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ALTERNATIVES FOR PROMOTING LIQUIDITY 

IN THE COMMERCIAL REAL ESTATE MARKETS, 

SUPPORTING SMALL BUSINESSES, AND 

INCREASING JOB GROWTH 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

JULY 29, 2010 

Printed for the use of the Committee on Financial Services 

Serial No. 111–150 

( 

(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 A. 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) 

C O N T E N T S 

Page 

Hearing held on: 

July 29, 2010 ..................................................................................................... 1 

Appendix: 

July 29, 2010 ..................................................................................................... 37 

WITNESSES 

THURSDAY, JULY 29, 2010 

Craft, Hon. Robert, Mayor, Gulf Shores, Alabama ............................................... 12 

Daniel, Jonathan, Chief Executive Officer and Founder, Silo Financial Corp. .. 21 

DiAngelo, Chris, Partner, Dewey & LeBoeuf, LLP ............................................... 17 

Gronstal, Thomas B., Iowa Superintendent of Banking, on behalf of the 

Conference of State Bank Supervisors ............................................................... 10 

Helsel, James L., Jr., 2010 Treasurer, National Association of Realtors (NAR) 16 

Lancaster, Brian, Royal Bank of Scotland, on behalf of the CRE Finance 

Council .................................................................................................................. 14 

Lindsey, Todd, Partner, US Capital ....................................................................... 19 

Panasci, Ernest J., Shareholder and Director, Jones & Keller, P.C. ................... 23 

APPENDIX 

Prepared statements: 

Craft, Hon. Robert ............................................................................................ 38 

Daniel, Jonathan .............................................................................................. 43 

DiAngelo, Chris ................................................................................................. 48 

Gronstal, Thomas B. ........................................................................................ 65 

Helsel, James L., Jr. ......................................................................................... 62 

Lindsey, Todd .................................................................................................... 71 

Panasci, Ernest J. ............................................................................................. 75 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Frank, Hon. Barney: 

Written statement of the National Association of Home Builders ............... 81 

Bachus, Hon. Spencer: 

Article from the American Banker, dated July 23, 2010 .............................. 92 

Perlmutter, Hon. Ed: 

Article from Forbes.com, dated July 19, 2010 ................................................ 95 

(1) 

ALTERNATIVES FOR PROMOTING LIQUIDITY 

IN THE COMMERCIAL REAL ESTATE 

MARKETS, SUPPORTING SMALL 

BUSINESSES, AND INCREASING 

JOB GROWTH 

Thursday, July 29, 2010 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The committee met, pursuant to notice, at 10:10 a.m., in room 

2128, Rayburn House Office Building, Hon. Barney Frank [chairman of the committee] presiding. 

Members present: Representatives Frank, Kanjorski, Waters, 

Watt, Moore of Kansas, Hinojosa, Clay, McCarthy of New York, 

Scott, Green, Cleaver, Perlmutter, Donnelly, Minnick, Adler, Kosmas, Himes, Maffei; Bachus, Biggert, Miller of California, Hensarling, Neugebauer, Posey, Jenkins, Paulsen, and Lance. 

Also present: Representative Shuler. 

The CHAIRMAN. The hearing will come to order. 

And I am going to first recognize the gentleman from Idaho, Mr. 

Minnick, who was the major force in bringing this issue to our attention, along with others on both sides of the aisle. But he has 

made it a particular point and is one of those who was most responsible for our decision to have this hearing. 

So the gentleman from Idaho is now recognized for 3 minutes. 

Mr. MINNICK. Thank you, Mr. Chairman. 

Mr. Chairman, and Ranking Member Baucus, thank you for calling this hearing today on the Commercial Real Estate Stabilization 

Act that I introduced with Heath Shuler, Suzanne Kosmas, Mike 

Simpson, Martin Heinrich, and Steve LaTourette. This is truly a 

bipartisan piece of legislation to address a looming national crisis. 

According to the Congressional Oversight Panel, the value of the 

Nation’s commercial real estate has declined by more than 40 percent. In 2007, it was worth $5.5 trillion and supported $3.3 trillion 

in debt. Today, it is worth only about $3 trillion and will only support about $2 trillion in debt. 

Most of the commercial real estate lenders on the smaller 

projects in Main Street America are our local community banks. As 

those $3.3 trillion in loans come due, either the already overextended borrowers must come up with new equity or the banks renewing the loans must write them down. Doing so impairs the 

banks’ capital and ability to continue doing business. 

2 

If this plays out in the free market, the Oversight Panel estimates that as many as a quarter of America’s 8,000 smaller banks 

are at risk. This process is being accelerated by bank regulators 

who are demanding our smaller banks reduce their exposure to the 

falling commercial real estate market by reducing their commercial 

real estate loans from an average of over 3 times their capital to 

one-third that level. 

In my State, fully a third of my banks are already under Federal 

supervision, and many more fear they will be, come the next bank 

examination. As a result, small business can’t borrow and, without 

credit, can’t create the new jobs our economy so desperately needs 

to continue the economic recovery. 

This bipartisan bill will allow our smaller banks to sell their performing loans—subject to the tough new risk-retention rules we 

have just enacted—to larger money center financial institutions, 

which will aggregate them into larger, institutional-sized packages 

of loans and get them rated as investment-grade by rating agencies, who now must stand behind their ratings and can be sued if 

they prove negligent. 

These larger financial institutions will then have these packages 

guaranteed by the Treasury, making them marketable to pension 

funds and other institutional buyers. This process will jump-start 

the commercial mortgage bond market, which used to supply twothirds of the capital to the commercial real estate market but has 

not existed at all for smaller properties since the market collapsed 

2 years ago. 

This will allow our smaller community banks to clear their portfolios of illiquid but performing commercial real estate loans and 

reduce their inventories to levels demanded by their regulators at 

fair market, not sacrificed, prices. This will stabilize their balance 

sheets so they can both survive and again begin lending to builders, developers, and small businesses, who will create the new jobs 

required for our economy to recover. 

The program will be administered by a board consisting of the 

Treasury Secretary, the Federal Reserve Chairman, the SEC 

Chairman, the FDIC Chairman, the FHA Director, and four industry experts appointed by the President. 

Because the assets insured will be investment-grade, and the 

Treasury will be paid a hefty 2 percent insurance fee, the program 

will make money for the Treasury and will only be required until 

the private market regains the confidence it needs to create and 

market these instruments without needing a Federal guarantee. 

It will expire on its own accord in 3 years, and the Secretary of 

the Treasury will have the authority to terminate it sooner if he 

determines that the commercial bond market is comfortably reestablished. All profits earned from the program are required to be 

used to reduce the deficit. 

Thank you, Mr. Chairman. I look forward to hearing from our 

panel of experts. 

The CHAIRMAN. I would note that the gentleman used 3 minutes 

and 50 seconds. That will leave us with 5 minutes and 10 seconds. 

And I now recognize the gentleman from Alabama for 2 minutes. 

3 

First, let me ask unanimous consent that we have one of the cosponsors, the gentleman from North Carolina, Mr. Shuler, join us 

today. Is there any objection? 

Hearing none, the gentleman is welcomed. 

And the gentleman from— 

Mr. BACHUS. Mr. Perlmutter objected, I think. 

Mr. PERLMUTTER. No, I withdrew it. 

The CHAIRMAN. I didn’t hear him. He did it visually. 

Mr. BACHUS. If he won’t mention Tennessee Volunteer football, 

I will go along with it. 

Mr. SHULER. After last season, no. 

The CHAIRMAN. The gentleman from Alabama is now recognized 

for 2 minutes. 

Mr. BACHUS. Thank you, Mr. Chairman. And I thank you for 

holding the hearing on issues facing the commercial real estate 

market. 

On an almost daily basis, I am told that financial institutions, 

at the urgings of regulators, are making additional capital demands on their borrowers with commercial real estate loans, creating a vicious cycle of distress sales, lower appraisals, and depreciation for neighboring properties. Many of us are particularly concerned about the financial challenges just ahead, where somewhere 

between $200 billion and $500 billion in commercial real estate 

loans mature in the next 12 to 15 months. 

These are aggravated in Alabama and the Gulf Coast by economic fallout from the BP oil spill. There we are seeing a preview 

of what we will soon experience throughout the country, or may experience: a cascade effect of less tourism; a diminished capacity to 

repay loans; lower appraisals, which depress property values; fewer 

real estate sales; and overall lower revenues for businesses and 

struggling communities. 

In Alabama and other Gulf Coast States, the financial impact 

has rippled from the shoreline throughout our entire State due to 

less tax revenue. Aggravating that situation are unfilled promises 

by BP to compensate for the losses, which is particularly upsetting 

when the citizens of Alabama see BP’s public relations campaign 

on TV claiming to expedite the claims, although their claims have 

not been processed. 

It is my pleasure to invite Gulf Shores Mayor Robert Craft to testify today to inform us about the additional challenges facing communities and States dealing with what can only be termed an environmental and economic catastrophe. He is, in every sense of the 

word, an eyewitness to what is going on. 

With regard to the broader commercial real estate market, what 

is happening along the Gulf is indicative of what could happen 

across the country if credit is not made available to the marketplace. Once these loans come due, the losses to the FDIC Insurance 

Fund could be significant. 

One of the proposals we are hearing is a new $25 billion fund 

for commercial real estate with the Treasury Department with a 

10-year full faith and credit. We need to look long and hard at this, 

about whether we may be creating even more risk from the private 

sector to the taxpayer. 

4 

A worthwhile strategy, in my view—and I will close with this— 

is Mr. Garrett’s legislation, the U.S. Covered Bonds Act, on which 

Congressman Kanjorski and I joined him as original cosponsors. 

This should move to the House Floor as soon as possible. And I 

think it would be a valuable source of liquidity to the commercial 

real estate market. 

Thank you, Mr. Chairman. 

The CHAIRMAN. The gentlewoman from Florida, Ms. Kosmas, for 

2 minutes. 

Ms. KOSMAS. Thank you, Mr. Chairman. And thank you to those 

who are here for the hearing. I just want to make a few quick comments on this. 

As a small business owner myself for most of my life, I agree 

with the comment that community banks are the lifeblood of our 

communities and that we have to ensure their continued viability. 

Many of us have recognized for a long time and have made comments in this committee and elsewhere about the need to ensure 

that our commercial real estate markets remain viable so that 

businesses can function. 

Many businesses, both small and medium-sized, in my district 

and elsewhere, cannot access new loans, and banks are often forced 

to cut off their existing lines of credit. This, of course, causes these 

businesses to lay off employees and threatens their ability to continue to operate. 

This dilemma is compounded by the fact that many community 

banks are unable to find financial stability or are unable to deal 

with the often arbitrary requirements regulators place on them. As 

a result, the communities, both the businesses and families within 

those communities that have been served for years, are under 

threat of no longer having available to them the vital credit and 

other services that they need from institutions with whom they 

have built strong, long-term relationships. 

I think this bill is a very important piece of legislation. It is a 

commonsense, bipartisan solution that smartly facilities the development of private commercial credit markets and incentivizes the 

free market to take action here. If we do not act fast, we risk missing a window of opportunity for properly dealing with the trillions 

of dollars in debt set to come due over the next few years. 

The price to pay for inaction will be significantly increased in 

States like Florida. Florida’s unemployment rate continues to be 

the Nation’s fifth highest. In addition, the recent oil spill could easily cause a double-dip in Florida’s economy. With Florida’s main 

economic drivers being tourism and growth, we recognize that the 

oil spill has the potential to exacerbate the difficult economic situation that already exists there. 

I really urge my colleagues to look closely at this and to support 

this very fine piece of legislation. 

Thank you, Mr. Chairman. 

The CHAIRMAN. The gentlelady from Illinois, Mrs. Biggert. 

Mrs. BIGGERT. Thank you, Mr. Chairman. I am pleased that we 

are having yet another hearing on commercial real estate. 

At my request, the Oversight and Investigations Subcommittee 

held a hearing in Chicago in May on this topic. Chicago is home 

to key leaders in all aspects of commercial real estate, also called 

5 

CRE, including acquisitions, appraisals, mortgage lending, and 

securitization, to name a few. 

During our field hearing, we learned that the CRE industry faced 

many obstacles to recovery, including property devaluation and 

illiquidity in the securities market. We also discussed the difficulty 

some banks, especially smaller banks, have with concentrations of 

riskier or specific kinds of CRE loans. 

Several regulators testified, and it became apparent that a few 

regulators clearly dropped the ball after the CRE crisis that occurred during the 1990’s. Some regulators failed to issue regulations in a timely fashion to address concentrations in CRE loans 

at financial institutions. And when these same regulators finally 

issued regulations, these regulations were clearly not enforced, as 

was discussed in many material loss reviews of failed banks. 

There are many ideas floating around about how to address the 

problems in the market. However, I am very concerned with any 

proposals that would create a new taxpayer-backed program instead of addressing some of the fundamental problems with CRE 

that have been mentioned. 

Finally, I believe that one of the most important things Congress 

can do to jump-start the CRE market is to move legislation that 

will provide incentives for businesses, especially small businesses, 

to create jobs. 

This June, unemployment in Illinois was 10.4 percent, and it remains above the national average of 9.5 percent. With businesses 

downsizing or shutting their doors, workers being laid off, taxes increasing, and regulatory and market uncertainty, we can anticipate 

additional residential foreclosures, followed by the commercial 

building vacancies. Job creation should be the number-one priority 

for this Congress. 

With that, I look forward to hearing from today’s witnesses. 

The CHAIRMAN. The gentleman from California, Mr. Miller, is 

recognized for 2 minutes. 

Mr. MILLER OF CALIFORNIA. Thank you, Mr. Chairman. 

I want to commend Mr. Minnick for trying to address this issue, 

but there are some concerns with the way the bill is proposed. 

One concern in high-cost areas, for example Mr. Frank’s district 

or mine, putting a $10 million arbitrary cap on that would tend to 

focus the amount more on commercial strip centers, small commercial buildings. Those projects are basically more sensitive to the 

economy than the larger projects are. 

But a problem I have that I don’t think this is going to address 

is something I brought up 3 years ago. There is not a shortage of 

qualified borrowers, and there is not a shortage of qualified 

projects. The problem is that lenders are put in a situation by 

mark-to-market requirements that, if you take a loan and it is devalued 45 to 50 percent, this bill does not address that. 

So if we are talking about a conforming loan, a loan that basically is performing, that is not the problem. The problem is the 

loans that you could say are not performing because of ST requirements or mark-to-market that take a loan where the lender is current with the borrower, yet when it comes time to refinance the 

loan, the loan is upside down based on the SEC requirements or 

mark-to-market. That will not change this. 

6 

And unless we are willing to address that issue, you are not 

going to take a loan that you can say is performing, because if it 

is performing, the small lender has no problem with it, but taking 

that loan and giving it to a larger lender and say the government 

is going to back that loan, we are going to turn it into a commercial 

mortgage-backed security, you can’t do that if the loan is not performing and it is not meeting current market standards. 

So I applaud you for this effort because we need to address it, 

but it does not address the problem we are going to face out there. 

I agree, there is no way in the world we should put the taxpayers 

at risk. But you are not going to have the government come in and 

guarantee a loan that is not performing to begin with. The loans 

that are going to be transferred or are going to want to be transferred are the ones that are not performing, because if a loan is 

performing, the lender has no problem with the loan. 

So why would a lender want to get rid of a performing loan that 

meets the requirements, when the regulators are coming in and 

saying, ‘‘Get rid of the loans that do not meet the requirement.’’ 

And I could go 20 minutes on this, Mr. Chairman— 

The CHAIRMAN. No, you can’t. 

Mr. MILLER OF CALIFORNIA. —but I applaud you. I know you will 

not let me, I know you will not lend me the time, but I would love 

to work on this issue. 

The CHAIRMAN. The gentleman from Colorado is recognized for 2 

minutes. 

Mr. PERLMUTTER. Thank you, Mr. Chairman. 

And, Mr. Miller, you and I should sit down and work on this together. 

About 4 weeks ago, we passed a bill, the Small Business Lending 

Act, and attached to that bill was a bill that I proposed, along with 

Mr. Mike Coffman, a Republican from Colorado, which did very 

much what Mr. Miller was talking about. You took a capital loss 

on real estate but then amortized it out over 6 years, up to 10 

years, if small business loans were being made by that particular 

bank. 

A similar type of approach was taken back in the 1980’s with agricultural banks and other banks. Mr. Bill Isaac addresses it, calls 

it a net worth certificate that was used back in the 1980’s. So that 

independent, small, community, regional banks could weather the 

storm. And we have had a heck of a storm over the course of the 

last 2 years. 

One of our panelists, Mr. Ernie Panasci—from Denver, Colorado, 

a prominent financial attorney in Colorado and in the Denver 

area—helped us draft the amendment that has passed on to the 

Senate and is part of the Small Business Lending Act. He will testify today about the difficulties that a number of Colorado banks 

and borrowers are having because of the drop in commercial real 

estate prices. 

And it is my pleasure to introduce him now, because I may be 

gone when he finally gets to testify, that he is here to speak on behalf of bankers and the real estate community in Colorado on this 

very important subject. 

With that, Mr. Chairman, I would yield back. 

7 

The CHAIRMAN. The gentleman from Texas, Mr. Hensarling, for 

2 minutes. 

Mr. HENSARLING. Thank you, Mr. Chairman. 

I think we all know that there are serious problems in our commercial real estate market. Many fear that the worst is yet to come 

over the next couple of years. This may be true. On the other hand, 

I think I have noted that REITs are up 7.7 percent this year, while 

our major equity indexes are pretty well flat. I read recently that 

JPMorgan, Goldman, and Citi are at least seemingly returning to 

the securitization market. So, how bad things are, relatively speaking, I think to some extent it is hard to tell. 

I do know that, although this bill is well-intended—I took very 

careful note of what the gentleman from California says. I appreciate the experience and perspective that he brings. And, indeed, 

I think the application of mark-to-market, even today, is a significant part of our challenge. But I fear, at the end of the day, that 

we are looking at one more taxpayer backstop, perhaps one more 

taxpayer bailout, that I am not sure—in fact, I feel quite dubious— 

that it is going to be worth the cost. 

I know recently the Special Inspector General for the TARP reported, ‘‘The current outstanding balance of overall Federal support 

for the Nation’s financial system has actually increased more than 

23 percent over the past year, from approximately $3 trillion to 

$3.7 trillion.’’ At what point do we say, enough is enough? 

There are many people who benefited on the upside of the runup of the commercial real estate market. They enjoyed the upside, 

and now they want the taxpayer to be exposed to the downside. 

I think ultimately, we are going to have to concentrate on the demand side of this equation, and that is getting the economy moving. And, again, I fear that the greater problem is not lack of capital, it is lack of confidence from the actions of this President and 

this Congress. And until that changes, we are not going to solve 

the market problems. 

The CHAIRMAN. The gentleman’s time has expired. 

Next, I will go to the gentleman from Texas, Mr. Neugebauer, because our last speaker is a non-member and we take members first. 

The gentleman from Texas, Mr. Neugebauer, for 2 minutes. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. I appreciate you 

having this hearing. 

Obviously, all of us know that the commercial real estate borrowers are looking to refinance some of their loans, but they are 

faced with lower property values, higher vacancy rates, and there 

are reasonable questions about the capacity of the lenders to be 

able to do that. 

I appreciate the gentleman from Colorado and others who work 

on this issue. But the problem here is that everybody’s answer to 

freeing up the credit markets again is putting the taxpayers on the 

hook for some of the risk. 

These markets functioned before without the taxpayers, but now, 

for some reason, we, with this big marriage of the Federal Government and all these markets—and many of us voted against that because we knew it was going to be a rocky marriage to begin with, 

but what I have been saying for a number of months is that the 

divorce is going to be worse than the marriage. And that is 

8 

weaning the private markets from saying, ‘‘You know what? We are 

not quite sure we want to take that risk, but we might be willing 

to take it if the taxpayers would pick up part of the tab.’’ 

We can’t build a long-term future for this country on the backs 

of the taxpayers. The taxpayers, quite honestly, are facing their 

own challenges right now. And so what we really need to do is get 

rid of all of this uncertainty that we have created in Congress 

about the potential implications of regulations and taxation and get 

the government out of the way and let the free markets work. 

Free markets, when allowed to function properly, aren’t kind, but 

they are very efficient. The problem is that we have delayed the 

efficiency in the market by all of this intervention. And what it is 

really time to finally do is let the free markets work, and they will 

work through this. 

But very few times when you put the taxpayer on the hook are 

we going to be able to unhook the taxpayer. And the taxpayers 

back home in Texas are tired of being hooked up. 

With that, I yield back my time. 

The CHAIRMAN. The gentleman from North Carolina. 

I am sorry, but we don’t have back-and-forth during opening 

statements. 

Mr. PERLMUTTER. I just wanted to have something admitted for 

the record. 

The CHAIRMAN. Oh, yes. 

Mr. PERLMUTTER. An article that Steve Kagen, Ron Klein, and 

I wrote for Forbes magazine, dated July 19, 2010. 

The CHAIRMAN. Without objection, it is so ordered. 

I also have been asked by the National Association of Home 

Builders to put their statement in the record. I will just read the 

operative paragraph: 

‘‘NAHB urges Congress to direct financial institution regulators 

to encourage lenders to work with residential construction borrowers who have loans in good standing by providing flexibility on 

reappraisals, loan modifications, and perhaps forbearance. Solutions could include allowing institutions to continue making and 

holding sound acquisition, development, and construction loans 

even if they are above the loan-to-capital thresholds and to permit 

institutions to write down troubled loans over an extended period 

up to 10 years.’’ 

If there is no objection, I will put that in the record. 

And the final statement comes from the— 

Mr. MINNICK. Mr. Chairman? 

The CHAIRMAN. Yes. 

Mr. MINNICK. I would ask your permission to enter into the 

record the text of an interview that I gave on this topic that appears in today’s New York Times. 

The CHAIRMAN. Without objection, it is so ordered. 

Mr. BACHUS. Mr. Chairman, I ask for unanimous consent that 

anyone who— 

The CHAIRMAN. Right, we have general leave that anything that 

members want put in the record can be put in. The gentleman is 

correct. There is no objection. 

9 

And finally, without objection, we will hear from our non-member 

who is a cosponsor of the legislation, the gentleman from North 

Carolina, Mr. Shuler. 

Mr. SHULER. Thank you, Mr. Chairman. 

Chairman Frank, Ranking Member Bachus, and members of the 

committee, I appreciate the opportunity to participate in this hearing to discuss the Commercial Real Estate Stabilization Act with 

you. I am proud to introduce this bill with Walt Minnick and Suzanne Kosmas because I truly believe that commercial real estate 

and failing community banks are problems for my district and the 

rest of the country. 

This problem starts with commercial real estate but doesn’t end 

there. In rural America, the concerns about commercial real estate 

are pressing. Depressed commercial real estate values are also affecting the big picture. What starts with commercial real estate 

stretches from local community banks to our small businesses, decreasing the amount of job opportunities and stunting job growth. 

If community banks can’t lend, and they can’t refinance the loans 

on their books, they will be seized by the FDIC. Once that happens, 

small business lending and job growth are doomed. 

We are all just beginning to understand the scope of this large, 

multi-trillion-dollar problem. It is complicated, and until today, 

most people decided to kick the can down the road and to ignore 

the problem. Congressman Minnick and others, along with our 

staff, have held over 300 meetings over the last year with all affected parties and only come to the conclusion that something has 

to be done, and done fast. 

I think this bill is an effective, practical way to start addressing 

the lack of credit and liquidity in the commercial real estate market, which, in return, will start giving some community banks and 

commercial real estate developers around the country a fighting 

chance. 

At the rate that we are going today, if we don’t get this bill moving or come up with something similar to address this problem, we 

will have a massive problem for our Nation’s real estate and business world. CRESA affects Main Street America and everyday 

small businesses and entrepreneurs. I look forward to working with 

you through this piece of legislation. 

I yield back the balance of my time. 

The CHAIRMAN. We will now begin the hearing. We will start 

with Mr. Thomas Gronstal, who is the superintendent of the Iowa 

Division of Banking. He is here on behalf of our frequent collaborator, with whom we enjoy working, the Conference of State Bank 

Supervisors. 

I would note that, in the financial reform bill, where there are 

entities set up consisting of groups of regulators, at the initiative 

of the House, the Conference of State Bank Supervisors is a participant. And we welcome the ability to work with the CSBS. Thank 

you. 

Mr. Gronstal, go ahead. 

10 

STATEMENT OF THOMAS B. GRONSTAL, IOWA SUPERINTENDENT OF BANKING, ON BEHALF OF THE CONFERENCE 

OF STATE BANK SUPERVISORS 

Mr. GRONSTAL. Thank you. Good morning, Chairman Frank, 

Ranking Member Bachus, and distinguished members of the committee. As was stated, I am Tom Gronstal, superintendent of banking for the State of Iowa, and chairman of the Conference of State 

Bank Supervisors. 

Thank you for inviting me here today. We appreciate the time 

that the committee and that Representative Minnick, in particular, 

have devoted to exploring the means for stabilizing the commercial 

real estate market and overcoming the challenges that community 

banks continue to face in serving this market. 

The current economic environment has created a great deal of 

uncertainty in the commercial real estate market. This uncertainty 

poses challenges for businesses, investors, and banks. Investors 

and businesses are likely to restrain capital investments and plans 

for expansion, and lenders hesitate to extend credit as they struggle to ensure collateral protection and the ability to repay. 

These issues are having a significant impact on the commercial 

real estate market, affecting the performance of existing loans, 

valuations on bank balance sheets, and, ultimately, the availability 

of credit. 

In my home State of Iowa, the number of banks with considerable commercial real estate concentrations has declined over the 

past 3 years. Public demand for commercial real estate loans has 

greatly diminished, and there is very little new development occurring in the State. This has caused unemployment in the construction sectors to rise notably over the past 2 or 3 years. 

Most of my colleagues around the country are seeing many aspects of the commercial real estate market stabilizing, but general 

demand for commercial real estate loans continues to lag, and 

banks’ interest in funding new commercial real estate loans is still 

low. 

As regulators and policymakers, we must recognize that any economic recovery will be uneven. In some regions of the Nation, portions of the banking industry and financial markets continue to 

face significant challenges, even as other areas are showing signs 

of recovery. 

Given where we are in the current economic cycle, we believe 

that Congress can play an important role the commercial real estate market by providing a Federal guarantee for prudently underwritten loans. Therefore, CSBS supports the objectives of Representative Minnick’s Commercial Real Estate Stabilization Act, its 

focus on small and mid-size institutions, and its approach of 

leveraging a government guarantee to incent private lending and 

investment activity. 

Federal guarantees have been effectively used to support bank 

lending to small businesses and farmers, and CRESA can be structured as a measured risk to support private investment and lending to further public policy and economic objectives. 

In addition, CRESA contemplates conservative lending by community banks and other institutions with the expertise and experience to engage in successful commercial real estate lending. The 

11 

program’s use of a government guarantee to attract and encourage 

private market activity increases the likelihood of broader market 

benefits beyond the individual transactions. Ultimately, implementation of CRESA could provide fuel for market stability and remove 

uncertainty among market participants. 

In terms of the program’s structure and oversight, we propose 

that State bank regulators should be represented on the program’s 

oversight board. Giving CRESA’s stated focus on smaller institutions, State bank regulators, as prudential regulators of the vast 

majority of community banks and because of our knowledge of local 

economies, should be a part of CRESA oversight. 

CSBS remains a fierce supporter of the Nation’s dual banking 

system, which supports community banking. We commend Congress for reaffirming the dual banking system in the Dodd-Frank 

Wall Street Reform and Consumer Protection Act. And we believe 

Representative Minnick’s proposal is also an affirmation of the 

dual banking system and the vital role community banks play in 

our national economy. 

Ultimately, our Nation’s leaders must seek to create a holistic 

approach to stabilize all banking industry participants. Government efforts must be undertaken, with the stated objectives of stabilizing not only the national economy but local economies as well. 

Only through preserving a diverse financial industry and stimulating local economies will we ultimately enjoy a comprehensive 

and sustainable economic recovery. 

I appreciate the opportunity to testify today, and I look forward 

to answering any questions you may have. Thank you. 

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

54 of the appendix.] 

Mr. MINNICK. [presiding] Thank you, Mr. Gronstal. 

The Chair asks the gentleman from Alabama to introduce our 

next witness. 

Mr. BACHUS. Thank you. 

It is my pleasure to introduce Mayor Robert Craft of Gulf Shores, 

Alabama. He has not only been a dynamic public figure, but he is 

also a highly successful businessman and farmer. He has a 1,200- 

acre turf farm and sells to a lot of landscapers and contractors. He 

also developed and is the owner of a residential planned community, which is actually nine residential—I guess you would call 

them villages. It has two Arnold Palmer golf courses on it, a Courtyard by Marriott, and also a condominium complex. 

So he has seen it, not only as mayor, but also as a businessman 

dealing with banks. He has seen his community, over the past 30 

years that he has been a resident, mushroom and prosper despite 

hurricanes. But what he is facing today is, I think, the most challenging time that Gulf Shores has faced in its long and prosperous 

history: a combination of the tough economics and then aggravated 

tremendously by the BP oil spill. So he is truly an eyewitness to 

what is happening, as I said in my opening statement. And I look 

forward to his testimony. 

I know I was talking to—Congressman Shuler and I were at 

breakfast together, and he was talking about some of the challenges facing North Carolina. And I think because of the oil spill, 

we are probably just 2 or 3 months ahead of the curve, but I know 

12 

you are experiencing a lot of the same frustrations that the mayor 

discussed with me yesterday, and we have heard it here, and that 

is this vicious cycle of banks because the regulators are pushing 

them into taking action and calling loans or asking for more collateral, had distress sales. I know your son is— 

Mr. WATT. Mr. Chairman, could we get on with the hearing instead of listening to our colleague? 

Mr. MINNICK. Yes, I guess we can. We have been doing this since 

before you got here. All the members— 

Mr. WATT. But we are past the opening-statement point. We are 

trying to listen to the witnesses. 

Mr. MINNICK. You may proceed, Mr. Bachus. 

Mr. BACHUS. Thank you. 

Let me just close by saying, I appreciate you being here, Mayor 

Craft. 

Mr. CRAFT. Thank you, sir. 

Mr. MINNICK. Mayor Craft? 

STATEMENT OF THE HONORABLE ROBERT CRAFT, MAYOR, 

GULF SHORES, ALABAMA 

Mr. CRAFT. Chairman Frank, Ranking Member Bachus, and 

members of the committee, first let me state again how much the 

Gulf Coast residents along the Gulf of Mexico appreciate your interest in our region in the aftermath of this BP oil spill. 

This hearing concerns possible legislative efforts to address the 

ongoing difficulties in the commercial real estate market. Of 

course, these difficulties have had a very significant impact along 

the Gulf Coast of America. Property values have fallen dramatically in our communities, as they have fallen elsewhere. Banks 

that provided credit to our community have been significantly damaged. Over the past several years, these banks have charged off 

tens of millions of dollars of loans in Gulf Shores alone. Now, Federal bank regulators are requiring further write-offs based on the 

temporary loss of real estate value, given the uncertainties of the 

conditions created by the oil spill. 

Once the leak is stopped and the beaches are cleaned up, tourism 

will return, and property values will return as well. That doesn’t 

mean they will return to 2006 valuations, but they will certainly 

return to pre-spill valuations. In fact, Mr. Feinberg has stated that 

his BP fund claims process will not recognize any real estate claims 

for just this reason: Real estate values are only down temporarily. 

Unfortunately, the bank regulators are aggravating the problems 

on the Coast by various actions they have taken. The interagency 

statement that these regulators issue is of no value either to the 

affected banks or to the residents of the Gulf Coast. The statement 

that urges banks to waive late fees and ATM charges are gestures 

of no meaning. 

Our banks have had Federal examiners twice force them to write 

off millions of dollars in performing loans that are current simply 

on the basis that the underlying collateral has lost value since the 

oil spill. This makes no sense. It just makes recovery of the region 

that much more difficult, if not impossible. 

Without help, Gulf Shores and Orange Beach, our neighbor to 

the east, would lose what has taken decades to develop across mulVerDate Nov 24 2008 18:08 Nov 18, 2010 Jkt 061854 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 K:\DOCS\61854.TXT TERRIE
13 

tiple generations of families. With the loss of business revenues, 

Gulf Shores and Orange Beach are at the risk of losing businesses 

needed to serve as the driver of our only island economy: tourism. 

Once this family business infrastructure is lost, it cannot be magically recreated. 

Every business located on the island is directly affected by this 

disaster and has suffered loss. There are no exceptions. From the 

beginning of this disaster, our community has been assured that 

we would be made whole by BP. This has not occurred. 

The financial impact of the oil disaster is devastating. Our local 

community of Gulf Shores and Orange Beach has approximately 

$1.3 billion of existing debt that is dependent on tourism revenue 

to service. 

The Gulf Coast would urge this committee to work with Federal 

bank regulators to provide its banks time to work out the problems 

created by this spill. They need more than an interagency statement on ATM fees. Here are a few concrete examples of what is 

needed: 

Appraisals: Bank regulators continue to insist on new appraisals 

even though the real estate market is so unstable as to make 

meaningful comparables impossible. It is essential that the bank 

regulators accept existing, pre-spill appraisals, not distressed valuations caused by arbitrary markdowns in the aftermath of this 

spill. 

Bank regulators should also recognize BP and Feinberg claims as 

equivalent to insurance claims when those claims are corroborated 

with data. Thus, examiners ought to take these claims into account 

when assessing the repayment prospects of a loan. 

There is another reality they should consider, and that is the effect this spill has had on the coastal banks’ ability to raise capital. 

The investor community has begun to re-enter the bank capital 

market, even for troubled banks, but the investors have indicated 

that they want to let the market settle after the spill is over before 

investing in these area banks. The regulators should work with 

these banks to give them more time to raise capital. 

In sum, the bank regulators need to give these banks some 

breathing space. And, in the long run, this will reduce the cost to 

the taxpayer by saving many of these banks and also allowing our 

area economy to recover. 

Finally, these points are exactly in line with a letter that Chairman Frank and Mr. Minnick sent to the Federal bank regulators 

in the fall of last year. I am told by bankers that the regulators 

have not responded in the requested manner. 

As you consider this difficult decision, please understand the consequences of adding another layer to the recovery of this region. 

Failure of many banks and most businesses is a certainty. Please 

don’t underestimate the urgency that exists here. We would deeply 

appreciate any help you can provide in obtaining the relief mentioned here, and in Chairman Frank and Mr. Minnick’s letter of 

October 29, 2009. 

Thank you. 

[The prepared statement of Mayor Craft can be found on page 38 

of the appendix.] 

Mr. MINNICK. Thank you, Mayor Craft. 

14 

Mr. Lancaster? 

STATEMENT OF BRIAN LANCASTER, ROYAL BANK OF 

SCOTLAND, ON BEHALF OF THE CRE FINANCE COUNCIL 

Mr. LANCASTER. Thank you, Chairman Frank, and Ranking 

Member Bachus. My name is Brian Lancaster, and I am here today 

as a board member of the Commercial Real Estate Finance Council, 

which represents all lenders, issuers, investors, and other services 

in the commercial real estate finance business. 

Today, my testimony will focus on three areas: the challenges facing the $3.5 trillion market for commercial real estate finance; 

the unique structure of commercial mortgage-backed securities and 

the need to customize reforms; and suggested policies to support 

commercial real estate and small business. 

As the lagging indicated, the $7 trillion commercial real estate 

market is now feeling the full impact of a prolonged recession. 

Today, a perfect storm exists with four interconnected challenges. 

We are in the midst of a severe recession. Unemployment, consumer spending, business performance, and asset values have all 

deteriorated and compound the CRE downturn. A severe equity gap 

exists in commercial real estate. Commercial properties have lost 

30 percent to 50 percent of their value since 2007, and this is arguably the biggest challenge facing commercial real estate today. 

More than a trillion dollars in commercial real estate loans mature in the next several years. More troubling, many of these loans 

will require significant borrower equity to refinance, given the decline in property values. The CMBS markets are restarting, but 

slowly. CMBS issuance plummeted from a peak of $240 billion in 

2007, nearly 45 percent of all commercial real estate lending, to 

$12 billion in 2008, $2 billion in 2009, and, at $2.4 billion for the 

first half of this year, is just now starting to pick up. 

The four key areas we believe that will provide a framework for 

recovery are as follows: 

Increased coordination of accounting and regulatory reforms. Beyond the economic conditions, the largest impediment to a revival 

of the commercial mortgage-backed securities market is the uncertainty that exists due to regulatory and accounting changes. Separate from Dodd-Frank, the market already has seen several retention proposals from the regulators: new risk-based capital proposals 

and retroactive changes to securitization accounting under FASB 

166 and 167. When taken together, these changes create tremendous uncertainty and make it difficult to make a loan, buy a bond, 

or develop or expand a securitization program. 

Dodd-Frank includes a study on the combined impact of 

securitization reform proposals and credit availability. This report 

is important, but Congress also should promote greater coordination between regulators and accounting policymakers. 

Policymakers must remember that the commercial mortgagebacked securities market is very different in several ways. CMBS 

borrowers are sophisticated businesses with income-producing 

properties. The CMBS structure typically has 100 to 200 loans that 

average $8 million in size. There is significant transparency; although it can be made better, it is actually quite high. At the Commercial Real Estate Finance Council, we have the Investor ReportVerDate Nov 24 2008 18:08 Nov 18, 2010 Jkt 061854 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 K:\DOCS\61854.TXT TERRIE
15 

ing Package, which was designed by investors for investors to improve transparency. And it is the only market with first-loss investors who re-underwrite all loans prior to issuance. 

Dodd-Frank rightfully ensures that retention rules are considered jointly with some specific considerations for commercial real 

estate loans and CMBS. We applaud Congress for these distinctions, and we urge regulators to ensure that risk retention for commercial real estate loans is implemented in such a way as to promote a recovery of the flow of credit to the real estate borrowers 

and sound lending practices. 

Investors need certainty in regulation and confidence in other 

areas such as ratings and contractual agreements. Policymakers 

should consider ways to use securitization as an exit strategy after 

institutions fail, similar to the Resolution Trust Corporation’s. 

Other items include creating a U.S. covered bond market as an additive tool, accounting relief for consolidation, and proposals to recognize losses over time. 

However, the challenges facing the commercial real estate market today are beyond the scope of what any one program could or 

should do in attempting to provide a solution. Today, smaller financial institutions, such as small and regional banks, face the greatest strain from commercial real estate, particularly construction 

loans and land loans that have not been securitized. In fact, approximately 1,500 U.S. banks are at risk, according to the FDIC, 

due to commercial real estate exposure which is on balance sheet. 

Given the commercial real estate challenges faced by small institutions and small businesses, it is logical that the small business 

lending fund also incorporate small commercial real estate mortgages that are income-producing. The council applauds Congressman Minnick’s efforts to clarify the definition of small business 

lending to commercial real estate loans. If implemented properly, 

it could assist in recapitalizing small banks while incentivizing 

commercial real estate lending to small business to fuel job growth. 

The council commends Representative Minnick’s efforts with 

CRESA, and we would make the following points: Additional liquidity could be helpful, but any approach should incentivize financial institutions and borrowers to deal with the equity gap in existing loans. Encouraging securitization of such high-quality assets 

could maximize benefits by freeing up balance sheets and promoting additional private lending. We stress that mortgage lending 

for small businesses be provided by a variety of small, mid-sized, 

and larger banks, life insurers, and other nonbank lenders. 

Thank you. 

Mr. MINNICK. Thank you very much. 

I neglected to mention that Mr. Lancaster is speaking on behalf 

of the Commercial Real Estate Finance Council. And we appreciate 

your cataloging the issues that face your members. Thank you for 

your testimony. 

Mr. LANCASTER. Thank you, Representative Minnick. 

Mr. MINNICK. I would now like to call on Mr. James Helsel, who 

is going to speak on behalf of the National Association of Realtors. 

16 

STATEMENT OF JAMES L. HELSEL, JR., 2010 TREASURER, 

NATIONAL ASSOCIATION OF REALTORS (NAR) 

Mr. HELSEL. Thank you, Mr. Chairman, Ranking Member Bachus, and members of the committee. My name is Jim Helsel. I am 

the 2010 treasurer of the National Association of Realtors, and I 

thank you for the invitation to testify before you today. 

I have been a Realtor for more than 35 years, specializing strictly 

in commercial real estate. I am president of Helsel Incorporated 

Realtors in Camp Hill, Pennsylvania. I am here today to testify on 

behalf of the 1.1 million Realtors of the National Association of Realtors. 

We are in support of several resolutions to ease the commercial 

real estate credit crisis and to restore lending to the small business 

community. 

First, I want to address H.R. 5816, the Commercial Real Estate 

Stabilization Act. We applaud its goals to help stabilize the commercial market and to clear troubled properties off the market. We 

are ready to work with Representative Minnick and the committee 

to review this proposal to see how it could help restore our industry. 

Second, NAR strongly supports H.R. 3380, introduced by Representatives Kanjorski and Royce, which would raise the credit 

union members’ business lending cap from 12.25 percent to 25 percent of total assets. 

Lack of available credit remains a significant challenge for our 

industry right now. What is more, it is the smaller regional and 

community banks with large commercial real estate exposure that 

count for almost one-half of the entire business loans issued in the 

country. That has put a significant dent in the commercial and the 

credit availability to small business communities. In turn, this has 

reduced cash flow and elevated vacancies in the commercial markets. 

In the past, consumers and businesses have relied on credit 

unions to fill the gaps when banks cannot serve them. But today, 

credit unions are hampered by the 12.25 percent cap that is before 

them. The Credit Union National Association estimates that if H.R. 

3380 were signed into law, credit unions could extend up to $10 billion in additional business loans, helping create 108,000 jobs. 

We strongly urge this committee to move H.R. 3380 forward. 

Furthermore, we also support the Administration’s proposed increase of the cap on credit union member business lending at 27.5 

percent of total assets. However, we oppose the Administration’s 

requirement that credit unions must have at least 5 years of member business lending experience in order to qualify for the higher 

limit. It would unfairly prevent credit unions that are well-capitalized and ready to lend to the small business community from participating. 

Anecdotally, I would like to just tell you a very short story. About 

a year ago—I am, by the way, a very small business in central 

Pennsylvania—I had the opportunity and the requirement to refund and to refinance a loan I had on a small building where my 

business exists. That building sat on a loan that was a 20-year amortization with a 10-year balloon. At the end of 10 years, 1999, it 

was my obligation to refinance the loan. It was a performing asset; 

17 

it was a performing loan. We had never missed a payment. The 

asset was performing on its own, as well. 

I went to three banks, one which held the loan and two others, 

all of which said, ‘‘I am sorry, Mr. Helsel. We are out of the real 

estate business right now.’’ I went to a credit union. In 3 days, the 

credit union gave me a commitment letter subject to an appraisal. 

By the way, the equity, the LTV on that loan was 20/80. I only 

owed 20 percent of the value of the property. I could not get a loan 

through a commercial bank, and I went to a credit union. So, 

anecdotally, it tells you—and that is typical of my business and my 

business climate right now. 

Third, I want to address the small business lending fund legislation in SBA loans. NAR recommends that you pass H.R. 5297, the 

Small Business Jobs and Credit Act of 2010, which was introduced 

by Chairman Frank. This legislation contains lending provisions 

that help ensure community banks have both the incentive and the 

capacity to increase total loans to small businesses. We strongly 

urge you and encourage you and your colleagues in the Senate to 

pass this legislation quickly. 

Many small businesses are having trouble obtaining SBA loans 

right now. While we applaud the SBA’s decision to include real estate professionals as eligible candidates for SBA loans, we believe 

raising loan limits for both SBA 7(a) and 504 loans can further add 

relief. Raising these loan limits will open up another avenue for 

commercial property owners to get the credit they need. Furthermore, permitting SBA 504 loans to be used to refinance performing 

commercial properties will also help ease the liquidity crisis in the 

commercial sector. 

In conclusion, NAR believes it is critical for Congress to act 

quickly and to get capital flowing to small businesses in the commercial real estate market. A strong commercial real estate sector 

is critical to millions of U.S. jobs and to helping keep our overall 

industry afloat, and our overall economy afloat more importantly. 

Thank you for this invitation to testify before you. I am happy 

to answer any questions you may have. Thank you so much. 

[The prepared statement of Mr. Helsel can be found on page 62 

of the appendix.] 

Mr. MINNICK. Thank you very much, Mr. Helsel. 

Next, we will hear from Mr. Chris DiAngelo, who is a partner at 

Dewey & LeBoeuf, a firm that I believe has done more legal work 

on documentation of commercial real estate lending than any firm 

in the world. 

Mr. DiAngelo? 

STATEMENT OF CHRIS DiANGELO, PARTNER, DEWEY & 

LEBOEUF, LLP 

Mr. DIANGELO. Thank you, Mr. Chairman, Ranking Member 

Bachus, and members of the committee. I appreciate the opportunity to speak with you today about this piece of legislation. 

As the chairman mentioned, I am a partner with the Dewey & 

LeBoeuf law firm in New York City. I had the structured finance 

group. I have worked with banks and real estate lending for about 

30 years. 

18 

I would just like to make a couple points about this bit of legislation, primarily from a legal point of view, but also from a somewhat economic point of view, just having been in the industry for 

such a long time. 

The first point I would like to make is to raise the connection between small balance commercial real estate lending and small business lending generally. In this country, most small business lending actually does take the form of commercial real estate lending. 

And, furthermore, another connection is the connection between 

small business lending and jobs. There was one study that I read 

recently, an SBA-related study that said, for every $650,000 worth 

of SBA lending, one job was created. So, again, in this country, all 

three of these things are tied pretty closely together: small business lending; small balance commercial real estate lending; and 

jobs. 

The second point I would like to make is the connection between 

small balance commercial real estate and community banks. What 

happened in this country over the past, say, 20 years was the phenomenon where you had the Federal GSEs, Fannie and Freddie, 

basically took a large part of the residential market away from the 

smaller banks. You had large non-depository finance companies do 

the other types, the so-called subprime and alt-A mortgages. You 

had the larger banks also doing credit cards, other types of consumer finance, large finance companies such as Ford Credit and 

GMAC. There was really very little left for the community banks 

to do other than this type of product, the small balance commercial 

real estate loan. 

That is not to suggest that the product is a bad product or that 

the loans were bad. It is just pointing out that—we read so many 

reports today about the concentration of commercial real estate at 

these smaller banks, and we should understand how that happened. 

The third point I would like to make relates to the issue of what 

happens if we don’t address this problem. We actually see it happening pretty much every Friday when the FDIC sends out its 

weekly e-mails about the closings of banks. 

And I want to make an important point about that, because I understand the reluctance for Congress and the government to embark on another Federal program. But I do want to point out that, 

right now, these problems of the commercial real estate lending 

and the community banks simply rolls to the FDIC. Again, it is not 

the FDIC’s fault; the FDIC does not have the authority to deal with 

anything other than receivership estates. 

So it seems to me, at least in looking at this legislation and comparing it to the authority of other Federal agencies, that by letting 

these problems roll into bank receiverships, we are probably maximizing the cost to the government, rather than trying to take this 

particular narrow problem and—I don’t want to say nip it in the 

bud, because the bud may have already passed—but at least get it 

a little earlier in the process before it rolls into a receivership estate. 

This problem also has been remarked on by a number of commentators, including Professor Warren’s committee, which dedicated its February report to commercial real estate. This problem 

19 

of commercial real estate lending has been unusually sticky, and 

the various programs, to date, have just not been able to address 

it thoroughly. 

This particular bit of legislation, I have reviewed quite carefully, 

and it seems to be very similar in one regard, although in different 

operation, to the TALF program, which was used to jump-start the 

securitization markets generally, although it had difficulty cracking 

the commercial real estate nut. By similar to TALF, I mean that 

it was a program that was rolled out by the Federal Government 

and quickly became unnecessary. It was designed to quickly become unnecessary. And the private market has taken asset-backed 

securities, by and large, over from the TALF program. 

There are two quick points I want to make. Covered bonds, I understand that is moving ahead, and I think that is a great idea. 

The one observation I would make about covered bonds is it will 

very likely be a large bank program, and it will be very difficult 

to get these smaller banks and these types of loans into that program. 

The second thing I would like to mention in passing is the markto-market observation. That is a very difficult problem. And I note 

that this legislation does not try to solve that problem, but rather 

it asks the regulators to try to solve that problem. It is a very difficult problem to address through legislation. 

Anyway, thank you for your time, and I look forward to working 

with you and answering any questions. 

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

48 of the appendix.] 

Mr. MINNICK. Thank you, Mr. DiAngelo. 

Next, we have Mr. Todd Lindsey. Mr. Lindsey has a 20-year 

background, I understand, in the early stages of the CMBS market 

and has as much experience as anyone in the room in the smaller 

segment of the market which this bill intends to address. 

Mr. Lindsey? 

STATEMENT OF TODD LINDSEY, PARTNER, US CAPITAL 

Mr. LINDSEY. Thank you, Mr. Chairman, for the opportunity to 

testify today. 

Over the last 15 years, our credit markets have become increasingly reliant on and structured around securitization. Leading industry experts and government officials, including Secretary 

Geithner and Chairman Bernanke, have stated that a functioning 

securitization market is a vital part of our credit system and our 

economic recovery. 

Over the last 24 months, much has been done by government 

and private industry to stabilize the credit markets, including, as 

Chris mentioned, parts of the securitization market. The residential real estate, consumer credit, and corporate credit markets have 

stabilized, in large part because of successful government programs 

targeted at those particular markets. The commercial real estate 

market has been left behind and now poses very significant risks 

to the credit system and our economic recovery. 

As Congressman Minnick stated, in 2007, the value of all commercial real estate was approximately $5.5 trillion. According to 

many research reports, values have declined by 40 percent or more 

20 

from those highs. This decline has destroyed over $2 trillion of equity in the commercial real estate markets. Further declines will 

create greater losses, and a majority of those losses will be absorbed by the banking system and, ultimately, the taxpayers. 

The simplified graph that I have included in my testimony that 

I think you all have a copy of shows the significant risks that are 

created by a further devaluation of commercial real estate. As you 

can see in that graph, if you take a look at it, losses between $300 

billion and $1.8 trillion are possible. It is important to understand 

that our entire banking system is capitalized between $1.2 trillion 

and $1.4 trillion. Real estate losses of the magnitude demonstrated 

in this graph will have a catastrophic effect on our credit system 

and our economy. 

It should also be pointed out that many commercial real estate 

transactions are reflecting reductions of value of 70 percent or 

greater. This is the free market fixing the problem. The lack of a 

functioning credit market will continue to be a major cause of further declines. 

In 2007, the commercial real estate securitization market provided $240 billion of funding to the commercial real estate sector. 

Since that time, the commercial securitization markets have been 

shut down. With economic regulatory and accounting risk clouding 

the market, the future of securitization is unclear. 

In short, without some sort of government assistance, the 

securitization markets are not likely to provide any significant 

credit to the commercial real estate market. Because commercial 

real estate loans generally do not fully amortize over their loan 

term, the Nation’s stock of commercial real estate loans is refinanced on a regular basis. It is estimated that $1.3 trillion of loans 

will reach maturity in the next 36 months. 

A majority of the smaller balance commercial real estate loans 

are on the balance sheets of our Nation’s community banks. But because of both capital and regulatory constraints, many banks are 

not in a position to make new loans or refinance their existing 

loans. 

The bill we are discussing today is designed to jump-start the 

private commercial mortgage-backed securities market. The CMBS 

market is well known by market participants and has demonstrated the ability to facilitate the funding of large numbers of 

loans. 

The bill directs the Treasury to guarantee bonds, backed by 

newly originated commercial loans, and the taxpayer will be protected in the following ways: 

One, a large guarantee fee will be paid to the Treasury. This fee 

will be structured to offset any costs or losses of the program and 

hopefully, and I truly believe, generate very substantial profits to 

the taxpayers. 

Only newly underwritten loans, underwritten in accordance with 

guidelines developed by industry experts, will be included in the 

program. 

All properties will be reappraised at today’s market valuations. 

Making loans at a low point in the real estate cycle has historically 

been very safe. 

21 

This program is not a silver bullet, and it is not a bailout for financial institutions or real estate developers. To the extent individuals or institutions have made poor decisions, they will suffer the 

consequences of their actions. The bill simply supports the extension of reasonable credit to the commercial real estate sector. 

I look forward to any questions you may have on this program 

or the market in general. And thank you very much for your time 

and attention to this matter. 

[The prepared statement of Mr. Lindsey can be found on page 71 

of the appendix.] 

Mr. MINNICK. Thank you very much, Mr. Lindsey. 

I would like to now call on the gentleman from Connecticut, Mr. 

Himes, to introduce our next witness. 

Mr. HIMES. Thank you, Mr. Chairman. 

And it is a delight to introduce to the committee Mr. Jonathan 

Daniel from Stamford, Connecticut, a constituent, and principal 

and founder of Silo Financial Corporation, which provides a broad 

range of specialty capital—bridge mortgages, mezzanine loans, and 

other financing—in the commercial real estate market. 

Mr. Daniel has been in my office on a number of occasions talking about an innovative potential solution to the challenges that we 

are talking about today using and leveraging the successful SBIC 

program. And I look forward to having the opportunity to share his 

ideas with the committee. 

Thank you. 

STATEMENT OF JONATHAN DANIEL, CHIEF EXECUTIVE 

OFFICER AND FOUNDER, SILO FINANCIAL CORP. 

Mr. DANIEL. Chairman Frank, Ranking Member Bachus, Congressman Himes, and committee members, thank you for the invitation to participate in today’s committee hearing. 

I am the principal and founder of Silo Financial Corp. from 

Stamford, Connecticut, which is a private real estate finance company that provides capital to small- and medium-sized real estate 

owners and developers. 

I would also like to recognize that Jay Rollins of JCR Capital, a 

Denver-based private real estate finance company, has worked tirelessly with me on this initiative. 

In reference to H.R. 5816, I trust that this program could provide 

smaller community banks with a means to underwrite and originate new qualified commercial mortgages, which they are currently 

unable to originate due to balance sheet issues, overexposure to 

real estate, and stringent regulatory oversight. The ability to finance more transactions could likely help create a floor for commercial real estate values and create work for many professionals, 

including electricians, plumbers, roofers, general contractors, pavers, and more. 

Credit is the backbone of commercial real estate, and it remains 

extremely challenging for nearly all small balance commercial 

property owners to access mortgage capital. The convergence of declining fundamentals, lack of capital, and maturing loans have created a ticking time bomb of loan defaults, job losses, and property 

foreclosures that may sweep through this country worse than the 

residential mortgage crisis. 

22 

According to a 2007 study by NAIOP, the operating outlays associated with office, warehouse, and retail space built in 2007 alone 

are estimated to total $2.4 billion annually. This direct spending of 

building operations would add $5.1 billion to the GDP, support approximately 57,000 jobs, and generate $1.6 billion in new personal 

earnings. If we extrapolate the results of this study and apply it 

to the entire commercial real estate marketplace, encompassing 

over 32 billion square feet, then the impact to GDP and jobs is exponentially significant. 

According to the Congressional Oversight Panel’s report, ‘‘Commercial Real Estate Losses and the Risks to Financial Stability,’’ 

hundreds more community and mid-sized banks could face insolvency, extending an already painful recession. 

To address this crisis, we have developed a practical intervention 

initiative that, combined with H.R. 5816, could help contain and 

begin to remedy the commercial real estate crisis—at no cost to 

taxpayers. 

Further, we are proposing a program where we, the lenders, will 

provide equity capital in a first-loss position, thereby insulating 

taxpayers from risk. In this program, the government would be a 

secured lender at no more than 50 percent exposure to today’s real 

estate values. 

We propose the expansion of the Small Business Investment 

Company Program to include the financing of small balance commercial real estate. The existing Small Balance Investment Company Act was formed in 1958 in efforts to provide capital to startup 

and capital-deprived companies and businesses. In light of the commercial real estate crisis, we are proposing the SBIC Act to temporary allow the participation of qualified small commercial mortgage lenders. 

The Small Business Investment Company Program is a unique 

public-private partnership that has provided over $57 billion in financing to more than 107,000 small U.S. companies since the program’s creation. There are hundreds of small real estate finance 

companies across the country, like Silo in Stamford, Connecticut, 

and JCR Capital in Denver, Colorado, which provide commercial 

real estate loans. Typically, these finance companies utilize privatesector equity combined with bank lines to make loans. 

Unfortunately, these smaller finance companies are also prohibited from accessing capital themselves in this market environment. 

This, in turn, means even less capital can flow into commercial real 

estate markets. Thus, banks have less take-out options, values continue to decline, and community banks are forced to close. 

The SBIC Debenture program, which has never lost money, 

would work perfectly to accommodate small real estate finance 

companies’ need for capital in an effort to complement bank lending in this environment. Generally, SBICs have one-third of their 

own capital at risk in a first-loss position. So, for example, if ABC 

Real Estate Finance Company had $50 million of equity and was 

granted an SBIC commercial mortgage license, it could borrow 

$100 million at market rates and have $150 million to deploy and 

originate small balance commercial real estate loans with. To the 

extent these loans in a portfolio were made at no greater than 75 

23 

percent of today’s values, the taxpayer’s last dollar exposure would 

be no greater than 50 percent of today’s values. 

To conclude, the SBIC program would be a perfect temporary 

and complementary solution with H.R. 5816 until the traditional 

capital markets return to normal. 

Thank you again for your invitation to discuss the important 

issues of today’s hearing. I will be happy to answer any questions 

that you may have. 

[The prepared statement of Mr. Daniel can be found on page 43 

of the appendix.] 

Mr. MINNICK. Thank you very much, Mr. Daniel. 

Our next and final witness is Mr. Ernie Panasci. He was a shareholder at Jones & Keller and was introduced earlier by my colleague, Mr. Perlmutter. 

Mr. Panasci? 

STATEMENT OF ERNEST J. PANASCI, SHAREHOLDER AND 

DIRECTOR, JONES & KELLER, P.C. 

Mr. PANASCI. Thank you. 

Chairman Frank, Ranking Member Bachus, and members of the 

Financial Services Committee, thank you very much for the opportunity to testify at today’s hearing on behalf of financial institutions in the United States. 

As you stated, I am an attorney in Denver, Colorado, representing financial institutions throughout the western United 

States. My financial institution practice in the States in which it 

covers gives me a broad perspective on what is going on in community banks in the western region of the United States. 

I am here today to discuss H.R. 5816, the Commercial Real Estate Stabilization Act of 2010, and complementary legislative regulatory proposals that would increase the availability of credit and 

improve the financial condition of financial institutions. My analysis of this bill leads me to believe it will be a step in the right 

direction to unclog the commercial real estate lending markets. 

The old 8 and 10 percent capital guidelines imposed by the regulators have been replaced by 10 and 12 percent and, in some instances, far greater capital requirements on financial institutions. 

Most financial institutions are having a difficult time raising equity 

capital and, as such, are not able to make new loans because each 

dollar lent by a financial institution requires 10 to 14 cents in additional capital, depending upon the capital requirements imposed 

upon the institution. 

The commercial real estate credit guarantee program would enable financial institutions to remove the guaranteed portion of 

these credits from their CRE portfolio, enabling them to make additional commercial real estate loans. 

The program as outlined by the bill would be a benefit to financial institutions. However, I suggest the House consider limiting 

the maximum guaranteed amount to one institution to approximately 3 percent of its total risk-based capital as of a certain date 

and, if possible, increasing the amount of total guaranteed dollars 

to some amount in excess of $25 billion. My belief is that the Secretary of the Treasury will find a great interest in this program. 

24 

In addition to the commercial real estate guarantee program, I 

applaud Congress for its passage of the Dodd-Frank Act. In particular, I believe that section 616 of the Dodd-Frank act is very relevant to the proposed commercial real estate credit guarantee program and small business lending program. As you know, section 

616 requires the Federal Reserve, in establishing regulations for 

capital standards, to take such standards into account as countercyclical economic conditions. In other words, in times of economic 

prosperity, the capital standards should be higher and, in times of 

economic stress, the capital standards should be lower. 

With the combination of a decrease in the capital standards applicable to banks during these economic times and the implementation of amortization provisions of the small business lending fund 

program, overall, banks will be in a much better position to lend 

to businesses. I encourage the Federal Reserve to act on these 

countercyclical regulations as soon as possible, given the fact that 

we are still in the middle of an economic crisis. 

While I believe the foregoing will provide some relief to financial 

institution lending and to financial institutions, I cannot stress 

enough the importance of the implementation of the temporary amortization authority currently provided in H.R. 5297. 

As you are aware, Regulation H, enacted by the Federal Reserve 

in the 1980’s, assisted agricultural banks with the amortization of 

agricultural loan losses. The FDIC report concerning banks that 

participated in this program states that, of the 301 banks operating 

in the agricultural capital forbearance program, 201 were operating 

as independent institutions 1 year after leaving the program, another 35 had been merged without FDIC assistance, and 65 banks 

failed. As these results indicated, after a period of forbearance, a 

large majority of the institutions in the program were either able 

to recovery or had sufficient value to be acquired. Losses of the 65 

banks that failed were similar to those of other failed banks. 

The combination of increasing capital demands due to the economic conditions that the country as a whole has been experiencing 

have contributed to a decrease not only in commercial real estate 

loans but also small business lending. Many bankers now realize 

that the loan portfolio diversification isn’t necessary and are not 

able to undertake small business lending due to the aforementioned issues. Enabling institutions to increase small business lending would have a positive impact and would subsequently increase 

banks’ capital. 

I look forward to any questions you may have. 

[The prepared statement of Mr. Panasci can be found on page 75 

of the appendix.] 

Mr. MINNICK. Thank you very much, Mr. Panasci. 

And I thank all the members of the panel for their thoughtful 

testimony and for rearranging your schedules to be with us today. 

I would like to start by asking Mr. Lindsey: You heard the testimony of two of my colleagues, in their opening statements, that 

this legislation was ill-advised and untimely from the standpoint of 

creating additional risk to the taxpayer and would cost the taxpayer, potentially, and was indirectly another form of bailout. 

In your testimony, you indicated you thought exactly the opposite 

was the case. Could you explain to us, again, why? 

25 

Mr. LINDSEY. Yes. And I wish they were here to hear my answer. 

The structure of this program calls for a 2 percent guarantee, 

and that is a minimum fee, to be paid to the Treasury Department. 

I think that fee is probably 4 to 5 times what the industry used 

to charge for ensuring a similar risk. 

What we are talking about here is the Treasury Department, 

what we call in the industry, wrapping investment-grade bonds to 

Triple A bonds. By doing that, what they do is they help private 

industry accumulate loans. Because, right now, the biggest risk to 

securitization is the accumulation of loans in preparation for 

securitization. The big banks are worried that something may happen in that 6-month period of time that makes them keep all these 

loans on their balance sheet or have to fire-sell them into the market, and they are very hesitant to do it. 

So, I think the 2 percent fee that is in the program is more than 

enough to cover any costs or projected losses. And, of course, we 

would be modeling with the Treasury Department the structure 

and creating the default models that would make sure that was the 

case. I think that the legislation is written to make sure that it is 

at least neutral to the taxpayers. 

Mr. MINNICK. And, Mr. DiAngelo, you indicated that another cost 

of doing nothing might be a substantial number of commercial 

banks going under, being seized by the FDIC, and that those costs 

would also accumulate to the taxpayer. 

Could you elaborate as to why those costs might be incurred if 

this legislation is not passed? 

Mr. DIANGELO. Yes. Most of the bank failures that have been occurring at the community bank level have been, frankly, due to 

this problem, the commercial real estate problem, and particularly, 

even more narrowly, the small balance commercial real estate 

loans. 

Again, the FDIC is not set up to proactively deal with these problems. It can only deal with a bank once it is in receivership. There 

is really, at the moment, no agency that can tackle this particular 

problem. When the problem was tackled in the 1980’s and early 

1990’s, the government set up the RTC as a separate entity to deal 

with it. But, once again, I think that was from receivership estates. 

It was essentially taking a job that the FDIC is doing now on its 

own and creating a separate entity just to do those transactions. 

We don’t have that today, so the FDIC—it is funny, the FDIC— 

we, collectively, have really asked the FDIC to do a job that it was 

not set up to do, which is to try to respond to a lack of liquidity 

in the commercial real estate lending markets. So what happens is, 

you have an agency that is really not set up to tackle this problem, 

but by default it tackles it anyway; any losses roll to the deposit 

insurance fund, which is not precisely a taxpayer-supported fund, 

it is funded by bank assessments. But I would imagine that the 

bank assessments somehow gets passed on to the bank customer, 

so the difference between something that like and a tax is probably 

fairly small. 

So my point on this is that the sooner we could get to this problem, probably the less cost it is going to be writ large to the banking industry and the public. 

Mr. MINNICK. Thank you. 

26 

And, quickly, Mayor Craft, you indicated in your testimony that 

you thought 1,500 banks may be at risk if we simply let the market 

play out. Do you have an estimate for us of the cost to the customers and taxpayers if that free-market scenario plays out? 

Mr. CRAFT. Yes, sir. We, in our small community, have 32 miles 

of beach area, and we are a very small portion of the entire Gulf 

Coast community affected. We have existing about $1.3 billion 

worth of debt in acquisition, development, and operational costs. 

And we are severely impacted. All of the economy within this region is either tourism or fishing, both of which are highly seasonal 

and have been devastated with cash flow. And that will flow back 

on the banks as we try to make the payments on existing credit 

and try to survive to the next season. 

Mr. MINNICK. Thank you, sir. 

Ranking Member Bachus? 

Mr. BACHUS. Thank you. 

Let me say that the testimony has been very helpful this morning, and I think there are several proposals in the testimony that 

merit consideration. And I think one thing that I take out of this 

hearing is that the risk of not doing something is greater than the 

risk of doing something; and that if it is well thought out, that the 

exposure to the taxpayer will be minimal, and that we can protect 

the taxpayer, and that any losses actually could be minimized that 

the taxpayer would take. So we will take these proposals very seriously. 

And, also, I would like to, I guess, associate myself with the testimony several of you had, that the way to create jobs is small business and small business lending. Many of our programs to date 

have been, I think, designed to help the larger institutions. And 

that is a significant failure that we have had over the past 2 or 3 

years; we have neglected the smaller institutions. And a lot of 

these programs that have gone out before were smaller institutions, and our regional banks even, on occasion, weren’t able to 

take advantage of that. 

It has also created a perception, which I think is true, in the general public that our larger institutions, both by the regulators and 

by the response, have been protected and insulated, when, really, 

a lot of the risk-taking and what happened was a direct result of 

some of their activities, and that our smaller banks and our businesses and commercial real estate is more of a victim of what they 

did. And it is really not a fair approach that has been taken. 

So we will not dismiss these proposals as simply more exposure 

to the taxpayer, I can tell you, speaking for myself and at least 

some of the other members. 

Let me ask Mayor Craft: If the bank regulators don’t respond 

positively to the relief you are seeking from the coastal community 

banks, what would you suggest the Congress do? 

Mr. CRAFT. Take some type of legislative action to help. We cannot survive as a community without our regional and local banks. 

With the season out there, it is as important to our economy as our 

fisheries and our lodging industry, either one. 

So we have to have survival of our banks. And if we don’t take 

some action, particularly as it relates to the reappraisal—which I 

know the valuations are going to be quite a bit less than the loan 

27 

value, probably, and we do not have the availability to meet a cash 

call as a community. So we certainly need some legislative help. 

Mr. BACHUS. All right. Thank you. 

My second and last question, Mayor Craft, you state that real estate prices that existed pre-spill in the early part of this year will 

return after the leak is stopped and the beach is cleaned up. In 

fact, a lot of them are clean today. I think you keep getting the 

same picture of the same beach, and it affects the tourism. 

What is your basis for that assumption? 

Mr. CRAFT. Very little of the real estate holdings that are mortgaged and financed are residential real estate. Most of it is investment real estate. It participates in the tourism economy. Once the 

tourism economy improves, the values will go up with it. 

And we are becoming confident that, with Mr. Feinberg, in our 

discussions and meetings with him, that he understands the urgency and understands the requirements of funding the cash revenue that has been lost in these industries in the past year. 

Mr. BACHUS. All right. 

Let me say to Congressman Minnick and others, I think one 

strong argument for addressing this problem, particularly helping 

the community and small banks, is we have this so-called doctrine 

that has become pretty infamous over the last 2 years of ‘‘too-bigto-fail.’’ And what we have done with a lot of our actions are grow 

the largest banks to the point where they are about 50 percent bigger than they were before the crisis. 

So, as we continue to lose our regional and community banks, we 

are going to be in a situation where we are going to create even 

larger institutions. And one of my somewhat disappointments 

about this legislation was we did create a ‘‘too-big-to-fail,’’ where 

we said that if they fail, the government would, at least in an implied way, come in and bail out the creditors or counterparties. I 

believe in America you should not create two classes. And, actually, 

it makes their cost to capital less. 

So, I will be interested in seeing how the regulators respond to 

that. Because they literally begged us to give them the authority 

to step in and help these ‘‘too-big-to-fail’’ institutions, which are 

getting bigger by the day. 

Mr. MINNICK. I would like to thank the ranking member for 

those thoughts and also for his suggestion that this important 

problem which faces Main Street be addressed in a bipartisan fashion. Thank you. 

The Chair calls on the gentleman from North Carolina. 

Mr. WATT. Thank you, Mr. Chairman. I want to compliment the 

chairman on how good he looks in that chair up there. He looks 

very comfortable. 

I don’t want anything I say here to suggest any animosity toward 

the bill that we have been talking about. I actually support it. But 

there are some realities here that my colleagues on the other side 

have pointed out that raise some interesting questions, because 

most of them are very much free-market people. They don’t want 

the government to do anything that is involved in the free market. 

And I suspect, when I talk to most constituents of mine who fit the 

demographic profile that our witnesses seem to fit, that most of 

them are free-market people too. 

28 

So we are constantly in this battle of how much should government be doing versus the private sector. And this is a government 

program, because, at some level, what is being proposed is making 

government the backstop, taxpayers the backstop for this. I support 

that. I have been supporting it for years in various contexts, similar to the SBIC proposal that Mr. Daniel testified about, the 

MESBIC program that we have been talking about for years to try 

to stimulate development and investment in minority and underserved communities. 

But there are some troubling things I have heard in this testimony today also. And one of those came from Mr. Helsel when he 

said that he had this balloon loan, and he got to the end of the amortization period and his option was to refinance. And Mr. Lindsey 

reaffirmed that, because he said real estate mortgages are never 

intended to be amortized completely. 

You take the combination of those two things, and that is a troubling position that you are in. Because most of the people I know, 

when they get a short-term balloon loan and they get to the end 

of it, they know that they have an obligation to pay that loan, not 

to refinance it. 

That is the same thing that we have criticized the speculators 

about. You got a lower interest rate on a 10-year loan with a balloon on it than you would have gotten on a 30-year loan had you 

fully amortized it. 

So do I understand that the real estate market is not set up anymore to amortize loans ever? Do we always contemplate that they 

would be refinanced at the end of some payment term? That is a 

troubling notion to me, because I never thought of that. And I practiced law in this area for 22 years. When we got a loan, we expected to pay it. And that is the kind of personal responsibility that 

we have been preaching to every borrower in this country. 

So, tell me I misheard you when you said what you said, or tell 

me what the rationale for this is. 

Mr. HELSEL. Congressman, the fact is that most commercial 

loans are never set up to be paid off over the balance of the entire 

mortgage. 

Mr. WATT. But should we be encouraging that as a proposition? 

Mr. HELSEL. I am not sure if we should encourage it or discourage it. It is the system that we work in. And the system we work 

in says that we will give— 

Mr. WATT. But that is not the system we work in for anybody 

else in this country. You borrow money, and you pay it back at 

some point. Or you assume the risk, not the taxpayers assuming 

the risk. 

Mr. HELSEL. I guess I would say that, under a residential scenario, I would agree with you. But the fact is that, in order to 

make a commercial transaction work, many times the only way to 

drive down the cost of the mortgage is to take a loan, as you suggested, which gives you a lower rate at the front end, recognizing 

you are going to refinance it sometime over the balance of the total 

period of that loan. And that is about $1.4 trillion in loans that are 

going to come due over the next 18 months to 2 years. So that is 

the situation we sit in right now. 

29 

I would have been happy to take a 20-year loan at the rate I had 

been given. Unfortunately, I didn’t have that opportunity by the 

banks. 

Mr. MINNICK. The time of the gentleman has expired. 

Mr. LINDSEY. One thing the securitization model can do is extend 

longer amortization— 

Mr. MINNICK. The gentleman’s time has expired. 

The Chair recognizes the gentleman from Texas. 

Mr. WATT. Could I just request that they submit their answers 

to the questions that I posed in writing? We can’t do this in 5 minutes, so I would like to get written responses to the questions, if 

I could. 

Mr. MINNICK. The Chair asks the witnesses to respond in writing 

to the gentleman from North Carolina. 

Mr. Green? 

Mr. GREEN. I pass. 

Mr. MINNICK. The Chair recognizes the gentleman from North 

Carolina, Mr. Shuler. 

Mr. SHULER. Thank you, Mr. Chairman. 

I also want to thank the ranking member for his comments, as 

well. 

I first want to tell Mayor Craft, our heart goes out to people in 

the Gulf region. I spent some time in Louisiana, and I know the 

whole Gulf Coast has been hit numerous times now. It is just, how 

much can you take? 

So, you start to realize, being in North Carolina, most of your 

folks, when they retire, they will move to the mountains of North 

Carolina. And what is happening is, because of the commercial real 

estate, the endeavors that they have been in in the Gulf region and 

the depreciated value that they have now on their real estate, they 

can’t get that home equity loan or they can’t sell their home to the 

value that they have in it. So that is prohibiting them to actually 

come into my region. We see how that has a huge impact on our 

region. So our heart goes out to all the people in the Gulf region, 

and hopefully it all gets cleaned up and gets the economy back up. 

To Mr. Lindsey, what happens in a normal real estate process 

from the standpoint of if a bank has a bad, let’s say, developer, who 

has a strip center, $7 million valued on it, and that person hasn’t 

does his performance, he is not a very good manager, he doesn’t 

have good anchor tenants, what happens to that piece of property? 

What impact does it have to the person right across the street, who 

has a very similar value of real estate? What happens to the manager who has done very well and gotten great anchor tenants and 

has never missed a—what happens to his real estate value? 

Mr. LINDSEY. As real estate values decline—in your example, if 

there were two similar properties across the street from one another, and one is in trouble with the bank, someone like myself— 

and I have done it—would buy that property at a substantial discount. 

I can give you a real-world example. We purchased a note from a bank. The note was $6 million. We paid $825,000 for it. The 

original valuation of the property was about $8 million. There is a 

sister center across the street. Our property was less than optimally occupied. The one across the street was almost fully occuVerDate Nov 24 2008 18:08 Nov 18, 2010 Jkt 061854 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 K:\DOCS\61854.TXT TERRIE
30 

pied. The strategy for us, because our cost is so low, will be to cut 

rents in half, go across the street and get the tenants from the people over there. By the way, that particular property happens to be 

also bank-owned. 

So we will take those tenants, put them into our building, and 

then buy that building from them at a substantial discount and 

then re-tenant it. Whenever there are loans clearing at these very 

low valuation levels, the first thing that we do is cut rents and fill 

up our buildings. 

If you look at what happened in the RTC, there were formulas 

that most of the market was using at the time where you just look 

at the property and say, ‘‘I have to cut rents to 60 percent of market,’’ let’s say, and ‘‘I want a 10 or 12 percent rate of return, and 

that drives my purchase price,’’ and that is what they did. But the 

problem with that is it pulls the entire real estate complex down. 

I think ultimately it affects everything. 

Right now, you see some healing in the bigger part of the market. I am talking about trophy properties. There are transactions 

happening there. And I think the market feels like they are insulated from the risks that we are talking about today. I disagree. A 

$10 million loan supports a pretty big property. And if guys buy 

those at substantial discounts, they are going to start poaching tenants out of these big buildings, and, ultimately, those big buildings 

will start to decline in value, as well. They are not going to escape 

this, in my opinion. 

Mr. SHULER. What would be the impact if, let’s say, the project 

that has full tenants was owned by an individual? Would you say 

that person’s value would decline such that they may not have the 

opportunity to use some of the equity in that piece of real estate 

to go out and create another job or create another business or buy 

another piece of real estate? 

Mr. LINDSEY. I totally agree with you. To the extent you have equity destruction of any type—and, like I said in my testimony, 

there has been $2 trillion worth of equity destruction. In the past, 

people would have been able to borrow money based on the value 

of their real estate and do something. Right now, what everybody 

is doing is paying off debt instead of investing it in their businesses. It is a very serious problem. 

Mr. SHULER. Mr. Craft, do you kind of see the same thing? If 

something happened to—I guess you own a sod farm, and let’s say 

one of your competitors ended up in a bankruptcy situation and 

they did a short sell on the courthouse steps. And let’s say it was 

a $6 million piece of real estate and they bought it for $600,000. 

Think about the impact. That is going to have significant impact 

on the valuation of your own product. 

Are you starting to see some of that in the Gulf Coast? And I 

know that we have the problem with the BP situation, but there 

have been a lot of problems, certainly, in the Gulf Coast region for 

the last 2 years, well before BP came in and kind of compounded 

that problem. Have you started to see where the banks are, kind 

of, locking some of these businesses up based upon maybe bad 

practices of a competitor? 

Mr. CRAFT. Absolutely. And when we have that situation, not 

only does your competitor buy a piece of property at a much lower 

31 

price, he has a much lower cost. And so he has a competitive advantage over those of us who are in business who have stayed solvent. So it has a definite impact. 

Mr. SHULER. Thank you, Mr. Chairman. 

Mr. MINNICK. Thank you, Mayor Craft. 

The Chair recognizes the gentlewoman from Florida. 

Ms. KOSMAS. Thank you, Mr. Chairman, and thank you for the 

opportunity to work on this legislation with you. 

I want to thank all the members for being here today. 

I think since I have been here, for the last 18 or 19 months, I 

have been pretty vocal and outspoken about this issue, which I 

think has been under the radar screen for many people, I think, 

for two reasons: one expressed by a colleague a few minutes ago, 

where the average person walking down the street doesn’t even 

know that commercial real estate loans come due, are rolled over, 

refinanced, whatever term you want to use, on a regular basis. So 

they assume that all real estate lending, including commercial real 

estate lending, has the potential to be at a 20- or 30-year fixed 

rate, which, of course, we know is not true. So, perception-wise, we 

are in a dilemma, where, for most people, they don’t recognize the 

problem. So I appreciate very much the opportunity to put this 

focus on it. 

I also wanted to thank Mr. DiAngelo, particularly, for pointing 

out the very close connection between the viability of the community banks and the credit and services that they provide for small 

businesses in our communities and what that has to do with job 

creation, economic stability, and economic growth. It is also unrecognized by many people that those small businesses we hear about 

frequently create 60 to 70 percent of new job opportunities, and 

they cannot function, they cannot do that if they do not have access 

to credit. 

And the reasons that have been outlined today that they don’t 

have the opportunity to move forward, make loans to those folks, 

particularly those with whom they have long-term, good relationships. And, in many instances, performing loans that have never 

been delinquent are being called due in ways, as I say, that are unfamiliar to most people. 

So, mostly I want to thank you all for being here, helping us put 

this into focus. I appreciate the comments, also, of the ranking 

member, that he recognizes that this is a bipartisan, commonsense 

solution that will be helpful both to small businesses and to the 

community banks that provide so many great services to those 

small businesses in creating jobs. 

I want to identify, also, with Mayor Craft and the comments he 

made and the comments made by others about the appraised value 

of real estate and the difficulty that puts into the equation. But, 

being from Florida, we also are experiencing much of the same 

problem that you are, with regard to the oil spill. Frankly, in a 

State that is built on tourism, even the perception of oil on the 

shores affects our ability to attract visitors. And so we end up in 

the same dilemma that you are, whether or not our shores are actually affected to the same degree that yours are. So I want to 

make sure that we are in a position that we can continue to work 

32 

with you in trying to find a solution crafted specifically to that dilemma. 

Some of the proposals that have been made provide for an 18- 

month period of relief from the usual appraisal requirements in 

order to allow the markets to more rationally value real estate 

along the Gulf Coast. 

Do you have a time period in mind? Or what time period might 

you suggest if there were a way in which the Florida delegation, 

along with the delegations from the other Gulf States, could come 

together? Is there a timeframe specifically that you would recommend? 

Mr. CRAFT. I think 18 months is a reasonable amount of time. 

We feel fairly confident that we are well-positioned without this 

layer of an additional level of threat to our business operations that 

we will recover from the oil spill and we will recover once we start 

getting the moneys paid. And so, in 18 months, I think we will be 

stabilized as a business economy, in the hopes then that will raise 

the valuation up. 

Ms. KOSMAS. Thank you very much. 

Thank you, Mr. Chairman. I yield back. 

Mr. MINNICK. The Chair recognizes the gentleman from Colorado. 

Mr. PERLMUTTER. Thank you, Mr. Chairman. 

And I apologize to the panel that I had to step out for a meeting 

on these very subjects with one of the members of the regulating 

community. 

I would like to focus my first question to you, Mr. Panasci. In 

your experience representing different financial institutions in Colorado and the Rocky Mountain West, when—sitting on this committee, we saw a heart attack occur on Wall Street about 2 years 

ago. And then those ripples now have reached other States, obviously, for some time. 

Have you had any experiences with any of the financial institutions you represent or know about where they had good loans that 

had been examined, and then they go from a number one bank, 

CAMEL 1 or whatever they call those, to something else? Can you 

elaborate? 

Mr. PANASCI. One of the perceptions and, I will say, positions espoused is that these bad loans were made relatively recently. A lot 

of the loans that the banks are having problems with today are 

loans that existed in their loan portfolio for years, prior to 2007 

and earlier. 

And these loans were on the books of the banks at a time when 

they were CAMEL 1- or 2-rated banks, which are the best CAMEL 

ratings you can have is 1 and the worst is a 5. And then all of a 

sudden the regulators come in, they examine the portfolio, and perhaps correctly, and all of a sudden the CAMEL rating goes from 

a 2 to a 4, or a 1 to a 4 or a 5. And those loans existed in the portfolio for many years when they had a higher CAMEL rating. It 

wasn’t as if the bankers immediately got stupid and starting making bad loans. These are loans that existed over a period of time. 

So there is a tremendous impact on the economy. And everybody 

here has talked about what happens, what the spiraling effect will 

33 

be based on the decrease in values of commercial real estate that 

could come and probably will be coming in the future. 

So these loans existed for an extended period of time. And I can 

tell you, based on my experience, I meet with the regulators constantly, and I represent a lot of financial institutions throughout 

the West. And in my meetings, the bankers are very tired, and a 

lot of them want to get out of the industry. But you know what? 

The regulators are tired, too. They go in, and they are delivering 

an ugly message to the bankers. The bankers receive the ugly message. And everybody is tired. 

And the industry needs help. There is no question about it. What 

you don’t want to have is 1,500 banks fail, because just look at the 

statistics on bank failures and the realization on the assets that 

the FDIC seizes. It is anywhere from 60 to 70 percent loss on these 

institutions. And if you take that across-the-board in commercial 

real estate, you are looking at some real problems. 

I am very familiar with Congressman Minnick’s area because I 

represent some banks in the State of Idaho. The Boise area is having an extremely difficult problem right now in commercial real estate. 

So there is a number of solutions that can be undertaken to help 

resolve these problems, and I think the bills that you are looking 

at right now are very important. I cannot overemphasize the importance of a loan loss amortization program for these banks, like 

we had in the 1980’s for agricultural banks. These banks are profitable, pre-loan loss reserve, their operating profits are there; they 

can work through these problems. They are better equipped to 

work through the problems than the FDIC. 

If you remember, the Department of Liquidation was established 

in the 1980’s and closed down in the 1990’s when the economy improved. What makes us think that the FDIC is well-equipped to 

start up a Department of Liquidation again? It is a new agency, in 

essence, a subdivision within the agency. So it is a big problem, 

and it is going to continue to get worse. 

Mr. PERLMUTTER. I thank you. 

And I think the whole point of this—and I appreciate the gentleman from Idaho bringing this bill and having this panel—is 

about weathering the storm and having institutions standing when 

things turn, whether it is 18 months or 36 months or whatever it 

might be, so that we can continue to have competition among the 

banks in this country and opportunities for small businesses to 

work with local bankers. That is the bottom line for me, because 

it is those small businesses that are going to put a lot of people 

back to work. 

And, with that, I will yield back to my friend from Idaho. 

Mr. MINNICK. I thank the gentleman. 

Does the ranking member— 

Mr. BACHUS. I have an article from the American Banker, and 

I would ask unanimous consent—this is by George LeMaistre, 

dated Friday, July 23rd, entitled, ‘‘Viewpoint: Give Gulf Banks a 

Break on Property Appraisals’’—I would like to submit for the 

record. 

Mr. MINNICK. Without objection, it is so ordered. 

34 

With the ranking member’s permission, I would like to ask Mr. 

Lindsey one additional question. 

Mr. Lindsey, in your earlier comments, you indicated that this 

program should make the government money, not cost the government money, so that it was the opposite of a bailout. You also indicated that you thought that this was a temporary problem. 

Could you explain how the pricing of the program would lead to 

starting the market but then it no longer being necessary in a 

short period of time? 

Mr. LINDSEY. Sure. The program does have a 3-year sunset, but 

I really think that it would be, hopefully, sparingly used. And the 

reason is, that with the 200-basis-point or 2 percent guarantee 

fee—and that is paid annually—the profit incentive for the free 

market to step in and take the government out of that business is 

incredible. Two percent on a 10-year-type program such as this, if 

that was the longest term we did, and that is what I think it says 

in the bill— 

Mr. MINNICK. And you are in this market, so you are talking 

from personal experience? 

Mr. LINDSEY. Yes. I was in it for a long, long time. And we 

wrapped investment-grade risk to Triple A in the 1990’s, and we 

paid much less than 200 basis points for our wraps, for our insurance to Triple A. 

So I think it leaves so much room for the free market to come 

in as the market stabilizes, that they will. And I actually think 

that the bond market, right now, today, would probably facilitate 

the private market being able to go ahead and sell bonds into the 

marketplace without the guarantee. But the marketplace is afraid 

that, in an accumulation period that I talked about earlier, that the 

market dramatically changes and that they can’t sell bonds. 

So what this does is it gives them an option to use the guarantee 

program or place the bonds into the free market. And that is obviously what I think most of the people on this panel would hope, 

that the free market steps in and takes over this market. Because 

a $25 billion program is not going to solve this problem. So we need 

the free markets. We need this to jump-start the free markets, and 

that is what it is designed to do. 

So I think it is pure profit incentive that gets this program into 

the hands of the private industry. 

Mr. MINNICK. And if I—I can’t remember whether Mr. Daniel or 

Mr. Panasci analogized this program to what happened in the early 

days of the TALF program, where the program did, in fact, jumpstart the market and then the free market took over and it was no 

longer guaranteed. Is that—whomever made that comment. 

Mr. DIANGELO. Yes, that is correct. That program was announced, and it got used less and less every month, and, finally, 

it evaporated. 

Mr. MINNICK. And you would envision that would be the case for 

this program, as well? 

Mr. DIANGELO. Yes, based on Mr. Lindsey’s observations about 

the— 

Mr. MINNICK. And that was your experience as an attorney as 

these markets got started, and you lived through that TALF experience, as well? Is that correct? 

35 

Mr. DIANGELO. Yes. Exactly. 

Mr. MINNICK. Thank you. 

Does the ranking member have any additional questions? 

Mr. BACHUS. No questions. 

Mr. MINNICK. Then the Chair would like very much to thank all 

the members of the panel for being with us today. It takes a lot 

of time and effort to come to Washington. We appreciate your testimony. It was very prescient. And it will be available to all the 

members of the committee and our staffs. So we appreciate your insight into this very difficult issue. 

The Chair notes that some members may have additional questions for the panel 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 these witnesses and to 

place their responses in the record. 

This hearing is adjourned. 

[Whereupon, at 12:00 p.m., the hearing was adjourned.] 

(37) 

A P P E N D I X 

July 29, 2010 

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