tool that the banks do not have available today. 

Third, eliminate procyclical accounting policies and practices. 

The economic crisis highlighted the impact of procyclical accounting 

standards on financial markets including CRE. For example, the 

application of fair value accounting standards, which use near term 

exit pricing for asset valuation, proved to be both challenging and 

problematic during this period. 

The Roundtable recommends that FASB evaluate procyclical accounting standards and report to Congress how such standards 

might be modified in the current economy. This would include evaluation of fair value accounting, loan loss reserves, non-performing 

short-term loans, gain-on-sale, treatment of covered bonds, and deferred tax assets. 

11 

Finally, the Roundtable encourages greater coordination between 

accounting policy and other regulatory and statutory changes to 

avoid market dislocation, and to provide markets with certainty 

and confidence. 

Thank you for this opportunity to present the Financial Services 

Roundtable’s view. 

[The prepared statement of Mr. Askew can be found on page 56 

of the appendix.] 

Chairman MOORE OF KANSAS. Thank you, Mr. Askew. 

Mr. Hough, you are recognized, sir, for 3 minutes. 

STATEMENT OF THOMAS W. HOUGH, CEO AND CHAIRMAN, 

CARROLLTON BANK, ON BEHALF OF THE ILLINOIS BANKERS 

ASSOCIATION 

Mr. HOUGH. Thank you, Chairman Moore, Ranking Member 

Biggert, and members of the subcommittee. My name is Thomas 

Hough, and I am the chairman and Ceo of Carrollton Bank and 

also chairman of the Illinois Bankers Association. 

While Illinois bankers are working hard to meet the credit needs 

of our communities, we are facing unprecedented pressure from our 

regulators these days and we’re very concerned about that. 

My time here is brief, so I’ll try to make just two points. First, 

we believe that there are major disconnects in assurances regulators are making to Congress in Washington, D.C., with respect to 

their impact on community bank lending and community bank closings. Our members talk nonstop about the stringent regulatory environment today and how the application of outdated accounting 

rules is undermining their ability to extend credit. Obviously, we’re 

in turbulent economic times, which dictate a high level of caution 

when lending. But that alone does not explain the sometimes overly aggressive decisions and forced write-downs that our banks are 

experiencing in their field examinations today. 

For example, commercial loans are being downgraded even when 

they are fully performing. Collateral-dependent loans are being 

classified based on atypically depressed property values, even when 

the collateral is producing expected revenues, there is no intent to 

sell it in this distressed market, and a loan is not only current, but 

has never been past due. And based on accounting rules that were 

written for another era, we are being told to write down loans 

based on the performance of completely unrelated loans in our 

portfolio and even based on loans in the portfolios of our competitors down the street, in some cases. 

These examination mandates are being repeated every day 

throughout our State and they are needlessly depleting bank capital and in turn creating so much competition in capital markets 

that most banks’ chances for raising new capital today range from 

slim to none. 

This leaves many banks with few options. Many are shrinking 

their balance sheets, either by selling assets or by curtailing lending or not renewing loans. Unfortunately, for some banks the only 

option is no option at all and that’s to be drawn into receivership. 

Current Federal law provides virtually no discretion to the FDIC 

and the prudential regulators after the point when a bank’s capital 

12 

levels fall below certain levels, even when due to overly conservative write-downs based on ill-fitting accounting rules. 

Since Congress enacted fiducia in 1991, the regulators had no 

choice at that point to trigger so-called prompt corrective action 

when a bank’s cap drops below a certain level. And that’s my second point. 

There’s a major disconnect between when our regulators do have 

the discretion in the examination stage at the banks in the field 

to avoid causing the unnecessary depletion of capital compared to 

when do not have that discretion, in the prompt, corrective action 

stage. They are not connecting the dots between cause and effect 

and they should be. There has not been enough discussion of these 

disconnects and there should be. 

Most community banks will survive if given the time and leeway 

to work through this one-in-a-lifetime recession and more of them 

will lend more in their communities if they are not encumbered 

with unnecessary write-downs, needless cap recalls, and the 

chilling prospect of the prompt, corrective action. 

Chairman MOORE OF KANSAS. The gentleman’s time has expired. 

Can you wind up, sir? 

Mr. HOUGH. Yes, thank you. We urge you to keep these concerns 

in mind as you go forward in your deliberations in Congress. 

Thank you very much. 

[The prepared statement of Mr. Hough can be found on page 118 

of the appendix. ] 

Chairman MOORE OF KANSAS. Thank you. 

Mr. Ohlendorf, you are recognize, sir, for up to 3 minutes. 

STATEMENT OF GREG M. OHLENDORF, PRESIDENT AND CEO, 

FIRST COMMUNITY BANK AND TRUST, ON BEHALF OF THE 

INDEPENDENT COMMUNITY BANKERS OF AMERICA AND 

THE COMMUNITY BANKERS ASSOCIATION OF ILLINOIS 

Mr. OHLENDORF. Subcommittee Chairman Moore, Ranking Member Biggert, and members of the subcommittee, I am Greg M. 

Ohlendorf, president & CEO of First Community Bank and Trust, 

located in Beecher, Illinois. I have been in banking for 25 years,all 

of those years with my same institution, an $150 million community bank that was founded in 1916. I am pleased to address the 

subcommittee here today at this field hearing. I’m also privileged 

to represent ICBA and its 5,000 community bank members nationwide as well as CBAI in this important hearing. 

First Community Bank and Trust, like almost all community 

banks, specializes in small business lending, including commercial 

real estate or CRE lending. Community banks support small business lending and support local economic activity not supported by 

Wall Street. Even during these challenging times, our Nation’s 

nearly 8,000 community banks remain committed to serving their 

local small business and small business-lending customers. But my 

bank and all community banks face serious challenges that can 

hinder our ability to make small business and CRE loans. 

Community banks now confront the toughest regulatory environment in more than 2 decades. The banking regulatory agencies 

have moved the pendulum too far in the direction of overregulation 

at the expense of lending. As a result, capital standards above 

13 

those required by regulations, questionable loan valuations, loan 

loss reserve policies, and overly strict implementation of CRE concentration guidance, my bank and community banks all over the 

country are avoiding making small business and CRE loans that 

we would otherwise have made in the past. 

While the tough regulatory environment is inhibiting new loans 

in many instances, loan demand from qualified borrowers is also 

down. Many of our best, small business and CRE customers cite 

their uncertainty about the economic recovery as their key reason 

for seeking additional credit. Our country needs to return to a more 

balanced regulatory environment that promotes lending and economic recovery as well as safety and soundness. 

Specifically, we support a proposal to amortize loan losses over 

10 years for regulatory capital purposes. This proposal will not distort or misrepresent a bank’s GAAP financial statements and was 

successfully used during the agriculture crisis of the 1980’s. So this 

proposal is not unprecedented. 

The time has come to extend this reasonable lifeline to community banks. We support the Administration’s proposed $30 billion 

small business lending fund. A properly designed program will encourage additional small business lending, fuel job creation, and 

help create economic stability. And we support a regulatory proposal to include the entire amount of the allowance for loan or 

lease losses as part of the banks’ risk-based capital. This proposal 

would favorably impact 45 percent of Illinois banks and encourage 

all banks to reserve more. 

In our written statement, we discuss these and other recommendations in great detail. 

I would like to thank you for the opportunity to testify and I 

would be happy to answer any questions. 

[The prepared statement of Mr. Ohlendorf can be found on page 

158 of the appendix.] 

Chairman MOORE OF KANSAS. Thank you, sir. I thank all the 

witnesses for their testimony. I recognize myself for up to 5 minutes for questions. 

Mr. Borzak and Mr. Cosenza, one idea your organizations both 

propose is accelerated depreciation to improve CRE investment incentives and improve cash flow, but something our government 

must do a better job on, in my estimation, as we emerge from the 

financial crisis is getting back to fiscal responsibility and a balanced budget. What would the impact be on Federal tax revenues 

with this accelerated depreciation proposal and what would the 

costs be? 

Mr. Askew? 

Mr. ASKEW. I don’t have those numbers, but we could calculate 

that and get those back in a written statement. 

Chairman MOORE OF KANSAS. I would like to have those, sir, and 

we will share those with the committee. I would appreciate that 

very much. 

Mr. ASKEW. Yes, sir. 

Chairman MOORE OF KANSAS. Mr. Borzak, any thoughts? 

Mr. BORZAK. I also don’t have those numbers here, but I can get 

them. 

Chairman MOORE OF KANSAS. All right. Mr. Cosenza? 

14 

Mr. COSENZA. I don’t have the numbers, but you do understand 

why we’re behind this. It’s because it allows new money to come 

into someone’s existing property, much like Mr. Beef’s situation 

where a new investor would own part of that existing person’s deal. 

What are the incentives to do this? One of them is to have an accelerated depreciation for the income that you’re going to make, and 

the second one is for the Federal Government, that it pays down 

the existing person’s debt and furthermore improves the property. 

None of the money goes into the person’s pocket. 

Chairman MOORE OF KANSAS. I understand that, but I think our 

government has to be concerned about the debt our country has at 

the present time, which has increased over the past several years. 

I was surprised to see how many of you call for the extension and 

even expansion of TALF to help with the CRE, the commercial real 

estate market. 

Mr. Askew, will you explain this idea and why the Federal Reserve and Treasury should consider extending the program? 

Mr. ASKEW. Yes, sir. What is needed in the market right now is 

a secondary financial market, a securitization market. There has 

only been one issue of TALF on the CMBS that has gone through 

the DDR deal and that helped narrow the spreads in the market, 

but that’s just one deal. The market is still—we still have not had 

any other CMBS securitizations to speak of. So what we’re proposing in the paper is that Treasury would create the warehouse 

for pooled conduit loans. Right now, there are a lot of loans across 

small banks and large banks that are good, performing commercial 

real estate loans and the idea is to securitize those loans so that 

the banks, as Mr. Gutierrez says, can make more loans for commercial real estate. But we have to be able to securitize them, pull 

them together, pool them together, and we’re asking Treasury to do 

a warehousing function. It’s similar to the PPIP that was defined 

or talked about by the Congressional Oversight Panel, and it was 

a very profitable program, what they did with PPIP, so this one 

would return money to the government, but we just—the program 

expires in June, the CMBS program. So we just think it would help 

if they kept that a little bit longer. And also, it would be a good 

possibility for the government to start the program. 

Chairman MOORE OF KANSAS. Thank you, Mr. Askew. Do any 

other witnesses have a comment? 

Mr. Cosenza? 

Mr. COSENZA. I do, because the reason why an extension is needed is because it didn’t have long enough of a time originally the 

first time to work out its quirks. The reason why there was only 

one that was done is because it was such a doggone tough program. 

One of the aspects of it which I don’t think anybody realizes is that 

when a transaction is already done, let’s say there are 40 or 50 

properties in this one bond issue and an investor wants to buy into 

that bond issue, goes to the Federal Government, asks him for 85 

percent of a non-recourse funds to allow him to buy that, so that 

the money can move in the marketplace, that’s wonderful. The 

problem was that there were regulations within the Federal Government where they could say, we don’t like one of the assets in 

this pool, and therefore, we’re not going to give you, the investor, 

the money to invest in it. It was too late. The pool was already 

15 

done. And whoever did it, whether it was J.P. Morgan or whatever 

bank it was, it was too late. They’re stuck with the paper. That’s 

one aspect of it. 

Chairman MOORE OF KANSAS. Thank you. And I see my time has 

just about expired. I will recognize Ms. Biggert next, for up to 5 

minutes for questions. 

Mrs. BIGGERT. Thank you, Mr. Chairman, and thank you all for 

being such excellent witnesses today. I wish that we had more 

time, and Mr. Askew, thank you for the Financial Services Roundtable paper. I think that puts so much together and obviously we 

could probably talk about the 51 issues well into the night. But 

since we don’t have that time, I would just like to go over a couple 

of things and really talking mostly about the regulatory and statutory. For example, Mr. Hough, you said in your testimony that illfitting accounting rules are undermining the banks’ ability to extend credit. 

Mr. Askew, you said that the final interagency joint rule on FAS 

166 and 167 should be reexamined. And Mr. Ohlendorf, you talked 

about despite the guidance on CRE loan workouts, community 

banks continue to report that they’re forced to write down performing loans. 

So briefly, have any of your financial institutions had discussions 

with FASB officials about these accounting rules? We’ll just go 

right down the line. 

Mr. COSENZA. Any of the accounting rules for banks? I’m going 

to let the banks speak. 

Mr. ASKEW. We had all of the regulatory agents, we had OCC, 

the Fed, the Treasury, and FDIC at our meetings, Congresswoman 

Biggert, but we did not have FASB and in retrospect, I wish I had 

them at the table. I did not. But we do have meetings set up and 

we are going to visit FASB and talk to them about our suggestions. 

Mrs. BIGGERT. Mr. Hough? 

Mr. HOUGH. FASB has great power. They’re very independent. 

They’re the so-called five gnomes who sit in this office and make 

up these rules and it affects everybody and the whole economy, and 

it is very frustrating not to be able to have any access to these 

folks. 

Mrs. BIGGERT. Mr. Ohlendorf? 

Mr. OHLENDORF. One of the concerns that we have had with the 

whole FASB regulation is the cyclicality and countercyclicality of 

the loan loss reserve issue. We, in our industry, had some good 

times and banks made good profits and we can’t complain about 

that. But we were prohibited from being able to reserve for a rainy 

day because FASB rules do not allow for that. We had to test our 

allowance. We have an 11-component evaluation now that’s done 

every single quarter, and if I can’t show that my portfolio has 

strength or weakness in it, then I can only reserve a certain dollar 

amount. 

I wish in these times that my rainy day fund could have been 

a little deeper, because we had profits that we could have set aside 

that could have been used to help us through these troubling times. 

Now in this environment we come in and have to apply those same 

accounting rules, both from a regulatory perspective and an accounting perspective and those two people don’t always come from 

16 

the same perspective. And now they’re coming in, downgrading 

loans, reclassifying assets, looking at very short-term windows. 

We used to be able to look at a 3- to 5-year loss history. Now, 

regulators are coming in saying, your loss history needs to be 

looked at over 18 months, maybe 2 years at the most. We all know 

what has happened over those 2 years and you can understand 

very easily how much more money has to be set aside just at the 

time where capital is very, very dear and every dollar we set aside 

from our capital account and our allowance account limits small 

business lending. 

Mrs. BIGGERT. We have been told that regulators have the flexibility to interpret FASB accounting rules and we have also heard 

that some regulators are more overzealous than others when it 

comes to the CRE valuations. Is there a particular regulator, the 

FDIC, the OCC, the OTS or the Fed whose examiners are requiring 

performing and current loans to be devalued? 

Mr. OHLENDORF. We have heard anecdotal evidence from banks 

across the country and I think it just depends who your regulator 

is. If you’re in a tough market, and Chicago is a challenging CRE 

market, I’m not sure it matters what regulator. We have heard anecdotal evidence that all have been pretty dominating on loan valuations. 

Mrs. BIGGERT. Mr. Hough? 

Mr. HOUGH. I don’t think there’s any objective evidence. I think 

most bankers would say the problems are more with the Federal 

regulators than the State regulators because we have all heard, 

you have talked about it too, Congresswoman, about hearing one 

thing from the regulators in Washington, but then when it gets 

down to the field level, Chicago and my examiner is out of Champaign and Springfield, Illinois, when it gets down to the field level 

and they’re examining my bank or my members’ banks, that it’s a 

different type of a thing. And examiners have—they are risk 

averse. There’s no incentive for them to be anything but conservative. 

Mrs. BIGGERT. Just one other thing. From hearing everybody and 

the way that this is—I would love to host a roundtable with the 

regulators and the banks. Would your industry participate in a 

roundtable with FASB and Federal agencies on this issue? 

Mr. HOUGH. Yes. 

Mr. ASKEW. I think that is a great idea and I think that’s what 

we should do. I think that’s the only way we’re going to address 

all the issues in commercial real estate. 

Mrs. BIGGERT. Thank you. And I don’t know if the Realtors and 

whomever wants to participate, but any stakeholders we would be 

happy to have. Is my time up? 

Chairman MOORE OF KANSAS. Thank you. Your time has expired. 

I will next recognize Mr. Gutierrez for up to 5 minutes. 

Mr. GUTIERREZ. Thank you so much. I guess we have—listening 

here today, I just want to quickly go to Mr. Hough and Mr. 

Ohlendorf. Is there a difference by the regulators? When the examiners come down to examine your books are they being unfair? 

Mr. OHLENDORF. Congressman, anectdotally, from both my own 

situation as well as others that we represent, what is happening 

17 

during the exam, a typical exam at a community bank may be a 

2-week process. 

Mr. GUTIERREZ. Let me ask you the process more succinctly since 

I only have 5 minutes. What we have heard here is that the regulators are telling the examiners to take other things under consideration other than the underlying value of the property. That is, is 

the loan performing? Are they telling you that performing loans no 

longer will be part of your portfolio? You have to bring in more capital if you want them on your books? 

Mr. OHLENDORF. On certain loans, absolutely. 

Mr. GUTIERREZ. Mr. Hough? 

Mr. HOUGH. I have never experienced it at my bank, but members have told me that is the case. 

Mr. GUTIERREZ. I understand, you don’t want somebody hearing 

what you said and the big regulators send the examiners and say 

well— 

Mr. HOUGH. Correct. 

Mr. GUTIERREZ. We weren’t following the rules. We’ll have them 

come later on, but I think it’s a critically important question, that 

is, here’s what the Federal Government says it’s going to do and 

the regulators say they’re going to do, and guess what? As Mr. 

Cosenza said it doesn’t cost any money, right? It doesn’t cost any 

money. So in other words, there are things that we can do from a 

regulatory point of view, right? Just taking into consideration 

where we’re at today that won’t cost us any money, that will help 

us get through the tsunami that’s coming. Because when I asked 

Mr. Bernanke what the greatest threat is to community banks, I 

said community banks, Mr. Askew, you’re not the community banker, but community banks, he said CRE and the economy. 

I just want to go back because I think we have a wonderful Chicago experience, not wonderful that it happened, but wonderful in 

how it enlightens us. Midwest Bank, one of the reasons—and just 

think about TARP money. TARP is the solution, right? TARP is 

part of the solution, right? But it isn’t a solution because Midwest 

Bank got TARP money, got $80 million of it. And you know what 

they did once they got the TARP money, the regulators told them 

to stop lending money and shut down Mr. Beef. That’s a true story. 

That happened. So I think we need to focus on that because that’s 

very, very important. 

I want to ask because I’m not sure which one of the agencies is 

implicated, but there is guidance on prudent CRE loan workouts 

from last fall, 2009. 

And I think, Mr. Moore, it would be an important question if I 

and others move forward. We’re going to have a hearing on this on 

my subcommittee in the coming weeks just what kind of legislation 

and regulatory evidence we have and regulatory issues that we 

should take into consideration because what I see is the guidance 

and what the examiners are doing. And I want to say look, there 

are going to be different things that are going to have to be done. 

Some are going to be the same for everybody in the industry because on the other hand you folks that have this commercial real 

estate, you really have to get together and have one message. Because if I hear from the roundtable that represents the JPMorgan’s 

of the world, and the Citibanks of the world and the Bank of AmerVerDate Nov 24 2008 18:09 Nov 10, 2010 Jkt 058046 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 K:\DOCS\58046.TXT TERRIE
18 

icas of the world, all who got TARP money, that it’s a bad idea to 

allow the small community bankers to amortize differently their 

money, then here’s what we get. We get these financial institutions, the fact is, you’re all important and we’re not going to come 

here to beat up the big banks versus the small banks. You’re all 

important. But 40 percent, 4 out of 10 loans on commercial real estate are issued by community banks, banks $10 billion and smaller 

and they didn’t get many of those hundreds of billions of dollars in 

TARP money. 

So I think what we’re talking about in changing rule and because 

a rule doesn’t benefit you, big bank or your particular situation, 

but benefits someone else within the whole circle, I would just encourage you not to simply look at your own self-interest and what 

is good for you and your industry, but what’s good for America because that’s what you’re demanding that Chairman Moore and 

Ranking Member Biggert and I do, set aside Republicans and 

Democrats and set aside our difference and our own personal interests. I simply encourage you and ask you because we’re here to 

help you. This is a big important thing. Those mom-and-pop shops 

are out there and we want to help them and if you make a lot of 

money, God bless you. But I just want to make sure that there are 

businesses out there that are thriving and are encouraged to move 

forward. Thank you so much. You’re all very, very important to us 

and I hope you will work more collaboratively in the future. Thank 

you. 

Chairman MOORE OF KANSAS. I thank the gentleman, and I now 

recognize the gentlelady from Illinois, Ms. Bean, for up to 5 minutes for questions. 

Ms. BEAN. Thank you, Mr. Chairman. Mr. Ohlendorf, if you can 

give me a quick answer to this one, because I have a few other 

questions. In your testimony, you reference the benefit of the NOL 

carryback that we extended to 5 years in the stimulus that we did 

last February. Do you know what either your bank or those in your 

association, what were they able to do with those recouped taxes 

once they received them? 

Mr. OHLENDORF. Congresswoman, it certainly helped our capital 

position and others’ capital positions and the bottom line is if we 

don’t have capital available to us and if we don’t have capital that 

we can leverage, we can’t lend. And so anything that we can do to 

bring those dollars back, it gave us money to be able to leverage 

again. Had we not been able to do that, those losses would have 

just sat out there forever. Capital would have been depleted and 

those lending opportunities wouldn’t have been there. 

Ms. BEAN. You also in your testimony expressed support for the 

Administration’s proposal to take $30 billion of TARP money or 

other money and make that available to community banks. Many 

of the executive compensation provisions of what we had done in 

the broader TARP proposals didn’t scale to small banks, so that 

really limited participation of our smaller banks. Can you explain 

the potential of that investment, particularly given the scenario 

that we’re in? 

Mr. OHLENDORF. Congresswoman, we have seen obviously a 

number of significant Illinois failures. Seven community banks, a 

couple of weeks ago. A lot of those banks with just a little bit of 

19 

capital could have made it. We have seen estimates that in the low 

hundreds of billions of dollars, you could recapitalize every community bank in the country, when $2 trillion of capital was infused 

or loan guarantees or zero interest loans went to our big brethren. 

We understand they were important in the industry, but some of 

the creativity that was going on at that time to save the largest 

financial institutions, we would like to see at the community bank 

level some of that similar creativity, come up with ways that we 

can extend and give us some time. 

We all have to believe we will come out of this recovery at some 

stage in the game. As Congressman Gutierrez said, the tsunami is 

coming, we just don’t know how long that’s going to last, but if we 

can just get through it and have some capital in the kitty, I think 

we can make it through and the industry is going to make jobs 

available and make loans available and it’s going to make a difference. 

Ms. BEAN. My final sort of comment and question for the whole 

panel is, many of you talked about countercyclical, and I know Congressman Foster and I worked on putting countercyclical mechanisms into the Wall Street reforms that we did. Essentially, when 

we see a bubble in the formation increasing capital requirements 

on the way up, easing them on the way down so the fallout isn’t 

so deep and broad. 

There wasn’t a lot of call from industry participants on the way 

up for those increased capital requirements. Nobody wants to be 

the buzzkill. Even the regulators didn’t step in when the party is 

on. And so it’s interesting. We hear it, of course, after the fact 

when it improves one’s balance sheet to treat mark to market a little differently in a downward scenario than when it was improving 

everyone’s balance sheets. Again, there wasn’t a lot of call for looking at more regulation then. 

So what should we be doing in terms of as we did mortgage reform and the Wall Street reforms for residential, we really didn’t 

address underwriting standards, loan to value ratios. So I would 

like some comments on that and specifically if you consider that at 

the peak to where we are in values right now, there has been about 

a 43 percent drop since 2007 so that’s in the last 3 years. How 

much did it go up before that peak in the previous 3 to 5 years and 

shouldn’t there have been some caution? 

Mr. COSENZA. I’ll give you an example of this, a very particular 

one because I buy a tremendous amount of real estate. And during 

the last 14 months, I bought about $2.7 billion worth. Of that real 

estate, the capper-rates, the returns I got on my investment were 

similar to what I was getting 7, 8, 9, and 10 years ago. During that 

time, much of that inflationary period wiped out. So therefore, let’s 

assume for a minute that in 2001, 2002, and 2003, you were buying 

properties for somewhere around an 8 percent return, give or take. 

By the time it got to 2006, it was 6.5 percent. And all of us had 

to contend with that, otherwise sit back and don’t buy anything. 

Well now, similarly, all of the banks’ rates came down. I still had 

the same spread, my same cash flow. The mistake we all made was 

we did 5-year loans. And so the mark-to-market, even though we 

do 50 percent loans, the mark-to-market killed us too because if the 

real estate was $100 million, our loan was $50 million, and all of 

20 

a sudden, the real estate became only worth $70 million or $65 million, my loan had to get paid down. 

Ms. BEAN. So if everyone had bought a little less when it seemed 

out of control, wouldn’t that have been helpful? 

Mr. COSENZA. It would have been. There’s no question about it, 

but it’s not as if you made more money. It’s the whole economy just 

kept churning. 

Ms. BEAN. Will others weigh in on the values of what they had 

been before the peak and how much it increased in that 3 to 5 

years prior? 

Mr. BORZAK. Yes. The spread has increased by and capper rates 

decreased. Prices went up by a significant amount between 2003 

and 2007 when they peaked. However, it’s a more complicated 

issue. Real estate pricing is much more supply and demand of capital. And over the last 26 years since I have been in the business, 

the commercial real estate industry has become much more institutional and much less entrepreneurial. There was a lot more private 

equity capital and other institutional and pension fund money that 

was finding its way into real estate in the mid part of this past decade. That forced prices to unprecedented levels, but there was a lot 

of talk about whether that was a permanent shift and whether 

they were permanently going to be more dollars allocated to commercial real estate, so it wasn’t always apparent that it was a pricing bubble. On the residential side, it was a little bit more apparent. The kind of financial mechanisms that were being used to finance homes, maybe were suggesting that there was a bubble. 

Ms. BEAN. So more specifically, there’s limited time— 

Chairman MOORE OF KANSAS. The gentlelady’s time has expired. 

Ms. BEAN. Okay. I’ll follow up with you on that. 

Mr. COSENZA. Thirty percent. The answer is 30 percent. 

Ms. BEAN. Thank you. 

Chairman MOORE OF KANSAS. Mr. Foster is recognized for up to 

5 minutes, sir. 

Mr. FOSTER. Yes. First, Mr. Ohlendorf and Mr. Hough, do you 

have any reaction to Mr. Cosenza’s and the Realtors’ proposal to 

raise the cap on credit union business lending? 

Mr. OHLENDORF. I struggled with it from the standpoint of the 

financial situation between credit unions being nontaxed entities 

and the banks being taxed entities. It’s just a significant difference. 

Credit unions were set up to deal with small business—not small 

business, but small consumer, small loans, small things. And it 

made a lot of sense in areas that were underserved and that’s all 

well and good. I think you have to question the structure of those 

credit unions is such that the expertise is there. There are a lot of 

smart people in this business all around that made some terrible 

mistakes as far as what was going to happen in the business lending area. I think it’s potentially very dangerous and I also struggle 

with just the level playing field isn’t there. 

Mr. FOSTER. Mr. Hough? 

Mr. HOUGH. There’s only a small handful of large credit unions 

that would make any significant difference here, but we felt was 

well with the fact that they don’t pay income tax and we’re talking 

about balanced budgets and things, it’s troubling. 

21 

But on the other hand, clearly, it would help a little bit to provide more funding, but not very much to the CRE market. 

Mr. FOSTER. Mr. Cosenza, do you have an estimate for how much 

additional support this might bring to the commercial real estate 

market? 

Mr. COSENZA. I do not have that, but we will get it to you and 

every single dollar that goes into the economy that doesn’t cost the 

government or the United States citizens any money is certainly a 

smart thing to do at this time. 

Mr. FOSTER. Thank you. Let’s see. I would like to talk a little bit 

more about procyclical accounting policies. We’re going to be having 

at the American Enterprise Institute, actually, a workshop on a 

specific proposal having to do with changing the loan to value ratios during the upswing where you basically would not—let’s see. 

The easy way to explain it is you would automatically turn up 

downpayments by the amount that the housing market has gone 

up in the last say 4 years. 

And so what you’re doing is it’s a mechanism to automatically 

turn up the required downpayment or limiting the loan to value 

automatically by formula during the upswing. 

I was wondering if you have any reaction to this because it’s obviously politically almost impossible to pull away the punch bowl 

as the party is going. But on the other hand, it seems in retrospect 

to be absolutely necessary. I was wondering, are there mechanisms 

that you would support, specific mechanisms that would deal with 

the countercyclical problem on the upswing. 

Mr. COSENZA. Speaking personally, I would not have a problem 

with those kinds of restrictions. But in this respect, I’m not speaking for the National Association of Realtors, or all of those little 

guys who can’t possibly put down 50 percent or refinance to the 

tune of 50 percent when they had a loan which was 70 percent or 

80 percent loan to value. 

Mr. BORZAK. I think that’s a difficult proposition. I think those 

prices are set by so many different dynamics and to try to regulate 

whether the increase in pricing is due to a bubble that’s artificially 

induced because of financing techniques or because of real market 

fundamentals. Those increases in value may be sustainable and 

they may be permanent. And so to penalize certain areas based on 

certain arbitrary regulated pricing restrictions, that sounds like it 

could be overregulation. 

Mr. FOSTER. No, this is not an attempt to change the long-term 

value of markets. This is simply— 

Mr. BORZAK. Right, to change the amount of money— 

Mr. FOSTER. —when they’re rising rapidly to say wait, you can 

issue a mortgage with 90 percent loan to value on the value of the 

property 4 years ago, but not on the fraction of the appreciation 

that has happened in the last few years. 

Mr. BORZAK. And my only point is that the appreciation that has 

happened in the last few years in certain markets may be permanent, sustainable increases in pricing and to apply those lending 

standards differently. There are too many dynamics that are affecting the values. If it’s clear that there is a bubble, that there is an 

artificially-induced increased, then limiting the loan to value ratios 

might be healthy, but it’s difficult to determine. 

22 

Mr. ASKEW. Congressman Foster, I would commend looks at 

countercyclical approaches. I don’t know about the specifics of what 

you’re talking about here. I would love to look into it and we would 

be glad to do that and give you our feedback, but anything that we 

could do on the countercyclical side when we get through this hole 

that we have ourselves in would be helpful because anything you 

talk about, whether it’s the Resolution Fund right now, whether it’s 

FDIC assessments, loan loss reserves, there are several areas that 

we could prevent this type of problem if we were very proactive on 

the other side. So we would be glad to participate and we would 

like to participate to help look at those countercyclical solutions. 

Chairman MOORE OF KANSAS. The gentleman’s time has expired. 

We do have some extra time, though, and with the consent of the 

members of the committee here, we’ll go one more round for 2 minutes each this time, and I’ll recognize first the ranking member for 

up to 2 minutes. 

Mrs. BIGGERT. Thank you, Mr. Chairman. 

Mr. Borzak, have there been any assets that you have not been 

able to work out or get placed with a new lender and were all your 

workouts placed with your existing lender? Do you have additional 

debt maturing? And how do you expect to refinance? 

Mr. BORZAK. We have been fortunate that we have been able to 

find resolutions to all of our debt issues. We have only in a couple 

of cases been able to find those resolutions with alternate financial 

institutions. 

Generally, our resolutions were either with our existing bank, 

through equity paydowns and loan extensions or by financing the 

acquisition of that debt with 100 percent equity. So I know that it 

has been very difficult in the past 18 months to find alternative 

banking solutions or loan solutions to those workouts. 

Mrs. BIGGERT. In your testimony, you talked a little bit about 

CMBS special servicers. Could you mention them? 

Mr. BORZAK. Correct. The CMBS paper, the securitized paper is 

administered by a master servicer until there’s a problem and 

when there’s a problem, the special servicer steps in and because 

this is the first time since the CMBS concept really became so popular in the early 1990’s, this is the first time that industry has 

faced the kind of distress that it’s facing right now. 

The special servicers in the entire industry are really just trying 

to get up to speed and trying to find their way right now. So it’s 

very difficult at the moment to get ahold of special servicers, very 

difficult to get responses. It takes a while. And the solutions that 

the servicers are able to effectuate are more limited than with a 

bank that has a loan on their balance sheet and can do what they 

want inside of the capital constraints. 

So we do have one situation with a special servicer right now and 

we’re in dialogue, but it is a slow moving process. 

Mrs. BIGGERT. Thank you. I yield back. 

Chairman MOORE OF KANSAS. I thank the gentlelady, and next, 

the Chair will recognize for up to 2 minutes, Mr. Gutierrez, please? 

Mr. GUTIERREZ. I just have one question. Okay, so Mr. Borzak 

and Mr. Cosenza, what’s the peak, what year was the peak in real 

estate? 

23 

Mr. COSENZA. The peak was really toward the middle and end 

of 2006. That’s when I saw the— 

Mr. GUTIERREZ. The middle of 2006? 

Mr. BORZAK. I think prices continued to go up into the middle of 

2007. It was about July of 2007 that we kind of saw the peak. 

Mr. GUTIERREZ. So by the end of 2006— 

Mr. BORZAK. But Mr. Cosenza would know better than I would. 

Mr. GUTIERREZ. By the end of 2006, middle of 2007, right? That’s 

the peak of it. And that’s where a lot of these loans, the tsunami 

that I’m talking about are going to come from because if prices 

went down after that, people who in 5 years, that’s 2011, 2007, 

right, 2011, 2012, 2013, they’re the ones who are going to have the 

big problem, right, of loan to value because they got their loan 

when real estate was way up here and it came down in 2008, 2009 

and really hasn’t substantially come up. 

Okay, I just wanted to focus and target on those years, because 

I think from a legislative point of view, Mr. Moore, and Congresswoman Biggert, we should focus on where the problem is really 

going to be the worst. Thank you so much. Thank you, Mr. Moore. 

Chairman MOORE OF KANSAS. Certainly. The Chair next recognizes Ms. Bean for up to 2 minutes. 

Ms. BEAN. Thank you, Mr. Chairman. One of the questions I 

wanted to get back to was underwriting standards in general and 

do you think there should be a better look at underwriting standards, whether it’s loan to value ratios, should we consider things 

like as we did credit rating agency liability for derivatives where 

we had AAA rated securities that should never have gotten them, 

we did that in our Wall Street reforms. Should there be, as I understand in some countries, appraiser liability? Just your thoughts 

on those kinds of things. 

Mr. HOUGH. There were situations I saw in banking where a 

bank competitor would hire a certain appraiser and they might 

want to lend the full value of the property and the appraiser will 

appraise it for 120 percent. I don’t know how they did it, but you 

do wonder sometimes of the qualifications of the appraiser. 

Ms. BEAN. Any other comments? 

Mr. ASKEW. Overall, the commercial real estate market, unlike 

what happened in the residential market where there were some 

gaps in regulation, there were unregulated loan originators in some 

of our States. To underwrite overall is good in the commercial real 

estate space and also the loan to value ratio. Most of the loans average somewhere around 70 percent, so even 65 percent. So it’s a 

little bit different. But as far as values just falling right now, that’s 

what has created the problem. Values could have fallen, but they 

have fallen so much that is where the gaps, the equity gap has 

been created. 

Mr. COSENZA. In the commercial real estate business, I don’t 

think I have really seen any abuse from the appraisal industry per 

se. I think though because just like mark-to-market, as the values 

start going up, they really have to go with the values because 

that’s exactly what something will sell for. So they’re caught in the 

same spiral going up as the banks got caught with the mark-tomarket going down. And you could never balance it off. 

24 

Ms. BEAN. Would you say though there weren’t loans ever written that were almost not justifiable based on even maximum occupancy rates and rents? 

Mr. COSENZA. Some of the ones I have seen in The Wall Street 

Journal are absolutely stupid, including a large apartment complex 

that was in New York. 

Chairman MOORE OF KANSAS. The gentlelady’s time has expired. 

The Chair will next recognize Mr. Foster for up to 2 minutes. 

Mr. FOSTER. Yes. Let’s see, Mr. Cosenza’s suggestion was extending the cap on SBA 504 loans and to allow them to be used for refinancing of commercial properties. Does anyone have any comments 

on that? What’s the downside? 

Mr. ASKEW. I agree with him. I think it’s a good idea. 

Mr. FOSTER. No objections at all? 

Mr. ASKEW. None, whatsoever. But it has to be an easier process. 

Forty percent of the people can’t fill out the forms. It’s so tough in 

that industry, honestly. 

Mr. FOSTER. Is there a way to do that without compromising underwriting standards? 

Mr. ASKEW. Yes, there certainly is. If I gave a test to my students when I was a teacher and 40 percent of them failed and the 

other ones had to have help doing the test, either I taught wrong 

or I made the test wrong. It’s me, it’s not them. 

Mr. OHLENDORF. And I think getting some of the other institutions involved. A lot of SBA lending is concentrated in a small 

number of institutions. And I think finding a way to get more institutions participating in those programs, they certainly have viability, but the underwriting and the application process is pretty rigorous. 

Mr. FOSTER. There’s a related suggestion to generate a new class 

of SBICs that are allowed to participate in commercial real estate, 

mezzanine finance and so on and is that something that you have 

discussed or heard about, have any comment on? 

Mr. ASKEW. I have, and even though the SBA program from the 

Administration doesn’t fit our industry because they made it for 

the smaller banks, we have still supported that all along and we 

have been meeting with them on all the meetings, trying to help 

that process along because we think at the heart of it, it’s a good 

program. And the point about the complexity, we tried to make 

that clear and your point about the commercial real estate we have 

added those thoughts in for how we might expend the program. 

Mr. FOSTER. One of my hopes is that if you concentrate on the 

mezzanine finance segment of the market, then you have a third 

set of eyes so you can reduce the paperwork because you have external validation that this is a viable project. 

Mr. ASKEW. Right. 

Mr. COSENZA. And the National Association of Realtors would 

love to help work with Congress on that issue. 

Mr. OHLENDORF. As long as they can scale. 

Chairman MOORE OF KANSAS. The gentleman’s time has expired. 

I want to thank our first panel for your testimony. You’re now excused. I’ll invite the second panel of witnesses to please take your 

seats. We’re going to have a 3-minute recess, so if anybody has any 

25 

business to take care off, they can do that, and we will be back to 

start in about 3 minutes. 

[recess] 

Chairman MOORE OF KANSAS. This hearing will come back to 

order and I’m pleased to introduce our second witness panel. First 

will be Mr. Anthony Lowe, Regional Director, Division of Supervision and Consumer Protection, for the Chicago Regional Office of 

the FDIC. Second, Mr. Bert A. Otto, Deputy Comptroller, Central 

Office of the OCC. We’re pleased to have you both testify again, as 

you did at our Michigan hearing on small business lending. And 

third, we’ll hear from Mr. Daniel McKee, Regional Director, Central Region of the OTS. And Ms. Cathy ‘‘Lemieux’’—is that pronounced correctly? 

Ms. LEMIEUX. Yes. 

Chairman MOORE OF KANSAS. —Senior Vice President, Supervision and Regulation, at the Federal Reserve Bank of Chicago. 

Without objection, your written statements will be made a part 

of the record and you will have up to 3 minutes to summarize your 

statements. 

Mr. Lowe, you are recognized, sir, for 3 minutes. 

STATEMENT OF M. ANTHONY LOWE, REGIONAL DIRECTOR, DIVISION OF SUPERVISION AND CONSUMER PROTECTION, 

CHICAGO REGIONAL OFFICE, FEDERAL DEPOSIT INSURANCE CORPORATION 

Mr. LOWE. Thank you. Chairman Moore, Ranking Member 

Biggert, and members of the subcommittee, I am Anthony Lowe, 

Chicago Regional Director for the FDIC. I appreciate the opportunity to testify on behalf of the agency on the state of commercial 

real estate and bank lending. 

Adverse credit conditions brought on by an ailing economy and 

stressed balance sheets have created a difficult environment for 

both borrowers and lenders. Continued resolution of the current 

economic crisis will depend heavily on creditworthy borrowers having access to lending. 

Nationwide, expenses for troubled loans continue to weigh heavily on insured depository institutions. And total loan and lease balances at FDIC-insured institutions declined by $129 million during 

the fourth quarter of 2009. 

Illinois, like many States in the industrial Midwest, has been 

hard hit by the recent recession. Nearly 7 percent of the State’s 

jobs have been lost since the fourth quarter of 2007. Average home 

prices are well below peak levels of early 2007 and commercial real 

estate markets have been strained by higher vacancy rates. 

The financial condition of Illinois banks has deteriorated and remains weak. Illinois institutions’ loan loss provisions have reached 

record levels. Loan delinquencies are above national levels and Illinois institutions reported negative loan growth rates for 2008 and 

2009. These conditions have caused a number of bank failures. 

From October 2008 through April of 2010, 32 Illinois insured depository institutions failed. 

I am going to briefly turn to bank examination and regulation in 

the current environment. FDIC bank examiners work out of duty 

stations in 85 communities across the country, including 5 here in 

26 

Illinois. FDIC examiners are not directly involved in bank credit 

decisions. We do not instruct banks to curtail prudently managed 

lending activities, restrict lending to strong borrowers, or deny a 

refinance request solely because of weakened collateral value. We 

would not require a reappraisal for a healthy, performing loan. 

FDIC examiners focus on borrower case flow as the primary 

source of repayment during our credit reviews, not on collateral 

support which serves as a secondary source of repayment. The borrowers’ willingness and ability to keep payments current is always 

the primary criteria for our loan reviews. 

In February of this year, the regulators jointly issued an interagency statement on meeting the credit needs of creditworthy business borrowers to encourage prudent lending and emphasize that 

examiners will apply a balanced approach in evaluating small business loans. We believe this statement will help banks become more 

comfortable extending soundly written and structured small business loans. 

While many challenges remain before us, I’m confident the banking industry as a whole is moving in the right direction, towards 

sounder lending practices, stronger balance sheets, and a greater 

capacity to meet the credit needs of their communities. I’ll be 

happy to answer questions. 

[The prepared statement of Mr. Lowe can be found on page 136 

of the appendix.] 

Chairman MOORE OF KANSAS. Thank you, Mr. Lowe. 

Mr. Otto, you are recognized for up to 3 minutes, sir. 

STATEMENT OF BERT A. OTTO, DEPUTY COMPTROLLER, CENTRAL DISTRICT, OFFICE OF THE COMPTROLLER OF THE 

CURRENCY 

Mr. OTTO. Chairman Moore, Ranking Member Biggert, and members of the subcommittee, my name is Bert Otto and I am the Deputy Comptroller for the Central District of the Office of the Comptroller of the Currency. I have been a National Bank Examiner for 

almost 37 years and I have been involved in the direct supervision 

of community and mid-sized national banks for nearly my entire 

career. I appreciate the opportunity to be here today. 

The OCC’s core mission is to ensure that national banks remain 

safe and sound and meet the credit needs of their communities and 

customers. Part of an examiner’s job is to determine if banks make 

loans on prudent terms based on sound analysis of the borrower’s 

financial condition, recognize weaknesses and existing credits and 

work with borrowers to develop corrective plans whenever possible, 

maintain sufficient reserves and capital to buffer and absorb losses 

and actively reflect the condition of their loan portfolio and their 

financial statement. It is not the examiner’s job to dictate loan 

terms, products, or borrowers. These are decisions that bank management must make. 

The critical part of our job is determining when potential risk exposures or weaknesses require corrective action by bankers. Knowing when to make these calls requires judgment and a balanced supervised reproach. We strive to get this balance right through 

strong, thoughtful, and consistent supervision and clear, two-way 

communication with banks we supervise. Maintaining this balance 

27 

is critical in supporting a sustainable economic recovery and restoring the health of the commercial real estate market. 

Commercial real estate issues confronting the Chicago metropolitan market mirror what we have been seeing nationwide. Vacancy 

rates are still rising nationally and cash flows produced by CRE 

properties are continuing to decline. 

While there is some evidence of a slight improvement in the CRE 

markets, we expect that many banks will experience further deterioration in their loan portfolios. These conditions have strained 

both CRE borrowers and the CRE loan portfolios of many banks. 

The OCC has been addressing the build-up of risk in this market 

for the past several years and my written statement includes details about targeted CRE examinations we have conducted at banks 

at risk due to the nature and scope of their CRE activities, guidance we have issued, and outreach to examiners and bankers we 

have conducted. 

Last October, we and the other banking regulators issued additional guidance on CRE loan workouts to provide greater clarity 

and certainty on our policies and expectations. The guidance also 

promotes consistency across the agencies in our evaluation of CRE 

credits and stresses two of our long-standing policies that examiners will not classify a loan based solely on the decline and underlying collateral values, nor will they criticize prudent loan workout 

arrangements. Indeed, such workouts are often in the best interests of financial institutions and the borrower. 

In summary, we are aware of the critical role that bank credit 

plays in the health of our Nation’s economy. Our message to bankers is to make new loans to creditworthy borrowers using prudent 

underwriting standards, realistically recognize and address problem credits, and work constructively with troubled borrowers to the 

extent possible. 

Thanks again for the opportunity to appear here today and I will 

be happy to answer your questions. 

[The prepared statement of Mr. Otto can be found on page 172 

of the appendix.] 

Chairman MOORE OF KANSAS. Thank you, Mr. Otto. 

The Chair next recognizes Mr. McKee. You are recognized, sir, 

for up to 3 minutes. 

STATEMENT OF DANIEL T. McKEE, CENTRAL REGIONAL 

DIRECTOR, OFFICE OF THRIFT SUPERVISION 

Mr. MCKEE. Good afternoon, Chairman Moore, Ranking Member 

Biggert, and members of the subcommittee. Thank you for inviting 

me here today. My name is Daniel McKee and I’m the Regional Director of the OTS Central Region here in Chicago. 

Our region provides day-to-day supervision of OTS-regulated 

thrifts in 10 Midwestern States, including Illinois. In the Chicago 

area, we supervise 27 savings associations with total assets of 

about $7.1 billion. Approximately 23 percent of those assets or approximately $1.6 billion consists of commercial real estate, known 

as CRE. 

The nationwide contagion that began in the home mortgage market has reached CRE and although thrifts are limited in the 

amount of CRE lending they can do, some OTS-regulated thrifts, 

28 

particularly the small community-oriented institutions, have suffered significant CRE losses. In some cases, those losses have contributed to thrift failures. 

In light of elevated delinquency rates of all types of loans, thrifts 

and banks are understandably more careful in extending credit 

than they were during the height of the real estate boom a few 

years ago. This is generally a good thing. No one advocates returning to the kind of standards for loan underwriting that helped 

bring about the financial crisis. However, no one wants the pendulum to swing too far in the other direction and unduly restrict 

credit to creditworthy borrowers. 

The key is achieving a balance between the safety and soundness 

of financial institutions and the proper flow of credit that is essential to a vibrant economy. The OTS takes the position that thrifts 

should never turn away good customers. We have conveyed those 

supervisory expectations to the thrift industry and have joined in 

interagency guidance that drives home the point. 

The reality remains, however, that credit will continue to be 

somewhat constricted as long as the economy suffers from pressures such as high unemployment and the impact continues to 

show on the balance sheets of banks and thrifts in the form of delinquent loans. 

Regarding recommendations for the future, the OTS has advocated easing restrictions on commercial lending and small business 

loans by thrifts. This proposal which passed the full House of Representatives twice in the past is fully consistent with the traditional focus of thrifts on consumer and community lending and it 

would make badly needed CRE credit more available in communities across America. 

Thank you again, for having me here, Mr. Chairman, and I’m 

happy to answer any questions. 

[The prepared statement of Mr. McKee can be found on page 153 

of the appendix.] 

Chairman MOORE OF KANSAS. Thank you very much, Mr. McKee. 

And now, the Chair recognizes Ms. Lemieux for 3 minutes, 

please. 

STATEMENT OF CATHY LEMIEUX, SENIOR VICE PRESIDENT, 

FEDERAL RESERVE BANK OF CHICAGO 

Ms. LEMIEUX. Chairman Moore, Ranking Member Biggert, and 

members of the subcommittee, thank you for the opportunity to testify at this timely and important hearing. I should note that I’m 

testifying today in my role as Head of Bank Supervision at the 

Federal Reserve Bank of Chicago and what I say does not necessarily represent the views of the Board of Governors of the Federal Reserve System. 

Conditions in commercial real estate markets pose a threat to 

the banking industry nationwide, and in the Chicago area, many 

local banks have heavy concentrations in commercial real estate 

lending. There are signs that CRE markets are firming, however, 

the time needed to fully recover might be measured in years, not 

months. 

In my written testimony, I place this challenge in the context of 

overall financial and banking conditions and survey a wide range 

29 

of Federal Reserve initiatives. However, I will focus my remaining 

comments on bank supervision. 

Federal Reserve supervision has focused on CRE exposures for a 

number of years. Most recently, we have been working vigorously 

to implement the interagency guidance on prudent loan workouts 

issued last October. It’s key messages are: (1) that prudent workouts are in the best interest of both banks and borrowers; (2) examiners should take a balanced and consistent approach in their view 

of banks’ workout activities; and (3) restructured loans will not be 

adversely classified solely because the collateral has declined to an 

amount less than the loan balance. 

Since the guidance was issued, the Federal Reserve has conducted extensive staff training and industry outreach to underscore 

the importance of sound lending practices. For example, at the Federal Reserve Bank of Chicago, we have devoted 2 days to training 

our 300 examiners to ensure they had a thorough and consistent 

understanding of this guidance. We have also hosted a number of 

forums where supervisors and bankers can exchange views on CRE 

lending and credit availability. 

Current real estate market conditions are unlike any we have 

seen in some time. This has raised safety and soundness concerns 

at some banks. We are committed to working with our banks as 

they deal with these challenging conditions. A healthy banking system is a prerequisite for providing credit to sound borrowers. 

I would be pleased to answer any of your questions. 

[The prepared statement of Ms. Lemieux can be found on page 

122 of the appendix.] 

Chairman MOORE OF KANSAS. Thank you, Ms. Lemieux. I very 

much appreciate your testimony. I will start. I have 5 minutes for 

questions. 

Ms. Lemieux, I was struck by how many of our witnesses on the 

first panel called for the extension of TALF to help stabilize the 

commercial real estate market. What’s your reaction to that broad 

support for extending TAFL? Is that something the Federal Reserve should monitor and consider, especially with the expiration 

of the program to occur in the next month or so. 

Ms. LEMIEUX. I did hear the comments and will certainly relay 

them to the policymakers in Washington. I’m focused on bank supervision, but I will say that we are pleased that the TALF program has spurred the beginning of issuance and our contacts in the 

industry tell us that the private market is beginning to work and 

there are plans for private issuance of TALF, but I can provide you 

with further comments from our policymakers. 

Chairman MOORE OF KANSAS. Thank you. This next question is 

for all the witnesses. I appreciate very much the efforts of all of 

your agencies to provide more clarity and certainty on responsible 

small business lending and CRE loan workouts, but the message 

from D.C. doesn’t seem to be making its way down to the officials 

doing the bank examinations. 

We heard at our field hearing in Michigan last November and we 

have heard it today, so two questions: One, yes or no, do you acknowledge this is the case? And two, what steps is your agency 

taking internally to get that message all the way down to the frontline examiners. 

30 

Mr. Lowe, do you have thoughts, sir? 

Mr. LOWE. Yes, sir. I do. First off, is it the case that there’s a 

disconnect? Personally, I do not believe that there is. There may be 

some differences of opinion about the interpretation of how we’re 

looking at loans and looking at credit and the factors that we take 

into determining how credits will be classified, but I don’t believe 

there’s any disconnect between our policy statements, the financial 

institution letters that we have issued jointly with the other agencies. And some of the things that we have done at the FDIC and 

I think the other regulatory agencies have also, we have issued internal memorandums. We have had nationwide conference calls 

with all of our examiners across the country to make sure everyone 

knows what the expectations are. And that expectation is that 

we’re going to be looking at cash flow. We’re going to be looking 

at performance in determining the quality of credits and determining if there should be some type of impairment that needs to 

be recognized. 

Chairman MOORE OF KANSAS. Thank you. Mr. Otto, your 

thoughts? 

Mr. OTTO. Yes, I would agree with Anthony’s comments and then 

extend it a little bit further. I think we have done a lot of work 

in getting the message out to the examiners, but also bankers. We 

have held CEO roundtables. We have had chief credit officer 

roundtables where we really do ask for feedback on our policies. 

And if something is not clear, we would hope that we would have 

that two-way communication. 

But something I don’t think any of the agencies did a very good 

job of at the last downturn of the economy and we have kind of 

learned from that, that was a lessons learned and we’re really trying to stress the importance of that two-way communication. We 

can’t really deal with the issue unless we have bankers stepping 

up and talking to us about what their feeling is in their examinations. 

Chairman MOORE OF KANSAS. Thank you, Mr. Otto. Mr. McKee, 

sir? 

Mr. MCKEE. As Bert indicated, we have done the same at the 

OTS, and in the last couple of months, I have had 4 CEO outreach 

meetings where we invite between 15 to 25 CEOs together. I had 

one here in the Chicago office about a month, month and a half 

ago. And through that type of forum, we do get good feedback from 

the bankers, really what they’re seeing, what problems they are 

having. And we ask them during that process, what can we do better, what can we do differently through our exam process? 

I have a call with all of the examiners from the central region, 

the 10 States that I’m responsible for, later this month. And I’ll be 

going through the results of that type of a discussion with the examiners at that point. And nationally, the OTS has reached out to 

all the examiners on a conference call to discuss these types of 

issues as well. 

Chairman MOORE OF KANSAS. Very good. Ms. Lemieux, do you 

have any comments? 

Ms. LEMIEUX. I certainly agree with my regulatory colleagues. At 

the Chicago Fed, we really have four lines of defense to make sure 

that the application of the guidance is consistent and effective. The 

31 

first is examiner training, and I mentioned that in my opening 

statement. As the FDIC does, we have calls with the industry and 

calls with all our staff across the system to address questions that 

come up in the field as this guidance is applied. 

The second is outreach to the banking industry. The Chicago Fed 

conducts a community banking symposium. We had one last November and it was co-sponsored by the individuals here at this 

table. We had over 200 bank CEOs and Governor Duke was our 

speaker who discussed, in depth, that guidance which at that time 

had just been issued. 

Third, we have internal quality management programs that ensure that our guidance is supplied consistently. No one examiner 

gets to decide these things by themselves. There’s a group of people, not only the exam team, but the officers and managers in the 

office as well as we consult with our specialists as well as our colleagues in Washington to make sure we get that answer right. 

Fourth, as is the case with all agencies, bankers have the right 

to appeal examination decisions. And to date, the Chicago Fed 

hasn’t had appeals on this issue from our bankers. 

Chairman MOORE OF KANSAS. Thank you. My time has expired. 

The Chair will next recognize Ms. Biggert for questions for up to 

5 minutes. 

Mrs. BIGGERT. Thank you, Mr. Chairman. I appreciate all of your 

testimony and the issue you have been talking about as far as the 

loan valuations. Would you all be willing to participate in a roundtable with the stakeholders to discuss this? 

Mr. Lowe? 

Mr. LOWE. Absolutely. 

Mrs. BIGGERT. Mr. Otto? 

Mr. OTTO. Yes. 

Ms. LEMIEUX. I might offer that the Chicago Fed has hosted a 

number of hearings for different task forces and we would be happy 

to work with you on that. 

Mrs. BIGGERT. Thank you. I appreciate that. Then Ms. Lemieux, 

on page 7 of your testimony, you mentioned that the Fed recognized in the 1980’s and the 1990’s the problems with the rising 

CRE concentrations and as a result you led an interagency effort 

to develop supervisory guidance on CRE concentration. When did 

you propose this guidance? 

Ms. LEMIEUX. I’m a little confused with the reference. 

Mrs. BIGGERT. It’s on page seven. 

Ms. LEMIEUX. Do you mean the 1990 guidance or the most recent 

guidance? 

Mrs. BIGGERT. It was 2006. 

Ms. LEMIEUX. Yes, we actually in the Chicago Fed began identifying this issue much earlier. In 2004, we worked with our colleagues throughout the system and our bankers to really fully understand the issue. The guidance was developed and went through 

an inter-agency process and was eventually issued. 

Mrs. BIGGERT. It concerns me that for a decade and a half some 

banks continued to make these risky CRE loans and increased the 

concentration in their portfolio. 

Ms. LEMIEUX. I guess I’m a little confused, because certainly a 

lesson learned from the 1990’s was the impact commercial real esVerDate Nov 24 2008 18:09 Nov 10, 2010 Jkt 058046 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 K:\DOCS\58046.TXT TERRIE
32 

tate can have on—and concentrations can have. And in terms of 

our focus on risk management at banks, we certainly viewed concentration as a risk and worked with our banks to make sure that 

they had the procedures and the internal controls and the audit to 

mitigate the results of those concentrations. 

Mrs. BIGGERT. We looked at the Midwest Bank and Trust failure 

last Friday. It seems that was a concentration that wasn’t—that 

the various regulators didn’t really look at. 

Ms. LEMIEUX. There is never just one reason a bank fails. And 

certainly Midwest Bank was subject, had invested heavily in commercial real estate and the management there tried valiantly to adjust their operations to overcome the dramatic change in real estate values. As someone mentioned before, preemptory action requires certain actions. It’s just limited the time management had 

to make adjustments. 

Mrs. BIGGERT. I was just summarizing a report that says the 

FDIC failed to supervise the bank and failed to take any action. 

There was a risky CRE loan concentration and essentially failed to 

do the job. And then finally, it is no secret that our State Treasurer’s family bank, Broadway Bank, recently failed. And looking at 

that timeline, they issued more risky CRE loans over the course of 

several years and the press reports tell us that in 2007, 2008 the 

shareholders of the bank walked away, the family walked away 

with $70 million in dividends and in 2009, the Broadway Bank was 

told to raise $85 million by April and they didn’t meet that and 

failed. And the cost to the FDIC Fund is reported to be about $400 

million. And in addition, some say that the family could walk away 

with millions in tax write offs. And the jury is not out. Now we 

have another perhaps cost to the FDIC Fund of Corus Bank and 

any—we have to work for the MLRR report from the Treasury Inspector General on that. So we don’t know what’s going to happen 

there. And it could cost over $100 million. So there’s something 

wrong with this picture. And the regulators did nothing to stop this 

wave of these loans and I see he’s going to bang the gavel on me. 

Maybe I’ll get another chance to come back to that. 

Chairman MOORE OF KANSAS. You still have a minute or so, if 

you would like. 

Mrs. BIGGERT. Okay, good. Can anybody tell me why, for so 

many years, nothing has been done while your agencies knew that 

there was a problem if you all had an interagency, I would call it 

a summit or a meeting, saying that there was a problem and why 

weren’t these loans talked about and these unsafe and unsound 

practices of so many banks? 

Would anybody care to talk about that? 

Mr. LOWE. Yes, Congresswoman, I’ll try to attempt to answer 

parts of that. Back through the early part of the decade and leading up to the real estate crisis, if you were to look at our examination reports from any of the agencies of pretty much any of these 

banks that did fail, we were consistently warning the banks about 

concentrations of credit, concentrations in commercial real estate 

and specifically ADC and that type of lending. We were usually 

also making recommendations for the banks to strengthen their underwriting, to hold additional capital and again to strengthen the 

33 

oversight of that and measurement and monitoring of that particular facet of a bank’s operations. 

The majority of those institutions at that point in time before the 

real estate market crashed were continuing to make profits. The 

credits were continuing to perform at that time and I think this 

goes to what we have been talking about. If a credit is performing, 

if it is cash flowing, we’re looking at the collateral as a secondary 

form of repayment. So those credits were performing at that point 

in time. The market was still performing, so that did factor into 

our staff decisions. 

Chairman MOORE OF KANSAS. The gentlelady’s time has expired, 

so if you would like to ask that the witnesses make written comments available to the entire panel, we can do that as well. 

Mrs. BIGGERT. I appreciate that. 

Chairman MOORE OF KANSAS. Certainly. The Chair will next recognize for up to 5 minutes, Ms. Bean, the gentlelady from Illinois. 

Ms. BEAN. I actually may pick up where my colleague left off. 

Five years ago, before this problem in the real estate market, what 

was done to try to change the allocation of loans at community 

banks since there does appear to have been this overconcentration 

in commercial real estate? 

Mr. OTTO. I’ll make a couple of comments. I think that one of the 

things that we looked at, we do monitor concentrations and we will 

make sure that the Board, the Board of Directors have approved 

limits and if the limits get out of line, we will have discussions 

with them. Do they have the staff necessary to handle high concentrations? And quite honestly in some cases, we will ask the 

bank to add capital, raise capital in some of these. What we have 

found in this crisis, what has caused a lot of the banks’ problems 

has been high concentrations of out-of-area lending and growth. 

Concentrations and growth over my career, those are the two 

things that get banks into trouble. And we ask management to 

make sure that they have the controls in place, the MIS to monitor 

that and when it gets too high that the Board of Directors understand where they’re at. 

A lot of banks did not really know the level of concentrations. 

Ms. BEAN. I actually am going to take the rest in a written report as the chairman had recommended just so I can get to some 

other questions. The committee will be considering this week legislation similar to the President’s proposal to provide up to $30 billion of investment in community banks for the purpose of increasing small business lending. 

Not only what impact do you think that would have on small 

business lending in Illinois, but how will the supervision of the 

bank that receives that investment be altered? To whomever wants 

to address that. 

Ms. LEMIEUX. There are two ways to interpret that, certainly, we 

don’t supervise banks that have received TARP any differently or 

any other type program any differently than we do other banks. We 

want to be sure they operate in a safe and sound manner and serve 

the needs of their communities. Certainly, TARP banks have extra 

reporting requirements concerning lending, so that would be up to 

the designers of the program. 

34 

Ms. BEAN. Any other comments on that? Another question, you 

talked about sometimes banks appealing a decision. We hear, I 

think all of us have heard from community banks who have felt 

that regulators have been overly stringent. They hesitate to appeal 

because they’re fearful about ramifications. So who knows when a 

bank appeals a decision and should they be? 

Mr. LOWE. At the FDIC, we have made it clear, because we have 

also had several venues across the region where we have had director’s colleges and meetings with bank directors and chief executive 

officers where we have clearly indicated to them this is the process, 

if you don’t concur with our findings during the examination process or the processing of a report or before the rating is issued, 

there are clearly some steps that can be taken. We try to resolve 

our differences of opinion during the examination process. If that 

doesn’t occur and the bank still wishes to appeal or to have us consider some additional information we can usually do that at the regional office level. So that process has been made public to all our 

institutions that there is a process for them to pursue and we have 

had several appeals here over the last couple of years and we go 

through the process. We have a fresh set of eyes to look at the findings, look at the conclusions, look at the recommendations, and 

come to a conclusion as to whether the findings were well supported. 

Ms. BEAN. So you’re saying no, they shouldn’t be here on appeal? 

Mr. LOWE. No banks should be afraid to appeal. 

Mr. MCKEE. I just might add to that the CEO meeting that I referred to earlier, two of those meetings we had the ombudsman 

which is the person in our organization who would oversee any 

type of an appeal in attendance there to try to get the dialogue, for 

them to get comfortable that it’s not a bad thing for them to appeal, that we will take an independent review of it and make a decision at that point. 

Ms. BEAN. I appreciate that and if I have time, and I’m sure 

you’ll gavel me if I don’t, my last question is about some of the proposals to amortize real estate losses at community banks over a period of years instead of immediately. 

From your perspective, what are the positives and/or concerns? 

It does kind of align with some of the countercyclical recommendations that we have talked a lot about, but some also say that’s kicking the can down the road and making a problem fester. What are 

your thoughts? 

Mr. LOWE. I’ll tell you one of my concerns would be that you potentially have this gap between the regulatory capital of an institution and gap capital where if you have this forbearance potentially, 

the bank is showing that it has more capital to protect against 

losses than it actually does. I think that takes away the transparency in the financial process for investors, for bank customers, 

a lot of that transparency is eliminated in that type of a process. 

Ms. BEAN. Other comments? 

Mr. OTTO. We feel that it delays the problems. I think we have 

tried that in the past, and from our perspective, it hasn’t worked 

well. 

Mr. MCKEE. I believe it would delay really the true capital position reflecting that. The thrift industry back in the late 1980’s had 

35 

deferred loan losses, the same type of principle and I think it was 

a lesson we learned, that was maybe not a good thing to pursue. 

Ms. BEAN. Thank you. 

Ms. LEMIEUX. I agree with my colleagues. I think one point I 

would like to underline that Anthony emphasized is transparency 

to the market. So it’s not only the ability of our examiners to understand the financial condition of the organization, but also the investors in that organization and market participants. 

Ms. BEAN. Thank you. I yield back. 

Chairman MOORE OF KANSAS. The gentlelady’s time has expired. 

I now recognize Mr. Foster for 5 minutes. 

Mr. FOSTER. Thank you. One thing that we have heard from several witnesses, I guess, is the statement that loans will not be reclassified solely on the basis of the drop in collateral value. And it 

sounds like that is crying out for some fine print and a little asterisk. So I was wondering, under what conditions will the value of 

the underlying collateral become relevant in the examination process and so on? If we could just march down the line. 

Mr. LOWE. Basically, when we start looking at collateral we have 

come to a conclusion that the borrower does not have the wherewithal, either the willingness or the ability, to continue to amortize 

a loan as contracted. They either don’t have the cash flow, the global cash flow or assets that can be liquidated, to continuing amortizing and at that point in time, we will start to look at the collateral since that is the secondary source of repayment. 

Mr. FOSTER. Do you look at the overall—across the whole portfolio, the total amount of collateral compared to the loan size and 

so on in such a way that a bank would have an incentive to try 

to get rid of or not renew loans that were not well collateralized? 

If you understand my—what I’m trying to—whether you look at 

the total collateral position of a bank when you’re evaluating its 

health, I guess— 

Mr. LOWE. You mean for an individual credit? 

Mr. FOSTER. No, not on a loan-by-loan basis, but overall. 

Mr. LOWE. We generally will do our credit reviews on a loan-byloan type of basis and not by looking at the— 

Mr. FOSTER. So it’s strictly only true how well collateralized it is 

after you have concluded that the thing has gone belly up and 

you’re looking at liquidation as a possibility. Okay. 

Mr. OTTO. Yes, if the primary source of repayment obviously is 

cash flow, if that is gone, then we look at the collateral that the 

collateral covers, but the primary source of repayment would have 

to be gone. 

Mr. MCKEE. But if the primary source of repayment is still sufficient, the collateral may not be sufficient to collateralize the loan, 

but it doesn’t mean it’s a problem loan at that point. Again, we look 

at the primary source which in real estate is going to be your cash 

flow. 

Mr. FOSTER. So a bank that has lots and lots of performing loans 

all of which are undercollateralized would not be a source of concern for you? 

Mr. MCKEE. It potentially could be a source of concern. We would 

have to look at each loan on an individual basis. 

36 

Mr. FOSTER. If each were performing individually, you would say 

okay, that’s fine, and that’s really the way it works in reality. 

Okay. 

Mr. MCKEE. Because some banks can make unsecured loans. 

Mr. FOSTER. Okay. Let’s see, I guess it strikes me that one of the 

fundamental questions that we have to face when we’re talking 

about schemes to recapitalize banks as Melissa mentioned or just 

CRE market supports, whether we’re going to establish programs 

and policies that effectively put the taxpayer on the hook if there’s 

a double dip in commercial real estate prices. And from that point 

of view, the TARP program was a success. There wasn’t a double 

dip in toxic asset valuations and the taxpayer got out, in fact, with 

a profit. 

In the CRE, it’s less clear. I was wondering if you have any 

words of wisdom on how well defended we should be against a double dip in commercial real estate and prices as we’re thinking 

about these programs? 

Ms. LEMIEUX. We can refer it to the policymakers in Washington. 

Mr. FOSTER. It’s a fundamental question. We can recapitalize a 

bunch of marginal banks and lose that whole investment if, in fact, 

there is a further drop. And so it’s a fundamental question and I 

wonder who we should turn to for advice on the risks that we’re 

putting out for the taxpayer? 

Ms. LEMIEUX. It is a serious question and one of the criteria for 

TARP was that the money went to viable banks and that requirement was important to the market because they knew that was a 

requirement, so it was a signaling mechanism for others that might 

have the ability to invest in that bank. So that’s just an observation. 

Mr. FOSTER. Any words of wisdom you have would be very welcome because that’s the fundamental question we’re facing. 

Thanks. I yield back. 

Chairman MOORE OF KANSAS. The gentleman yields back, and I 

think we do have a few extra minutes here, so with everybody’s 

consent, we’re going to do one 2-minute round of questions again, 

and then we’ll start on our third and final panel. 

Mr. Lowe, I would like to get your view on a couple of items with 

respect to bank failures given the FDIC’s role in that. Knowing 

that more banks will likely fail and there will be some ongoing consolidation within the banking sector, what steps has the FDIC 

taken to make sure that any banks sold are sold to a wide variety 

of other firms and not just the largest banks? And what is your reaction to the suggestion that CRE assets from failed banks be 

securitized as they were following the S&L crisis? 

Mr. LOWE. With regard to the sale of institutions, we’re required 

under the law right now to make sure these transactions are done 

at the least cost to the Deposit Insurance Fund. When we go 

through the process of coming up with the bid list and actually 

when we put the bank out for bid, we do look at a lot of factors, 

the capital of the institution that’s going to be acquiring it, the 

management expertise, the business plan, different factors, but 

when we make a final decision we do still have to make sure it is 

the least cost, regardless of the type of transaction that we do decide is the best that we need to be pursuing. 

37 

I’m sorry, what was the second part of the question? 

Chairman MOORE OF KANSAS. What’s your reaction to the suggestion that the CRE has from failed banks be securitized as they 

were following the S&L crisis? 

Mr. LOWE. That’s an issue I would like to consider for a followup response. 

Chairman MOORE OF KANSAS. Ms. Biggert, you are recognized for 

2 minutes. 

Mrs. BIGGERT. Thank you, Mr. Chairman. I still don’t understand 

why it took 16 years for agencies to issue the guidance on CRE 

loan concentrations. I know John Dugan, the Comptroller of the 

Currency, in The American Banker, said we know that significant 

CRE concentrations and economic downturns can lead to an increase in problem banks, an increase in bank failures, loss of jobs, 

loss of income, loss to communities, loss to the Deposit Insurance 

Fund, and higher costs for all banks, even those that do not have 

CRE concentrations. I think it’s just a shame that—particularly 

with the FDIC. I have a bank in my District that failed and the 

way that—when it came out, the Inspector General for the FDIC 

said it was—that the FDIC failed to do the job and it is costing us 

so much money with—to take over banks. 

Is there going to have to be another special assessment to the 

banks for the FDIC? Is that in the works? 

Mr. LOWE. At this point in time, I’m not aware that we’re considering another special assessment. We continue to look at our pricing and our premiums. Just a couple of weeks ago—last month, actually, our Board of Directors did approve for notice of a proposal 

to look at—looking at the larger, more complex institutions and 

making sure they were appropriately pricing their deposit insurance coverage. But at this point in time, to my knowledge, there 

are no plans for an additional special assessment. 

Mrs. BIGGERT. That’s good news, because every special assessment then raises the capital which then lowers the ability of the 

banks to make the loans. Does anybody have anything additional 

to add to how this is going to change? 

Mr. MCKEE. I just might mention on the concentration piece that 

the thrift industry, OTS, we have a statutory limitation of 400 percent and that’s been in effect for many years, so we did not join 

the other regulatory agencies with their guidance because of the 

fact that we had the statute that already limited the CRE concentration. 

Mrs. BIGGERT. I worry about this, but on the other hand, I worry 

about an overreaction too, so there’s such regulation that it goes 

too far. Work on that, please. I yield back. 

Chairman MOORE OF KANSAS. Thank you. Ms. Bean, you’re recognized for 2 minutes. 

Ms. BEAN. Thank you, Mr. Chairman. You can get back to me 

in the interest of time so we can get you the third panel, but I had 

asked the last panel about underwriting standards for commercial 

real estate loans. If you can give me a yes or no on whether you 

think further congressional action is necessary in that regard, that 

would be helpful. If we can go right down the line? 

Mr. LOWE. No. 

Mr. OTTO. We would have to look at it. 

38 

Mr. MCKEE. Same here. We would have to study that. 

Ms. LEMIEUX. I think that’s in the realm of bank management. 

That’s a decision that different managers of banks and boards 

make, depending on the risk appetite of their organization. But 

again, we can get back to you on that. 

Ms. BEAN. I yield back. 

Chairman MOORE OF KANSAS. Thank you. Mr. Foster, you are 

recognized, sir, for 2 minutes. 

Mr. FOSTER. I was wondering if someone could explain briefly 

how the different classes of commercial real estate loans are handled in terms of capital requirements? And whether there are any 

changes in these requirements that could provide some capital relief without really changing the overall risk to the FDIC Fund, this 

sort of thing? Are there any specific proposals out there that would 

allow you to say that there is a certain class of real estate loans 

is not really a risk and you shouldn’t hold as much capital against 

it as other classes? Is that already done to the extent possible? Are 

there further enhancements of that, which might provide some relief? 

Mr. LOWE. The risk-based capital is, and I’m struggling with 

what the numbers are, the limits are, but there are different percentages of capital that’s assigned, based on risk-based capital. 

Mr. FOSTER. There are several of these different classes? 

Ms. LEMIEUX. This is the FOSL 1 rules, so there are big buckets, 

residential real estate. So they’re not very risk sensitive. That’s 

how we determine our risk-based assets. 

Mr. FOSTER. Is there a chance that you could better match the 

real risk to what’s there? 

Ms. LEMIEUX. Certainly, we’re working with all the regulators 

internationally on risk-based capital standards. And while in the 

United States, we have elected to apply those only at the largest 

banks, there are ramifications and proposals being considered to 

adjust the FOSL 1 requirements in light of what we have learned, 

but they certainly won’t be as individually tailored as they are for 

the largest banks. 

Mr. FOSTER. Have there been any easy to explain systematic differences in the lending practices and the degree to which commercial real estate is a problem among the different chartered organizations? It’s sort of an open-ended question. But if you just look, 

different banks. Maybe if you could respond in writing, I guess. 

Ms. LEMIEUX. Okay. 

Chairman MOORE OF KANSAS. I would ask the witnesses, if they 

would, please respond in writing, because the members certainly 

have the right to ask the questions. We’re just out of time now. 

I want to thank our second panel for your testimony. You’re now 

excused. I’ll invite the third and final panel of witnesses to please 

take your seats. Thanks again for coming today and for testifying. 

I’m pleased to introduce our third and final panel: Ms. Paula 

Dubberly, Associate Director, Division of Corporation Finance, at 

the SEC: Mr. Kevin Stoklosa, Assistant Technical Director, Financial Accounting Standards Board; Mr. Leslie Sellers, president of 

the Appraisal Institute; Mr. Kent Born, senior managing director, 

PPM America, testifying on behalf of the CRE Finance Council; 

39 

and Mr. Bruce Cohen, CEO, Wrightwood Capital, testifying on behalf of the Real Estate Roundtable. 

Without objection, the written statements of each of the witnesses will be made a part of the record, and you will each have 

3 minutes to summarize your statements and touch on the key 

messages you would like to share. 

Ms. Dubberly, you are recognized for 3 minutes. 

PAULA DUBBERLY, ASSOCIATE DIRECTOR, DIVISION OF CORPORATION FINANCE, U.S. SECURITIES AND EXCHANGE COMMISSION 

Ms. DUBBERLY. Chairman Moore, Ranking Member Biggert, and 

members of the subcommittee, I am Associate Director of the Division of Corporation Finance at the SEC and I’m pleased to testify 

on behalf of the Commission today on the topic of securitization. 

Securitizations may serve as a vehicle for financing commercial 

real estate, so my comments today will provide an overview of the 

Commission’s work in the securitization area, specifically focusing 

on a recent proposed rulemaking that the Commission published 

for public comment on April 7th that proposes significant revisions 

to the rules governing offers, sales, and reporting with respect to 

asset-backed securities. 

Securitization generally is a financing technique in which financial assets, in many cases illiquid, are pooled and converted into instruments that are offered and sold in the capital markets as securities. 

At its inception, securitization primarily served as a vehicle for 

residential mortgage financing, but since then has provided liquidity to nearly all major sectors of the economy, including the residential and commercial real estate industry, the automobile industry and the consumer credit industry. 

Many of the problems giving rise to the financial crisis involved 

asset-backed securities, including residential mortgage-backed securities. As the crisis unfolded, investors increasingly became unwilling to purchase these securities. The absence of this financing 

option has negatively impacted the availability of credit. 

The Commission’s proposal is intended to provide investors with 

timely and sufficient information. Although these revisions are 

comprehensive and therefore would impose new burdens, if adopted, the Commission believes they would protect investors and promote efficient capital formation. 

I will briefly summarize the proposal. The proposal would change 

the eligibility requirements for ABS offerings to qualify for expedited treatment. One of the current eligibility requirements for 

these expedited offerings is that the securities are rated investment 

grade by a nationally recognized statistical rating organization. 

Much has been written about the failure of ratings. The proposal 

would repeal the expedited offering criterion relying on ratings and 

establish new requirements for expedited ABS offerings. These proposed requirements are designed to provide for a certain quality 

and character for ABS securities that are eligible for expedited 

issuance. 

Because many ABS investors expressed concerns that they did 

not have enough time to consider the disclosures about the potenVerDate Nov 24 2008 18:09 Nov 10, 2010 Jkt 058046 PO 00000 Frm 00045 Fmt 6633 Sfmt 6633 K:\DOCS\58046.TXT TERRIE
40 

tial investment, the proposal would require issuers doing an expedited offering to provide at least five business days for investors to 

consider a preliminary prospectus about the offering. 

The proposal would require, in addition to aggregated pool data, 

disclosure of specified loan level data and machine-readable standardized format. The data points the Commission proposed to require for commercial mortgage-backed securities are primarily 

based on the definitions included in the CRE Finance Council’s investor reporting package, current regulation AB requirements and 

staff’s review of current disclosure. 

The Commission also proposed to require the filing of a computer 

program of the contractual cash flow provisions of the securities. 

Significant concerns have been raised about investor protection in 

the private ABS market where a significant portion of 

securitization transactions take place. 

The Commission proposed to require enhanced disclosure by ABS 

issuers who wish to take advantage of the safe harbor provisions 

for these privately-placed ABS. In addition, the Commission proposed amendments to require ABS issuers to file a public notice. 

The comment period for the proposed rules expires on August 

2nd. The Commission looks forward to reviewing and considering 

all comments. 

Thank you again for the opportunity to testify. 

[The prepared statement of Ms. Dubberly can be found on page 

105 of the appendix.] 

Chairman MOORE OF KANSAS. Thank you, Ms. Dubberly. 

Mr. Stoklosa, you are recognized for 3 minutes, sir. 

STATEMENT OF KEVIN STOKLOSA, ASSISTANT TECHNICAL 

DIRECTOR, FINANCIAL ACCOUNTING STANDARDS BOARD 

Mr. STOKLOSA. Mr. Chairman and members of the subcommittee, 

my name is Kevin Stoklosa, Assistant Director of Technical Activities at the Financial Accounting Standards Board. 

Thank you for inviting me today to participate in this important 

hearing. 

Since 1973, the FASB has established standards of financial accounting and reporting for nongovernment entities including both 

businesses and not-for-profit organizations. Those standards are 

recognized as authoritative, generally accepted accounting principles. GAAP is essential to the efficient functioning of the U.S. 

economy because investors, creditors, donors, and other users of financial reports rely heavily on credible, transparent, comparable, 

and unbiased financial information to make resource allocation decisions. 

Because the actions of the FASB affect so many organizations, 

the FASB carefully considers the views of all interested parties including users, auditors, regulators, and preparers of financial information in its decision-making process. Although the FASB and regulators have different objectives, because of their keen interest in 

GAAP financial statements as the starting point in their assessment of the safety and soundness of an entity’s financial position, 

the FASB members and staff regularly meet with regulators to obtain their input and better our understanding of their views. 

41 

The subcommittee is examining the causes of the turmoil in the 

commercial real estate market, and the state of the market. I 

would like to focus my remarks on the FASB’s accounting guidance 

that most significantly affects these companies. 

From the perspective of entities that develop, purchase, or own 

commercial real estate, the accounting guidance requires those entities to measure the investment at historical cost. Under this accounting model, entities are required to capitalize certain costs incurred in the development or acquisition of commercial properties. 

GAAP provides prescriptive guidance on what costs should be capitalized and when capitalization of those costs should cease to continue. Testing properties for impairment during both the construction stage and once the property is available for occupancy is also 

required. 

As a result of input from both preparers and users of financial 

statements, the FASB has recently added a project to its agenda 

to reconsider whether entities should be permitted to measure investment properties at fair value, instead of historical cost. International accounting standards currently permit investment properties to be measured at fair value. 

From the perspective of entities that finance commercial real estate, the accounting guidance is based on whether the creditor 

holds the loans or whether the creditor transfers or securitizes the 

loans. Last year, the FASB issued Statements 166 and 167 which 

were needed improvements to the accounting and reporting for 

transfers of financial assets, including securitizations, and other involvements with special purpose entities. This guidance, which still 

allows for entities to obtain sale accounting, where appropriate, it 

should result in more assets involved in such transactions staying 

on the books of the sponsoring financial institutions, by significantly reducing the ability to get off-balance sheet treatment for 

securitizations and other similar arrangements where significant 

risk is retained by the entity. Although this guidance will better reflect financial institutions’ exposure to risks, it may affect their 

ability to comply with the regulatory capital requirements and 

therefore affect the liquidity available to the CRE industry. 

Mr. Chairman, that concludes my prepared remarks. I would like 

to thank you and the subcommittee for the opportunity to testify 

this afternoon. 

[The prepared statement of Mr. Stoklosa can be found on page 

193 of the appendix.] 

Chairman MOORE OF KANSAS. Thank you, Mr. Stoklosa for your 

testimony. 

Mr. Sellers, you are next recognized for 3 minutes, sir. 

STATEMENT OF LESLIE SELLERS, PRESIDENT, APPRAISAL 

INSTITUTE 

Mr. SELLERS. Being here at the site of the Great Chicago Fire of 

1871 is reminiscent of mass destruction and rebuilding, not unlike 

the work that we face to rebuild our financial system today. Hundreds of banks are expected to fail in the next 2 years. Financing 

for commercial real estate is nearly nonexistent as trillions of dollars of commercial paper comes due. 

42 

Based on my discussions with government officials, investors, 

and borrowers throughout the world, there’s a striking concern that 

we conduct real estate financing with a Wild West attitude. The 

United States has lost credibility as a financial leader of the world. 

Clearly, if we are going to retain and attract new investment, we 

must earn back the trust of investors. 

We firmly believe that collateral risk assessment must be enforced. We cannot rely on credit risk alone. We must account for 

collateral risk. We need to promote quality and competency over 

speed and volume. We need to consistently enforce lending regulations and guidelines. We need to elevate risk management to be on 

par with loan production. 

We believe there are specific actions that can help put out the 

fires and help in the rebuilding process. First, to help with the 

CRE workouts, lenders should engage competent appraisers to provide multi-value appraisals, providing as-is market value, liquidation value, and fair value. These represent the most likely, the 

most pessimistic, and the most optimistic measurements applied to 

risk. 

Second, financial institutions should engage independent valuation experts in the periodic monitoring of CRE assets, much like 

pension funds and institutional investors do now. 

Third, we need to strengthen the interagency appraisal guidelines to demand competency, quality, and accountability. 

And finally, we need to strengthen the institutional capacity of 

collateral risk within the financial institutions and the bank regulatory agencies for better oversight and enforcement. 

In closing, professional appraisers stand prepared to battle the 

fires confronting the commercial real estate market today. As we 

look to win back the confidence of investors worldwide, we believe 

enhanced collateral risk assessment is one of the building blocks 

necessary to chart that path. 

Thank you, and I am happy to answer any questions. 

[The prepared statement of Mr. Sellers can be found on page 184 

of the appendix.] 

Chairman MOORE OF KANSAS. Thank you, Mr. Sellers, for your 

testimony. 

The Chair will next recognize Mr. Born. You are recognized, sir, 

for up to 3 minutes. 

STATEMENT OF KENT BORN, SENIOR MANAGING DIRECTOR, 

PPM AMERICA, ON BEHALF OF THE CRE FINANCE COUNCIL 

Mr. BORN. Thank you, Chairman Moore, Ranking Member 

Biggert, and members of the subcommittee. 

My name is Kent Born. I manage a $6 billion commercial mortgage-backed securities portfolio for PPM America. I also am a past 

president of the CRE Finance Council which represents lenders, 

issuers, servicers, and investors of all kinds. 

Today, I would like to focus on three points: first, the challenges 

facing commercial real estate finance; second, the unique structure 

of CMBS; and third, policies to support a lasting recovery. As a lagging indicator, the $7 trillion commercial real estate 

market is now feeling the full impact of a prolonged recession. The 

contagion from the collapse of the subprime market spread quickly 

43 

to CMBS even though loan defaults and ARM market remained 

less than one percent for more than a year after the subprime 

meltdown. 

Today, a perfect storm exists in four interconnected challenges. 

First, there’s virtually no lending in the CMBS market and this is 

down from nearly $250 billion of lending as recently as 2007. 

Second, approximately, $1.4 trillion in commercial real estate 

loans mature over the next several years. 

Third, at the risk of stating the obvious, we are in the midst of 

a recession. 

And finally, a severe equity gap exists in commercial real estate. 

Commercial properties have lost anywhere from 30 to 50 percent 

of value since the fall of 2007, and this is arguably the biggest challenge that we face in the market today. 

The centerpiece of the financial stability plan is restarting 

securitization to meet borrower demand. In order to do this, there 

are four key differences that need to be understood in any policy. 

First, CMBS borrowers are sophisticated businesses that own income-producing properties. Second, the CMBS structure typically 

includes anywhere from 100 to 300 loans averaging $8 million in 

size. Third, we have the COE Finance Council Investor Reporting 

Package, a standardized database that is now being used as a 

model for the residential market. And finally, we’re the only market with first loss investors who re-underwrite all of the loans in 

a pool prior to issuance. 

There are four key areas that provide a framework for recovery. 

First of all, we need increased coordination in accounting and regulatory reforms and we support a House-passed study on these 

issues. 

Second, we need reforms that are customized by asset class. In 

this regard, House and Senate-passed language to consider the best 

form of skin in the game for commercial mortgages is crucial. 

Third, we need new capital sources for the commercial real estate 

market. TALF was extremely helpful in terms of bringing liquidity 

back to the secondary market, but we need to explore ways to address the equity gap issue such as RTC-like structures, guarantees 

for small loans and/or covered bond frameworks. 

And finally, we need to provide investors with certainty. Investors need certainty in regulation and they need confidence in areas 

such as credit ratings and in underwriting and really the market 

as a whole. 

So I thank you for the opportunity to testify and I look forward 

to taking your questions. 

[The prepared statement of Mr. Born can be found on page 65 

of the appendix.] 

Chairman MOORE OF KANSAS. Thank you to all of our witnesses 

for your testimony. I recognize myself for up to 5 minutes for questions. 

Mr. Born, you first, sir. Taking a step back from commercial real 

estate, I find that most Americans may not understand how 

securitization works from a fundamental level and how it impacts 

their everyday lives. 

44 

I’m sorry, excuse me. I apologize. Mr. Cohen, you’re recognized. 

I apologize. I didn’t mean to leave you out there. You have 3 minutes, sir. 

STATEMENT OF BRUCE R. COHEN, CEO, WRIGHTWOOD 

CAPITAL, ON BEHALF OF THE REAL ESTATE ROUNDTABLE 

Mr. COHEN. My name is Bruce Cohen, and I’m the chairman and 

chief executive officer of Wrightwood Capital. I appreciate the opportunity to testify today on behalf of the Real Estate Roundtable. 

I commend you, Mr. Chairman, and the members of this committee for holding this hearing. The capital-related issues facing 

the commercial real estate industry are real and pose meaningful 

risks to the overall economy. We are grateful for your efforts to 

identify critical policy actions that can address this increasingly 

troublesome situation. 

The bottom line is this: Despite some stabilization of the broader 

credit market since the fall of 2008, and modest improvements in 

credit availability for a small segment of commercial real estate 

markets, the current financial system in America simply can’t meet 

the financing needs of the broader commercial real estate market. 

Absent a significant change to the current landscape, the jeopardy to the overall economy is material. Some might ask, why 

should we care? Let me offer some reasons for concern. 

First, we’re in a time in which budgetary pressures on State and 

local governments are extraordinary. Many people are unaware 

that local governments on average receive 50 percent of their revenue from commercial real estate-related transactional activities. A 

sick commercial real estate market will naturally exacerbate the 

problems these communities face. 

Second, the absence of capital translates to an inability to build 

new buildings or meet the construction-related needs of older ones. 

This will lead to a dramatic reduction in jobs, given the prominent 

role construction plays in our overall economy, as well as fewer opportunities for building owners to make their properties more energy efficient. 

Beyond the effects on jobs and building needs themselves, most 

are unaware of the sizable economic stakes that citizens have in 

healthy commercial property markets. Estimates are that Americans have approximately $160 billion of retirement savings invested in commercial real estate. So as commercial real estate goes, 

so go local budgets that are already pinched, jobs which are already 

in short supply, and retirement accounts, pension plans, endowments, and foundations that have already been diminished. 

We recognize and appreciate the steps taken so far by the Congress, the Federal Reserve, and the Treasury Department to try to 

address the vast liquidity crisis that’s crippling the economy, destroying jobs, and causing a free fall in commercial property values, 

but much more needs to be done. 

Our overall economy needs to see job growth, but estimates suggest that 50 to 60 percent of all job growth comes from companies 

with less than 100 employees. Simply put, additional measures 

must be taken to create credit capacity in the regional and community banks which in turn will stimulate the availability of capital 

for small and mid-market companies. 

45 

Moreover, even if traditional portfolio lenders to commercial real 

estate such as commercial banks and life insurance companies return to the market in force, these institutions simply do not have 

the capacity to satisfy the credit demand of this industry. Therefore, additional steps must be taken to restore asset-backed and 

commercial mortgage securitization markets. 

In my written statement, I detail the policy mix the Real Estate 

Roundtable believes would be most helpful. First, the TALF program has compressed spreads and catalyzed some asset-backed and 

commercial mortgage-backed securitizations. The program has 

ended for legacy assets and will end in June for new CMBS. As 

this program has unwound, policymakers need to examine other 

measures that can help the securitization market. 

As for small banks, one idea being considered in Congress involves a measure that will allow small and medium-sized banks to 

amortize their write-down and losses on commercial real estate 

loans on a quarterly straight-line basis over a 7-year period. Beyond the need to restore credit, the industry also faces a large equity gap. We think it’s time to reform the laws applicable to foreign 

investment in U.S. real estate. Simple reforms to the current law, 

called FRPTA, could be made that would stimulate foreign capital 

flows. Lastly, we do not think it is the time to increase taxes on 

real estate, most specifically, the carried interest tax hike would 

discourage risk taking on the part of the real estate entrepreneur 

at a time in which we most need it. 

Thank you for this opportunity. I would be happy to answer any 

questions the committee might have. 

[The prepared statement of Mr. Cohen can be found on page 85 

of the appendix.] 

Chairman MOORE OF KANSAS. Thank you, Mr. Cohen, for your 

testimony. At this time, I recognize myself for up to 5 minutes for 

questions. 

Mr. Born, taking a step back from commercial real estate, I find 

that most Americans may not understand how securitization works 

from a fundamental level and how it impacts their everyday life. 

Would you explain briefly how securitization can help expand credit availability for small businesses, loans, credit cards, student 

loans, things of that nature, please? 

Mr. BORN. I think in general, securitization as a concept works 

quite well. There were obviously some abuses in the application of 

securitization which got us to the point where we are, generally 

speaking. It is a great way actually to, I think, to disperse capital 

throughout the system. Using the CMBS market as an example, 

you have banks who used to originate loans and warehouse loans. 

To the extent that they kept them on their balance sheet, at a certain point in time, they would be unable to continue to lend. By 

securitizing them and then selling the bonds to investors such as 

myself, you’re able to basically take a pool of loans, tranche it into 

different areas of risk, sell it to the investors, different investors, 

who have an appetite for that risk, and then start lending money 

again, providing capital to the system which I think is for the most 

part a positive for the economy. 

Chairman MOORE OF KANSAS. Thank you. During committee 

mark-up on financial regulatory reform in the House, I, along with 

46 

Representatives Walt Minnick, Melissa Bean, and others wanted to 

make sure the special nature of CMBS securitization was taken 

into account with respect to risk retention. 

Ms. Dubberly, on securitization of risk retention, also known as 

‘‘skin in the game’’ how would SEC’s proposed rule affect commercial real estate securitization? 

Ms. DUBBERLY. The SEC’s risk retention piece only relates to 

what we call shelf offerings, which are expedited offerings, 

straightforward regular offerings where you file a registration 

statement. Those aren’t impacted at all by the proposal. The proposal which has the risk retention piece in it is for expedited treatment. Currently, there is a requirement that the securities have to 

be investment grade. The Commission is trying to eliminate reliance on rating agencies, and so it tried to come up with another 

criteria for higher quality securities, so the 5 percent vertical slice 

risk-retention piece would apply there for any ABS issue. It’s a 5 

percent vertical slice. It’s a piece of each tranche that’s being sold. 

Chairman MOORE OF KANSAS. Mr. Cohen, do you, and then Mr. 

Born, have any comments on that question? 

Mr. COHEN. On the issue of risk retention? 

Chairman MOORE OF KANSAS. Yes. 

Mr. COHEN. Congresswoman Bean asked the question earlier 

about rating agency underwriting credit decisions. The best solution for credit decisions is the requirement to retain risk. So long 

as we have had a system where risk could be distributed, there 

wasn’t anybody who had a responsibility for credit decisions in the 

system. So our view is, to the extent that there is credit discipline 

that’s imposed, it will be imposed by people who have to bear the 

risk as opposed to any type of regulatory oversight. 

Chairman MOORE OF KANSAS. Mr. Born, any additional 

thoughts? 

Mr. BORN. I would say yes. Within the CMBS market, we originally tried to address this issue by virtue of these first loss investors as I described before who would literally re-underwrite every 

loan in the pool to get comfortable with that and then they would 

be buying essentially the equity piece and we’re in the first line of 

defense, if you will. I think where that started to go astray was 

once they began to package up these securities and sell them off, 

they no longer had the vested interest that they had originally, so 

in terms of CMBS, I’m not opposed to retention, but I think something more along the lines of a requirement that these first loss investors, after they do all this diligence, have to hold on to these securities for some specified period of time, I think would address 

that issue. 

Chairman MOORE OF KANSAS. My time is about to expire. I’m 

going to next recognize the ranking member, Ms. Biggert, please. 

Mrs. BIGGERT. Thank you, Mr. Chairman. As we just learned 

during Panel 2, the regulators knew for quite a period of time, almost 2 decades, that there was high concentration of risky CRE 

loans and tried to issue some guidance about it. But the guidance 

didn’t work and according to Panel 1, the guidance on valuation of 

performing loans also didn’t seem to be working, so as I mentioned 

to the other panels, would you and your agency or association participate in a roundtable? 

47 

Mr. BORN. Sure. 

Mr. COHEN. Absolutely. 

Mrs. BIGGERT. Mr. Sellers? 

Mr. SELLERS. Absolutely. 

Mrs. BIGGERT. What are the real barriers to recovery in the 

CMBS market? 

Mr. Born? 

Mr. BORN. I’ll take it. I think for us, it’s really this equity gap. 

You have a lot of properties out there whose current cash flow can 

cover the existing debt service payment. But once they reach refinance, depending on when that date occurs, there could be a significant gap between what their property is now worth by virtue 

of the depreciation of property values, generally, and what the loan 

amount is. So that, to me, is critical. 

The other issue that’s been problematic in terms of generating 

new lending in CMBS is the warehouse risk. There was so much 

volatility in CMBS prices in 2008, particularly, the last part of 

2008 that you couldn’t really originate a new loan or pool of loans 

and know that you could ultimately sell the bonds at a profit. 

One other point I would make, a number of people have talked 

about the importance of extending TALF for new issue CMBS. Candidly, I don’t agree with that. I think TALF for legacy CMBS was 

enormously successful in terms of spurring secondary market liquidity, but TALF for new issue was never really designed to address the two problems I just referenced. It was incapable of doing 

that. 

Mrs. BIGGERT. And you have talked about the 5 percent retention 

or ‘‘skin in the game.’’ Will that work with the securities? 

Mr. BORN. As outlined by Ms. Dubberly in terms of the 5 percent 

vertical slice, I’m not sure how well that works for us. I think there 

are a couple of things that we have been looking at, this notion of 

the first loss investor being required to hold that risk for a period 

of time. I think that would address it in CMBs. 

And the other issue, Congresswoman Bean has been asking several people about the government getting involved in underwriting 

standards. I think something along the lines of a best practices for 

commercial mortgage underwriting that both the government and 

trade associations could work on would be good and then perhaps 

have the loan originators represent or warrant that they, in fact, 

did follow these best practices in originating the loans. If you did 

that in conjunction with the first loss investors having to keep the 

riskiest piece, I think that gets you there. 

Mrs. BIGGERT. Thank you. Ms. Dubberly? 

Ms. DUBBERLY. I think one of the biggest problems with the 

CMBS market is investors. Investors aren’t ready to come back to 

the market and I think that hopefully the Commission’s program 

will help them have restored confidence in the market, and have 

the tools to make informed investment decisions so they don’t rely 

on the rating agencies. 

The Commission has asked a lot of questions about the first loss 

approach, about whether that makes sense. One of the problems 

with taking the first loss is the first loss person usually is also the 

master servicer and they will have a potential conflict of interest 

with the other tranches, with the other investors, because they will 

48 

want to hold on to the real estate longer than maybe the other investors would if there’s a problem. But the Commission has asked 

a lot of questions about that. 

Mrs. BIGGERT. So the SEC is really doing a lot to trying to spur 

the activity in this market? 

Ms. DUBBERLY. The whole April 7th proposal, the Commission 

feels will really benefit the market by helping to restore investor 

confidence in the market, yes. 

Mrs. BIGGERT. Mr. Sellers, did you have something you wanted 

to say? 

Mr. SELLERS. In regards to the ‘‘skin in the game’’ I’m old enough 

to remember back in the 1970’s when we had banks that made 

loans and held it for the whole length of the loan and they were 

extremely conservative in their lending practices. But we have gone 

from one extreme to the other in that we don’t have any ‘‘skin in 

the game’’ to where you have gotten in a situation where we’re just 

passing paper and passing risk. 

I think the real answer is somewhere in between. In regards to 

the CMBS market, we have an issue where investors are expecting 

their money when the bond comes due. While we may not really 

want to be able to refinance that loan, we may have to force them 

to refinance the loan in order to pay that loan off. So we have a 

timing issue that’s related. 

The other problem is we have many investors that have cash in 

their properties, pension funds, and rents. They’re not really worried, but they have some properties, 11, 12 percent we’re told, that 

are underwater. That doesn’t bother them. They can weather the 

storm. But when the other properties go under because the bonds 

are coming due and forcing these people to refinance under new 

underwriting guidelines, then we’re going to be bringing down the 

other people who are able to hold their property values as well. So 

it’s a very complex issue. 

Mrs. BIGGERT. Thank you. 

Chairman MOORE OF KANSAS. The gentlelady’s time has expired. 

The Chair next recognizes Congresswoman Bean for 5 minutes. 

Ms. BEAN. Thank you, Mr. Chairman, and thank you all for your 

testimony today. 

Mr. Cohen, in your testimony, you highlighted that while the TALF program did not produce many CMBS deals, it did spur $3 

billion in private sector deals. 

Would you agree with Mr. Born that we should then allow that 

program to expire at this time? 

Mr. COHEN. I think the position we’re taking is that the program 

itself is not as critical as much as other steps necessary to spur the 

secondary market. We really need to do things that will spur the 

secondary market. That’s the only way we can meet the proverbial 

tsunami of debt maturities that the Congressman was speaking 

about. That has to come from the secondary market. 

Ms. BEAN. So would you support some of the things that Mr. 

Born had spoken about, covered bonds, additional loan guarantees. 

I know also in your testimony you talked about FRPTA to bring— 

if we could repeal FRPTA, which disincentivizes foreign capital to 

come back to the market, those would be things that you would 

support? 

49 

Mr. COHEN. That’s correct. And just to amplify that for a second, 

to the extent that we have had a 40 percent deterioration in values, 

we now have a situation where lenders are coming back in at even 

lower financing levels than they had in the past. That’s calling for 

an enormous amount of equity to be able to meet these refinancing 

gaps. So we have to do things necessary to spur equity aggregation, 

equity allocation, and equity flows to this market. 

Ms. BEAN. My other question is that one of our colleagues, Mr. 

Minnick on the committee, has a proposal that would for a premium of 350 basis points provide a Treasury guarantee on new 

CMBS for CRE loans that are under $10 million each. The concept 

is to provide liquidity to community banks who issue sound, commercial real estate loans and bring investors back into the market. 

What’s your opinion of what that would do in terms of providing 

a temporary guarantee and what residual effect do you think there 

would be? 

Mr. COHEN. Again, I think our view is that you have to restore 

credit. You have to restore capital flows. Congressman Foster 

asked, how do you protect against further deterioration or additional declines in commercial real estate values? It is directly correlated to whether or not there’s capital and credit availability. 

So our view is anything that restores credit availability has to be 

for the secondary market and it has to be for the small and 

midsized banks. They, in particular, are the ones who are going to 

deliver credit to the market. 

Ms. BEAN. My last question, if I have some time, is for Mr. Born. 

You talked about the risk retention and actually having some concerns about that, not being opposed to it, but not limiting that as 

a way to better understand. And you talk about customizing by 

asset class. Given the way securities have been done recently, those 

who created the securities, those who rated the securities, and 

those who invested in the securities, the vast majority had no idea 

what was in those securities. So how do you customize that when 

nobody knows what’s going on? 

Mr. BORN. I guess—some people know what’s going on. 

Ms. BEAN. If you read, ‘‘The Big Short,’’ it was a really small 

number of people. 

Mr. BORN. As I said in response to Chairman Moore’s question 

about securitization. I think securitization is a good concept. There 

were obviously abuses in the system that got us to the point where 

we are. 

Ms. BEAN. Not just abuses, but a real lack of understanding and 

risk management tools in place that were being used or practiced 

to really understand. It was mostly gross incompetence. 

Mr. BORN. There were bad decisions made. There was a lack of 

oversight at steps along the road. I don’t disagree with that. But 

I think we are on the road to recovery. It’s early, but I think back 

to a year ago, looking at not only were there no new loans being 

made, but there were no bonds trading the secondary market in 

CMBS. Every bond you bought or sold was price discovery. It was 

an adventure. It took me from the last 2 months of 2008 when we 

were actually a pretty active buyer because we recognized the 

prices were so depressed it was a good investment. 

50 

It took me 6 weeks to buy the same amount of bonds I could 

have done in a couple of hours back in 2006. It was just a complete 

dearth of liquidity. We are now at a point where I can put bonds 

out to sell. I get 12 bids back. There’s a fairly defined market in 

terms of what the price should be. I try to buy bonds, the same 

kind of thing. 

So now the—and I’m a little off point here, but I think now the 

next step is this equity gap. Risk retention is extremely important. 

I don’t disagree with that, but I’m hesitant to set something up 

that results in one of the parties to the transaction having to keep 

all of the loans essentially on their balance sheet. That’s not going 

to get anybody to lend. That just fundamentally won’t work. So we 

just need to recognize some of the differences in CMBS versus 

other structured asset classes and just craft something that will get 

better oversight, but at the same time not shut down the lending 

market. 

Ms. BEAN. I know I’m out of time, but if I can request the Chair’s 

permission for a second to suggest that if you could give us some 

further suggestions on exactly how you would do that, that would 

be greatly appreciated. 

Mr. BORN. All right. 

Chairman MOORE OF KANSAS. The gentlelady’s time has expired. 

The Chair will next recognize Mr. Foster for up to 5 minutes. 

Mr. FOSTER. Yes, Ms. Dubberly, I am fascinated by your April 

7th proposal to get away from using credit rating agencies with 

computer-readable descriptions of the mortgaged-backed assets. 

And so let’s see, as I understand it, what you do is provide underlying data in a machine-readable format and also an actual piece 

computer code that would allow you to look at what happens as different tranches degrade and so on. Is that a correct understanding? 

Ms. DUBBERLY. Yes, that’s correct. It’s actually—I’m very excited 

about this because it’s the first time the Commission would require 

the filing of a computer program. So the way the pools are put together and the way the securities are actually structured is 

through the use of a computer program, the analysts run different 

models to figure out— 

Mr. FOSTER. I’m a former Python programmer. 

Ms. DUBBERLY. Then you know, so— 

Mr. FOSTER. There are all sorts of issues about changes in the 

compiler or the interpreter, actually, but you would have to make 

sure there’s an agreed upon—this is going to be a legally binding 

version of the computer program. 

Ms. DUBBERLY. Right now, they take the computer program, 

translate it into English and put it in the prospectus and so they 

already have that. And then if you’re an investor, you have to 

translate it from the English back into—trying to put it in a program if you want to run your models yourself. 

Mr. FOSTER. Right. So how many entities are there out there 

that could actually use that level of detailed information? Are there 

ten or a thousand? 

Ms. DUBBERLY. Oh no. I think the way it’s structured because 

the data points will be standardized and because it’s in XM Owl 

and because Python is open source, I think most investors in ABS 

will utilize this. ABS investors aren’t ‘‘ma and pa’’ investors. 

51 

They’re institutional investors. I think it will be easy for thirdparty vendors to develop software that will make it very useful for 

investors. 

Mr. FOSTER. I think that is potentially a great advance. I’m a little confused on how this might work in the commercial MBS realm. 

Because if you’re just talking about normal mortgage-backed securities, you have your credit scores and your income and your Zip 

Codes and relatively small number of things can fairly well characterize the mortgages well enough to get an estimate of what it’s 

worth. But in the case of commercial things, you’re so dependent 

on the details of the business operations, of each one of these loans 

that I’m a little bit skeptical, frankly, that it’s ever going to apply 

there. Or if people attempt to apply it, it will sort of be abusable 

in the sense that it will be easy to mischaracterize things with a 

simple set of numbers, what the true riskiness is. 

Ms. DUBBERLY. We need you to comment on our rule proposal. 

We hope it will apply well to commercial mortgages. It’s smaller 

pools, definitely, but it’s standardized data and it will still be in a 

format that can be utilized. A lot of it does depend on who are actually on the rent rolls for any shopping center or who are on the 

rent rolls for whatever the commercial property is, but we still 

think it will be a valuable tool for CMBS. 

Mr. FOSTER. So you have business interest on the commercial 

mortgage-backed security application of this? 

Ms. DUBBERLY. I’m sorry? 

Mr. FOSTER. I can usually understand a lot of enthusiasm. In 

fact, I know a couple of people who were based a couple of years 

ago, proposed this to me as something I might want to push. On 

the commercial—I’m sorry, on the residential MBS, but on commercial MBS, is there a real commercial interest in this? Do businesses 

want to use these tools for commercial MBS? 

Ms. DUBBERLY. Yes, I think it will make the job of analyzing the 

pools just faster and easier for them to do. If it’s not standardized, 

it will just take longer to do and this you’ll be able to do it much 

quicker. 

Mr. FOSTER. It could be a big help in trying to resurrect the 

whole securitization market. 

Mr. Stoklosa, are there countercyclical accounting standards that 

are going to cause bigger rainy day funds on the upswing that are 

under discussion, as opposed to just having relief once the bubble 

has burst? 

Mr. STOKLOSA. I don’t know if accounting standards are countercyclical or not. I guess that is for other people to judge. I think our 

goal is to have the accounting standards reflect the economics to 

the best they can. 

I know impairment was a big issue on one of the earlier panels 

and from an impairment perspective, we do have a proposal on the 

table to provide some new impairment guidance, to provide more 

flexibility, to provide more judgment for people and entities to better identify the risks that they have and the potential losses they 

may have. So we should be coming out with that proposed guidance 

in a couple of weeks. 

Mr. FOSTER. Also, Mr. Sellers, this thing also gets into the appraisal principles. If you were—if the appraisal was based more on 

52 

backward-looking historical value of the property, I think that 

would have a huge countercyclical element that you would simply 

treat skeptically the value of recently-appreciated assets and that 

principle to the extent that it got into our accounting standards 

and then appraisal standards, I think would be tremendously valuable in stabilizing our whole system. 

I would appreciate your reaction to that. 

Mr. SELLERS. I agree. The appraisal process is completely misunderstood. We do forecast the future. That is part of our proposal. 

You need to have competent appraisers who are using good, fundamental market analysis, not inferred, market analysis, but good 

and fundamental market analysis. 

And if you do that, you have a reasonable opinion or value based 

on specific trends and specific anticipated movements in the marketplace. The market completely moves backwards and forwards, 

up and down. We, as appraisers, can give you values and give you 

opinions of values of different types for different time periods. 

Chairman MOORE OF KANSAS. The gentleman’s time has expired. 

But we will, I think—Ms. Biggert indicated she would like to have 

an additional 2 minutes, and the other members will have an opportunity for up to 2 minutes. 

Mrs. BIGGERT. Thank you, Mr. Chairman. 

Mr. Stoklosa, we have been hearing some talk about the FASB 

or the FASB Chairman Herz, gave a speech recently that highlighted both the confusion about and the distinction between 

FASB’s role to set accounting standards for disclosure purposes and 

the need for banking regulators to ensure the safety and soundness 

of financial institutions. So I don’t know—there’s kind of a who 

does what. Would—how much of a role have stakeholders or perhaps the SEC had—as overseers of FASB and therefore all accounting rules and how they take it into account FASB changes to the 

accounting standards that effect commercial real estate such as the 

adoption of the financial accounting standards 166 and 167? 

Mr. STOKLOSA. Yes, I think the Statements 166 and 167, they’re 

all about transparency of risk. And whomever has the risk will do 

the accounting. So if the entity that’s setting up some sort of 

securitization, if they transfer the loans off their books, but if they 

retain a certain amount of risk, and if they retain enough risk such 

as first loss risk, have they really transferred anything? And therefore, that guidance will come up and say, if you haven’t transferred 

the risk, then you retain the accounting. You retain the loans on 

your books. If you transfer the risk, you get to take it off. 

Prior to 166 and 167, there were bright lines that allowed entities to even though they retained the risk were still able to get it 

off balance sheet. So we made those improvements. 

In terms of the SEC’s oversight, I leave it up to the SEC. I’m 

sure if that’s your role to talk about the SEC oversight. But the 

SEC, they’re involved in our process as are any other constituents. 

We have an open due process. We issue exposure drafts. We have 

roundtables where we invite all of our constituents to roundtables, 

that being auditors, preparers, users, regulators. So anyone who 

wants to participate in a roundtable to talk about the issues are 

free to do so. 

Mrs. BIGGERT. Do you have public opinion for these? 

53 

Mr. STOKLOSA. Pardon me? 

Mrs. BIGGERT. Do you solicit comments from the public? 

Mr. STOKLOSA. Yes. Our exposure drafts go out, normally for 

about 90 days for public comment, and we get the comments back 

and we present all that information to the Board for their redeliberations of the issues. 

Mrs. BIGGERT. Thank you. 

Chairman MOORE OF KANSAS. The gentlelady’s time has expired. 

The Chair next recognizes Ms. Bean for up to 2 minutes. 

Ms. BEAN. Thank you, Mr. Chairman. Just two things. Thank 

you again for hosting the hearing and by doing it here, we didn’t 

get interrupted and called to votes. So we were actually able to 

really hear the testimony which never happens in Washington. 

My only other comment is to say I think Congressman Foster is 

arguably the only Member of Congress who has programmed in 

Python before. So that’s all I have. Thank you. 

Chairman MOORE OF KANSAS. Thank you, Ms. Bean. Mr. Foster, 

if you have any comments? 

Mr. FOSTER. I was wondering if any of you are optimistic that 

covered bonds may be an important part of the way forward for 

commercial real estate. Any opinions, one way or the other on that? 

Nothing. You’re pretty much— 

Mr. BORN. I don’t know that it necessarily solves the problem, 

but it is one tool that can be explored. It’s not a cure-all for what 

ails us. 

Mr. FOSTER. So it’s not being actively developed by any segment? 

Mr. BORN. Not that I’m aware of. 

Mr. FOSTER. Okay, and I guess one last question on what I mentioned about the waterfall programs and so on, is that being retroactively applied to some of the MBSs that are out there as a way 

to maybe reliquify some part of that market? 

Ms. DUBBERLY. No. It would only be forward-looking. It would 

apply to new issuances after any rule was adopted. The problem 

would be the trusts are formed and they’re sort of self-running. It 

would be hard to put a new requirement on them after they have 

been— 

Mr. FOSTER. They might voluntarily do it to increase the— 

Ms. DUBBERLY. That would be fine. We would obviously love 

that. 

Mr. FOSTER. Thank you very much. I yield back. 

Chairman MOORE OF KANSAS. Thank you. I ask unanimous consent that the following items be made a part of the record: Number 

one, Biggert 1, I call it, is a letter from the Kansas Realtors for this 

area. I remind you that this issue does not just affect Chicago or 

Illinois, but Kansas, the rest of the country. 

Number two is a written statement with attachments from our 

friend and colleague, Representative Ken Calvert of California who 

has been active on this issue. 

Exhibit Number Three is our reports on CRE by the Congressional Research Service. 

And Exhibit Four is a Congressional Oversight Panel Report. If 

there are no objections, these will be received in the record. Thank 

you. 

54 

Again, I want to thank all of our witnesses for your testimony 

today. It has been very, very helpful. I thank this panel. I very 

much appreciate that. 

Ranking Member Bean has a parting comment or something she 

would like to say—excuse me, I’m sorry. 

Mrs. BIGGERT. If the gentlemen will yield? 

Chairman MOORE OF KANSAS. I apologize. I do. She has not been 

advanced yet. This is the ranking member. 

Mrs. BIGGERT. It’s very confusing to him too—Congresswomen 

from Illinois whose names start with a ‘‘B.’’ 

I have always liked to be a ‘‘B,’’ because usually you get to go 

first, but now she’s ‘‘B-E’’ and I’m ‘‘B-I.’’ Anyway, thank you. 

I would like to thank all the witnesses for coming to this hearing. 

I think it has been very, very helpful to us and we really have had 

the time to sit and listen to all of you and that’s so important for 

us as we move forward in this very complicated financial services 

reform, so we appreciate that. 

And I do really thank again my colleagues for coming in and particularly the chairman who did come from Kansas and has spent 

the time with us and we are really going to miss him as he is retiring this year. It’s going to be a big loss. I think we came in at the 

same time. 

Chairman MOORE OF KANSAS. Thank you very much. 

Mrs. BIGGERT. I didn’t realize when you came in, but we were 

colleagues and have spent the time in Congress together, so I appreciate it. 

Chairman MOORE OF KANSAS. That’s right. Thank you. The 

Chair notes that some members may have additional questions for 

our witnesses which they may wish to submit in writing. Without 

objection, the hearing record will remain open for 30 days for members to submit written questions to our witnesses and to place their 

responses in the record. 

The hearing is adjourned. Thanks to all. 

[Whereupon, the hearing was adjourned at 3:48 p.m.] 

(55) 

A P P E N D I X 

May 17, 2010 

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