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COMMERCIAL REAL ESTATE: DO RISING DEFAULTS 

POSE A SYSTEMIC RISK? 

HEARING 

BEFORE THE

JOINT ECONOMIC COMMITTEE 

CONGRESS OF THE UNITED STATES 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

JULY 9, 2009 

Printed for the use of the Joint Economic Committee 

( 

(II) 

JOINT ECONOMIC COMMITTEE 

[Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress] 

HOUSE OF REPRESENTATIVES 

CAROLYN B. MALONEY, New York, Chair 

MAURICE D. HINCHEY, New York 

BARON P. HILL, Indiana 

LORETTA SANCHEZ, California 

ELIJAH E. CUMMINGS, Maryland 

VIC SNYDER, Arkansas 

KEVIN BRADY, Texas 

RON PAUL, Texas 

MICHAEL C. BURGESS, M.D., Texas 

JOHN CAMPBELL, California 

SENATE 

CHARLES E. SCHUMER, New York, Vice 

Chairman 

EDWARD M. KENNEDY, Massachusetts 

JEFF BINGAMAN, New Mexico 

AMY KLOBUCHAR, Minnesota 

ROBERT P. CASEY, JR., Pennsylvania 

JIM WEBB, Virginia 

SAM BROWNBACK, Kansas, Ranking Minority 

JIM DEMINT, South Carolina 

JAMES E. RISCH, Idaho 

ROBERT F. BENNETT, Utah 

NAN GIBSON, Executive Director 

JEFF SCHLAGENHAUF, Minority Staff Director 

CHRISTOPHER FRENZE, House Republican Staff Director 

(III) 

C O N T E N T S 

MEMBERS

Hon. Carolyn B. Maloney, Chair, a U.S. Representative from New York .......... 1 

Hon. Sam Brownback, Ranking Minority, a U.S. Senator from Kansas ............. 3 

Hon. Maurice Hinchey, a U.S. Representative from New York ........................... 4 

Hon. Kevin Brady, a U.S. Representative from Texas ......................................... 5 

WITNESSES

Statement of Jon D. Greenlee, Associate Director, Division of Banking Supervision and Regulation, Federal Reserve Board of Governors, Washington, 

DC .......................................................................................................................... 6 

Statement of Richard Parkus, Head of CMBS and ABS Synthetics Research, 

Deutsche Bank Securities, Inc., New York, NY ................................................. 8 

Statement of Jeffrey D. DeBoer, President and Chief Executive Officer, The 

Real Estate Roundtable, Washington, DC ......................................................... 10 

Statement of James Helsel, Partner, RSR Realtors, Harrisburg, PA, and 

Treasurer, National Association of Realtors, Washington, DC ........................ 12 

SUBMISSIONS FOR THE RECORD

Prepared statement of Representative Carolyn B. Maloney ................................ 34 

Prepared statement of Representative Kevin Brady ............................................ 34 

Witness biographies ................................................................................................. 35 

Prepared statement of Jon D. Greenlee ................................................................. 36 

Prepared statement of Richard Parkus ................................................................. 40 

Deutsche Bank research report ‘‘The Future Refinancing Crisis in Commercial Real Estate’’ ..................................................................................... 42 

Deutsche Bank research report ‘‘TALF for New Issue CMBS: Fed Releases Terms’’ ................................................................................................ 66 

Deutsche Bank research report ‘‘TALF for Legacy CMBS: Fed Releases 

Terms’’ ............................................................................................................ 74 

Deutsche Bank research report ‘‘The Future Refinancing Crisis in Commercial Real Estate. Part II: Extensions and Refinements’’ ..................... 86 

Prepared statement of Jeffrey D. DeBoer .............................................................. 117 

Prepared statement of James Helsel ..................................................................... 132 

Prepared statement of Michael C. Burgess, M.D. ................................................. 139 

Letter from Chair Maloney to witness Greenlee ................................................... 140 

Letter from witness Greenlee to Chair Maloney ................................................... 141 

(1) 

COMMERCIAL REAL ESTATE: DO RISING 

DEFAULTS POSE A SYSTEMIC RISK? 

THURSDAY, JULY 9, 2009 

CONGRESS OF THE UNITED STATES, JOINT ECONOMIC COMMITTEE, Washington, DC. 

The committee met at 10:00 a.m., in Room 2226, Rayburn House 

Office Building, The Honorable Carolyn B. Maloney (Chair) presiding. 

Senators present: Brownback. 

Representatives present: Maloney, Hinchey, Sanchez, Brady, 

Burgess, and Campbell. 

Staff present: Gail Cohen; Nan Gibson; Colleen Healy; Aaron 

Kabaker; Andrew Wilson; Jeff Schlagenhauf; Chris Frenze; and 

Robert O’Quinn. 

OPENING STATEMENT OF THE HONORABLE CAROLYN B. 

MALONEY, CHAIR, A U.S. REPRESENTATIVE FROM NEW YORK 

Chair Maloney. The meeting will be called to order, and it is 

such a busy time on Capitol Hill. I am told they are going to be 

calling votes shortly, and I just came from a Financial Services 

Committee where we were voting in the committee on another bill, 

but we are focusing on a very important challenge today, and I 

would like to thank our distinguished guests and experts for agreeing to testify today on the growing financing problems we are facing in the commercial real estate market and the extent to which 

they pose a systemic risk to our economy. 

The current financial crisis is the result of significant losses experienced by key financial institutions with large exposures to residential mortgage assets. But banks now face a second wave of 

losses as commercial real estate loans, issued at the height of the 

real estate bubble, are coming due for refinancing. 

Tenant rent payments are often not sufficient to cover the loan 

payments and many borrowers’ commercial mortgages are underwater because the property simply isn’t worth today what they paid 

for it a few years ago. 

The decline in property values is astounding, particularly when 

you look at my home city of New York. For the year ending in 

March 2009, prices on commercial office space properties have 

dropped almost 13 percent. Deutsche Bank reportedly sold Worldwide Plaza in Manhattan for less than $400 per square foot, which 

I understand is less than one-third of the price the property could 

have commanded back in 2006. Many of my constituents and others that come to this committee tell me they can’t find any buyers, 

2 

and they cannot find anyone who will refinance their commercial 

loans. The bubble has burst, but a 60 to 70 percent collapse in 

prices poses a tremendous obstacle to the refinancing process. 

Moreover, in this highly constrained credit market that we now 

live in, even borrowers with performing commercial real estate 

loans who have equity in their properties report to me that they 

are having trouble getting refinancing. 

The commercial real estate time bomb is ticking. An estimated $400 billion in commercial real estate debt is set to mature this 

year with another $300 billion due in 2010. If mortgagers are unable to refinance, or otherwise pay their large balloon payments, 

we could expect to see the default rate soar. That, in turn, translates into potentially crippling bank losses, especially among smaller and regional banks. 

Doing nothing is not an option, because this looming crisis in 

commercial real estate lending could lead to an all-too-familiar predicament where banks suffer significant losses, major owners of hotels and shopping centers are forced into bankruptcy, foreclosed 

properties push commercial real estate prices further downward, 

and a perfect storm of all these factors combine to inhibit prospects 

for a sustained economic recovery. 

In recent speeches, New York Fed President William Dudley and 

San Francisco Fed President Janet Yellen raised concern about the 

potential systemic threats due to commercial real estate defaults 

and the need to reactivate the secondary market, in part through 

the TALF—the Term Asset-Backed Securities Loan Facility—in the 

Federal Reserve. 

The Federal Reserve has announced that it will extend the TALF 

to include both new and legacy commercial mortgage-backed securities in hopes that the July auction will be more successful than the 

June auction, which drew no takers. The expansion of TALF into 

legacy commercial-backed securities could increase the supply of 

credit to the commercial real estate market, which remains frozen 

with no new securities issued in over a year. 

Additionally, further details about the Public-Private Investment 

Program are emerging, which could potentially help with this problem. 

I also look forward to working with the Treasury on what has 

been referred to as ‘‘Plan C’’—efforts to head off looming problems, 

such as commercial mortgage defaults, rising homeowner delinquencies and solvency issues at community and regional banks, before they cascade into a greater crisis. 

But as we evaluate proposed solutions, we must be very wary of 

potential pitfalls. For example, the TALF program is set to expire 

at the end of this year, which may cut short the program’s effectiveness just as it begins to ramp up. Credit rating downgrades for 

CBMS could significantly limit the impact that the legacy TALF 

auctions have in providing liquidity to that market. 

Uncertainty about the PPIP’s future has reportedly kept some on 

the sidelines, so there is some urgency to the Treasury providing 

additional clarity about that program. 

We are all watching closely to see if these measures help to restart the commercial real estate market, but we need to be ready 

in the event that they fall short. 

3 

I look forward to testimony from our panel to help us find the 

keys to unlocking the commercial real estate loan market, and I 

thank all of my colleagues for coming. 

[The prepared statement of Representative Maloney appears in 

the Submissions for the Record on page 34.] 

And I recognize the ranking minority member, Senator Brownback. 

OPENING STATEMENT OF THE HONORABLE SAM BROWNBACK, RANKING MINORITY, A U.S. SENATOR FROM KANSAS 

Senator Brownback. Thank you very much, Chairwoman, appreciate that. And thank you very much for holding this hearing. 

I think this is one of the most important issues for us to keep 

our eye on at this point in time. Clearly, it is one that has been 

brewing for some period of time. Now it is on us. And I think we 

need to look at what it is that is taking place and what policy 

issues we can address to try to make it better or at least not as 

bad as it could possibly get. 

Similar to the market for residential real estate, the CRE market 

saw significant price increases from 2005 to 2007, and that resulted in large numbers of commercial properties being purchased 

or refinanced at unsustainable values. 

As in the housing market, we witnessed significant price declines. Prices have fallen by more than 20 percent since peaking in 

late 2007, and my guess is there is still further downward trending 

taking place, and I look forward to what the witnesses say, what 

they see taking place now and what looks to be in the future. 

Credit markets for commercial real estate are under significant 

stress, and the market for securitized commercial mortgages has 

evaporated. This coupled with tighter lending by banks is particularly troublesome in light of the hundreds of billions of dollars 

worth of commercial real estate loans that are maturing in the 

near future and must be refinanced, as the chairman noted. 

I know that the Federal Reserve has taken steps under the 

TALF to attempt to assist these markets returning to normal operations, but a number of items cause me concern, and I hope our 

witnesses will be able to touch upon those issues in their testimony 

or any questions we would have. 

From a financial market’s perspective, the defaults in the 

subprime mortgage market specifically in the broader residential 

market appears to have taken its toll primarily on large, supposedly more sophisticated, financial institutions. 

I know from my conversations with my banks back home and 

lending institutions, they didn’t have much exposure to the 

subprime market. However, lending on commercial real estate is 

the bread and butter of most community and regional backs, and 

I am very interested to understand the potential threats posed to 

those institutions by current and projected market conditions. 

I am also interested to learn whether, under current market conditions, the recently completed stress test was stressful enough to 

provide a clear picture of potential risk posed by deteriorating conditions in the commercial real estate market. 

And I go back to my only early personal experiences of the early 

1980s when we went through a farm crisis. We had loans going 

4 

into a number of situations where you had 50 percent equity in the 

loan, but then the land value cut in half, and now, you are at a 

100 percent debt in this situation, and unfortunately, it happened 

rapidly, and it put a lot of people in a very difficult situation very 

fast. 

Lastly, I am concerned that the recent actions by FASB in relation to qualified special purpose entities will serve to exacerbate already challenging market conditions. I hope that our witnesses will 

be able to discuss the potential impact of FASB’s actions, as well 

as discuss how the use of PSPEs in the commercial market differs 

from the use of SIBs in the residence and consumer lending side 

of the ledger. 

Overall, I really hope the witnesses can give us an accurate picture of where we are today, where a reasonable projection is that 

we could be headed to in the next 6 to 12 months and what policy 

issues you are most concerned about that we need to address to try 

to alleviate to the degree that we can further problems from happening in the commercial real estate market that could be caused 

by government action or inaction. So I hope you will really put your 

comments on a fine point to give us actionable items that we can 

follow on. 

And again, Ms. Chairwoman, I really appreciate you holding this 

hearing because I think it is very timely for what we are facing 

right now. 

Chair Maloney. Thank you. Thank you for your kind comments. 

And Mr. Hinchey is recognized for 5 minutes. 

OPENING STATEMENT OF THE HONORABLE MAURICE 

HINCHEY, A U.S. REPRESENTATIVE FROM NEW YORK 

Representative Hinchey. Well, just very briefly, I want to express my appreciation to you for being here because the subject 

that you are dealing with, of course, as has been mentioned, is 

critically important, and we respect your insight into this. 

The commercial real estate market now is in dire trouble. We are 

seeing a whole host of banks that have failed. I think the estimate 

is something in the neighborhood of 50 banks have so far failed. 

There is some speculation that that number is going to go up dramatically, that a dramatically increasing number of these banks is 

likely to fail. The huge debt of commercial real estate is very, very 

significant and roughly about half of what the value of the real estate market really is. 

So the circumstances we are facing are difficult and dire and 

need to be addressed. It is an interesting headline in the Financial 

Times this morning talking about how the International Monetary 

Fund is being optimistic about the global recession and how it is 

about to recover. Well, eventually it probably will, but there are a 

lot of things that need to be done I think to deal with this aspect 

of it, and the commercial aspect is critically important. 

Other things that we have to face, of course, is the dramatic increase in unemployment which is very, very severe, and it is likely 

to continue to increase in spite of the fact that a small fraction of 

the stimulus bill has just begun to get out there. 

But in any case, the issues that you are dealing with are critically important. We understand how critical it is. We very much 

5 

appreciate your being here, and look very much forward to hearing 

what you are about to say, and I thank you very much. 

Chair Maloney. Thank you very much. 

And Mr. Brady for 5 minutes. 

OPENING STATEMENT OF THE HONORABLE KEVIN BRADY, A 

U.S. REPRESENTATIVE FROM TEXAS 

Representative Brady. Thank you, Madam Chairman, for 

hosting and holding this hearing. I want to join you in welcoming 

the witnesses before the committee. 

The spreading crisis in the commercial real estate sector poses 

a serious threat to our financial system and economic recovery. The 

good news is, Americans hate to be in a recession. We are naturally 

positive, anxious to move toward positive recovery. 

The problem, though, in commercial real estate, it is not so much 

a pothole in the road to economic recovery but a sink hole, and I 

think issues we need to address today include liquidity, include 

cyclically biased appraisals that tend to magnify value swings in 

the commercial real estate market. And I think we are seeing bank 

regulators who assume today that every commercial real estate 

loan is a problem loan and are practically pressuring local bankers, 

especially small- and medium-sized banks, to reduce their commercial real estate lending, even when the loans are solid and even 

when the local market conditions are favorable. 

What I have heard repeatedly from people associated with the 

commercial real estate industry is that they are unable to refinance 

outstanding mortgage loans when they mature. While officials here 

in Washington talk about the need to boost the economy, Federal 

regulators are pressuring banks to reduce their exposure to commercial real estate loans. The result is that even some profitable 

commercial real estate firms that cannot rollover their debt now 

face bankruptcy proceedings. The magnitude of this problem is huge with at least $1 trillion 

of commercial real estate debt requiring refinancing over the next 

several years. Bank loans typically have maturity of 5 years or 

less. Loans on commercial mortgage-backed securities typically 

have longer ones, and these loans were made when credit conditions were very favorable and now have to be refinanced during the 

most serious liquidity crisis in many decades. 

The economic weakness resulting from the bursting of the credit 

bubble has reduced the market value of shopping centers, hotels 

and office buildings. Consumers are cutting back purchases, and 

companies are retrenching to cut coasts. High vacancy rates are 

boosting delinquency rates on commercial mortgage loans, and although the commercial real estate crunch began after the housing 

bubble burst, there is little doubt that the financial crisis has now 

spawned another dangerous threat to our prospect of economic recovery. 

Consequently, now is the time to repeal the punitive tax treatment of commercial real estate, including provisions taxing foreigners on U.S. capital gains from real estate sales. Congress 

should consider reducing the depreciation period for commercial 

real estate and reject proposed tax increases that will undermine 

the potential economic recovery. 

6 

Another problem affecting commercial real estate relates to depressed appraisals of property. Obviously, low appraisals on property are only going to make mortgage rollovers even more difficult 

in a liquidity crisis. Although it is understandable that appraisals 

will be affected by current depressed conditions in the industry, 

perhaps there is an alternative to valuing a long-lived asset in the 

trough of a severe recession. If a longer period of time were used 

as the basis for a property appraisal, a more accurate view of its 

long-term value might be available. 

In conclusion, the problems in the commercial real estate industry are a serious threat to the economy. Congress should consider 

policies to increase financial liquidity in the industry and avoid 

policies such as tax increases that will only aggravate the financial 

and economic distress. 

I would yield back, Chairwoman. 

[The prepared statement of Representative Brady appears in the 

Submissions for the Record on page 34.] 

Chair Maloney. I thank the gentleman for his testimony. 

And I thank Congresswoman Sanchez and Congressman Campbell for relinquishing their opening statements in the interest of 

moving to our distinguished panel, and in the interest of time, 

since we will be called for votes, I would like to put all of your extremely impressive bios into the record and just introduce you with 

your current title. 

[Witness biographies appear in the Submissions for the Record 

on page 35.] 

Mr. Greenlee, the Associate Director for Risk Management in the 

Division of Banking Supervision and Regulation at the Federal Reserve Board of Governors. 

Also, followed by Mr. Richard Parkus. He has been global head 

of CMBS Research at Deutsche Bank Securities. 

And Mr. Jeffrey DeBoer, who is the founder and President of the 

Real Estate Roundtable. 

And also, Mr. James Helsel. He is a realtor from Pennsylvania 

who currently serves as Treasurer for the National Association of 

Realtors. 

Thank you all for coming. 

And Mr. Greenlee, you are recognized for 5 minutes. Thank you. 

STATEMENT OF JON D. GREENLEE, ASSOCIATE DIRECTOR, DIVISION OF BANKING SUPERVISION AND REGULATION, FEDERAL RESERVE BOARD OF GOVERNORS, WASHINGTON, DC 

Mr. Greenlee. Chair Maloney, Vice Chairman Schumer, Ranking Members Brownback and Brady, and other members of the 

committee, I am pleased to appear today to discuss commercial real 

estate lending. 

Financial market dislocation and the continuing economic downturn are clearly challenging CRE markets. The pace of property 

sales has slowed dramatically since peaking in 2007, in large part 

due to accelerating job losses, declining demand for commercial 

space, and increasing vacancies. 

According to first quarter 2009 data, about 7 percent of commercial real estate loans almost doubled the level a year ago on banks’ 

books were considered delinquent, a reflection of the current chalVerDate Nov 24 2008 10:31 Feb 04, 2010 Jkt 052674 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 C:\DOCS\53863.TXT SHAUN PsN: DPROCT
7 

lenges in the CRE market. To address some of these challenges in 

the CRE markets, the Federal Reserve—— 

Chair Maloney. Mr. Greenlee, could you pull your mike closer 

and speak a little louder? Some of the panelists are having difficulty hearing you. 

Mr. Greenlee [continuing]. I am sorry. 

To address some of the challenges in the CRE market, the Federal Reserve announced that, starting in June 2009, newly issued 

high quality CMBS would be eligible collateral under TALF, followed by an announcement on May 19th that high quality legacy 

CMBS issued before January 1, 2009, would be eligible collateral 

under TALF beginning this month. 

The provision of TALF financing for high quality issued CMBS 

is consistent with other Federal Reserve programs to improve credit markets and should support new lending for credit worthy properties. 

From a supervisory perspective, the Federal Reserve has been focused on CRE exposures for some time. In response to concerns 

about building CRE concentrations in the early 2000s, we led an 

interagency effort to issue guidance on CRE concentrations in 2006 

to ensure institutions have effective risk management processes. As 

economic conditions have deteriorated, we have devoted more resources to assessing the quality of CRE portfolios at institutions 

with large concentrations, and we have also enhanced our training 

efforts. 

The recent Supervisory Capital Assessment Process, or SCAP, of 

19 firms, which is more commonly known as the stress test, provided an important perspective on CRE exposure risk. The SCAP 

estimated that cumulative 2-year CRE losses under the adverse 

scenario would be more than 8 percent of total exposure with losses 

on construction loans significantly higher. Using this information, 

we are working with smaller firms that have substantial CRE exposure to ensure that their risk management practices are adequate and that reserves of capital can support increased losses. 

The Federal Reserve has longstanding policies that promote 

proven risk-management practices that support sound bank lending. More recently, interagency guidance in November 2008 encouraged banks to meet the needs of credit worthy borrowers. Across 

the Federal Reserve system, we have also enhanced our training efforts to underscore these intentions. We are mindful of the potential for bankers to overshoot in their attempt to tighten lending 

standards and want them to understand it is in their own interests 

to continue making loans to credit-worthy borrowers. 

In summary, it will take some time for the financial markets to 

fully recover. The Federal Reserve is committed to working with 

other banking agencies and the Congress to promote the concurrent 

goals of fostering credit availability and a safe and sound banking 

system. 

Accordingly, we thank the committee for holding this important 

hearing, and I look forward to your questions. 

[The prepared statement of Jon D. Greenlee appears in the Submissions for the Record on page 36.] 

Chair Maloney. Thank you. 

Mr. Parkus. 

8 

STATEMENT OF RICHARD PARKUS, HEAD OF CMBS AND ABS 

SYNTHETICS RESEARCH, DEUTSCHE BANK SECURITIES, 

INC., NEW YORK, NY 

Mr. Parkus. Chair Maloney, Ranking Members Brownback and 

Brady, and other distinguished members of the committee, my 

name is Richard Parkus. I am a research analyst at Deutsche 

Bank, specializing in commercial mortgage-backed securities. It is 

a privilege for me to testify at this important meeting today to explore the growing problems in commercial real estate and the potential impact on regional and local banks. 

Before addressing my research, I must note that my views today 

are expressly my own and do not necessarily represent those of 

Deutsche Bank or any of its members. 

The commercial real estate sector is currently under greater 

stress than at any time since the crash of the early 1990s. In fact, 

I believe the severity of the current downturn is likely to exceed, 

possibly by a significant magnitude, that of the 1990s. 

The problems are twofold. 

First, the extraordinarily severe economic downturn has resulted 

in vacancy increases and rent declines that are similar to what was 

experienced in the previous crash. This, in turn, has already 

pushed default rates to levels of those approaching the 1990s. 

The second problem, one that is potentially even more serious, is 

that for those loans that do reach maturity, a very large percentage, perhaps in excess of 65 percent, may not qualify for refinancing under the dramatically tighter new underwriting standards, particularly in view of the fact that commercial real estate 

prices have already declined by 25 to 35 percent or more from their 

2007 peak and almost surely have further to fall. 

In order to work through this extremely stressful process, it will 

be critically important that commercial real estate financing markets begin to function again with some degree of normalcy. By this, 

we mean that loans which qualify under the new tighter underwriting standards must be able to obtain financing at commercially 

reasonable rates. 

At the moment, this is not the case. Commercial real estate financing markets are largely closed, at least for loans in excess of 

$35 million to $55 million. Smaller loans on properties that are 

performing well continue to have some degree of success in refinancing, namely, with regional banks. However, this source of financing is likely to continue to deteriorate as problem loans in 

bank portfolios mount. 

One common misconception, in my view, is that commercial real 

estate problems started in the CMBS and somehow spread to 

banks and other commercial real estate finance sectors. In fact, we 

believe that banks will once again prove to be the epicenter of commercial real estate loan problems. 

When looking at commercial real estate exposure in banks, one 

must distinguish between three categories of loans: construction 

and development loans; core commercial real estate loans and multifamily loans. In aggregate, banks have exposure to about $550 billion in con- struction loans; about $1.1 trillion in core commercial real estate; 

and $150 billion in multifamily loans. 

9 

By far, the most problematic of these is construction loans, which 

contain high proportions of both loans to home builders and condo 

construction loans. Furthermore, exposure to construction loans as 

a percentage of total bank assets rises rapidly as one moves from 

large money center banks to smaller regional and local banks. The 

four largest U.S. banks have an average exposure of less than 2 

percent of total assets, while the 31st to 100 largest banks have an 

average exposure of 12 percent. 

Given that commercial real estate prices are already down 40 to 

45 percent on stabilized commercial properties, they must be down 

vastly more than this on newly completed or only partially completed properties. Loss severities on defaulted construction loans 

could well exceed 80 percent. 

The 90-plus day delinquency rate for construction loans in bank 

portfolios was in the 12 percent region by the end of the first quarter of 2009, approximately 12 times higher than that for CMBS 

loans indicating the extreme risk in this project. Nevertheless, it is 

quite surprising that delinquency rates are not far higher. This is 

explained by the fact that construction loans are typically structured with reserves that are used to cover interest payments until 

the expected completion of the project. Thus, construction loan delinquency rates are currently artificially low due to interest reserves but will likely rise dramatically within the next 6 to 12 

months. 

Losses on construction loans are likely to be in excess of 25 percent, possibly well in excess, which would imply losses of at least 

$140 billion for banks. This, of course, would be disproportionately 

borne by regional and local banks as they have much higher exposures to these loans. 

In terms of core commercial real estate, the story is much the 

same, at least qualitatively. Again, exposures are much higher for 

regional and local banks than for the largest money center banks. 

The four largest banks have an average exposure of 3 to 4 percent 

for commercial real estate loans; while smaller regional banks have 

an average exposure of 15 to 20 percent. 

In my view, commercial real estate loans in bank portfolios are 

likely to be riskier than those in fixed rate CMBS. The view that 

core commercial real estate loans in bank portfolios are likely to 

underperform those in CMBS is supported by the fact that delinquency rates for bank loans have for many years exceeded those for 

CMBS loans. As of the end of the first quarter of 2009, delinquency 

rates on core commercial real estate loans in banks was approximately two and a half times that of fixed rate CMBS loans. 

In terms of specific loss estimates, it is reasonable to assume 

that loss rates on core commercial real estate loans in bank portfolios will be at least as large as those on the 2005 to 2007 vintage 

CMBS loans, which I expect will be in the 12 to 15 percent range. 

This would imply losses of at least $120 billion to $150 billion on 

bank core commercial real estate loan portfolios. 

The problems facing commercial real estate today are severe and 

will likely take many years to work through. There are no easy solutions. However, there are measures that can be taken that will 

help mitigate the pain and disruption of this process. By far, the 

most important of these are steps that promote the recovery of 

10 

commercial real estate financing markets. These should focus on 

reviving the public securitization market. 

We expect that over the coming 3 to 5 years, the amount of capital from traditional sources, e.g. banks, insurance companies, pension funds, committed to financing commercial real estate will decline significantly. It is absolutely critical that a revitalized CMBS 

market be able to step in and help fill the void. 

The CMBS market worked effectively and efficiently for well over 

a decade providing critical pricing information and tremendous 

transparency to the market. With the right changes and modifications, it is capable of playing a vital role again in the future. 

I thank you for your time and am happy to take questions that 

you may have. 

[The prepared statement of Richard Parkus appears in the Submissions for the Record on page 40.] 

[Deutsche Bank research report ‘‘The Future Refinancing Crisis 

in Commercial Real Estate’’ appears in the Submissions for the 

Record on page 42.] 

[Deutsche Bank research report ‘‘TALF for New Issue CMBS: 

Fed Releases Terms’’ appears in the Submissions for the Record on 

page 66.] 

[Deutsche Bank research report ‘‘TALF for Legacy CMBS: Fed 

Releases Terms’’ appears in the Submissions for the Record on 

page 74.] 

[Deutsche Bank research report ‘‘The Future Refinancing Crisis 

in Commercial Real Estate. Part II: Extensions and Refinements’’ 

appears in the Submissions for the Record on page 86.] 

Chair Maloney. Thank you. 

Mr. DeBoer. 

STATEMENT OF JEFFREY D. DEBOER, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, THE REAL ESTATE ROUNDTABLE, 

WASHINGTON, DC 

Mr. DeBoer. Good morning. My name is Jeff DeBoer. I am 

president and CEO of The Real Estate Roundtable. Thank you for 

the opportunity to testify here this morning. 

I want to commend you, Madam Chairwoman and members of 

the committee, for holding this hearing, for sounding the alarm 

about the ongoing commercial real estate financing problems and 

the dangers that it poses to the economy. I also want to commend 

you for helping to lay the foundation for policy actions that are 

much needed to address this increasingly troublesome situation. 

The bottom line is this: The current financial system in America 

simply cannot meet the financing demands of the commercial real 

estate marketplace. Today, even well-positioned, strong assets 

which have good debt coverage find it very difficult, if not impossible, to find financing. This is true for all types of assets, and it 

is true all across America. 

With very limited capacity to meet the ongoing demand for credit, there is an increasing concern in our industry about a potential 

wave of maturity defaults. This fact, coupled with what has already 

been discussed about net operating income having dropped substantially, has caused commercial property values to plunge. Most 

estimate across the board drops in commercial real estate at someVerDate Nov 24 2008 10:31 Feb 04, 2010 Jkt 052674 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 C:\DOCS\53863.TXT SHAUN PsN: DPROCT
11 

where between 25 and 35 percent. Mr. Parkus just gave a larger 

number. In any event, it is serious. 

In fact, the number of distressed commercial properties in the 

Nation has more than doubled in the past year and is expected to 

continue to rise. Maturity defaults, caused by the inability to refinance, and the distressed properties, caused by the weak economic 

conditions, are resulting in an incredibly stressed commercial real 

estate marketplace. 

Some might ask, why should we care? I will leave to others to 

discuss the potential impact on the financial institutions and systems in general, but let me offer a couple of other quick reasons. 

We should all care because a sick commercial real estate market 

reduces revenues for local governments. People are sometimes surprised to learn that about 50 percent of local revenues come from 

local property taxes, recording fees and transaction taxes. These 

fund education, road construction, law enforcement, energy planning and other things that we all like to have in our communities. 

Further, a sick commercial real estate marketplace means fewer 

transactions. Commercial property transactions on a year-over-year 

basis are down about 80 percent. This means fewer jobs. It means 

fewer construction jobs. It means fewer retrofitting jobs, and it 

means fewer opportunities for building owners to become more energy efficient and create green jobs. And importantly, we should 

care because a growing number of Americans invest in real estate 

through their pension and retirement plans. About $160 billion 

today is in it. 

So, as real estate goes, so go local budgets, so go jobs and so go 

retirement accounts. In my written statement, I detail a policy mix 

that we believe policymakers on and off the Hill should look at. 

First, we favor the TALF, but it must be given time to work. It 

only became operative for commercial real estate in mid June; yet 

it is scheduled to expire at year end. We need this announcement 

soon that the TALF will be extended into the end of 2010. 

Second, we need a new program to incentivize new lending. 

Without it, we don’t think new lending will start. We think that 

a privately funded—and my testimony offers a couple of ideas. We 

think one might be to explore a privately funded insurance program for securities backed by new loans similar to the FDIC program that now exists, or alternatively, a public-private financing 

vehicle similar to the PPIP that now is operative to buy legacy assets. It could be put in place to purchase new loans. 

Third, banks need to be encouraged, not discouraged, from extending performing loans. We have a proposal at the Treasury Department now that would provide greater guidance to the process 

of restructuring loans that have been securitized in a REMIC format. 

Fourth, there is a huge need—and Senator Brownback mentioned it in the agriculture situation—a huge need for equity infusion. We estimate this in our testimony to be about $1 trillion 

shortfall in equity across America. We think one way to get this is 

to reform the laws applicable to foreign investment in U.S. real 

property. Congressman Brady mentioned that, appreciate that. The 

current law is called FIRPTA. It is badly outdated, and it discriminates against investment in real estate. Simple reforms could be 

12 

done that would bring more robust investment without turning 

control over to foreigners. 

And finally, I would conclude by saying, now is certainly not the 

time for tax increases on real estate ownership. In particular, the 

carried interest proposal that seems to rear its head every few 

years is particularly a bad idea now given the state of the markets. 

This would seriously increase taxes on general partners in real estate partnerships, large and small, and all property types. We 

would urge that Congress reject that. 

Thank you again for the opportunity to be here. It is a very important hearing, and I look forward to your questions, and hope I 

can answer them. Thank you. 

[The prepared statement of Jeffrey D. DeBoer appears in the 

Submissions for the Record on page 117.] 

Chair Maloney. Thank you. 

Mr. Helsel. 

STATEMENT OF JAMES HELSEL, PARTNER, RSR REALTORS, 

HARRISBURG, PA, AND TREASURER, NATIONAL ASSOCIATION OF REALTORS, WASHINGTON, DC 

Mr. Helsel. Thank you. 

Chairwoman Maloney, Vice Chairman Schumer, Ranking Members Brady and Brownback, and members of the Joint Economic 

Committee, thank you for inviting me to testify on the crisis facing 

the commercial real estate markets. My name is Jim Helsel. I am 

the 2009 Association of Realtors treasurer. 

I have been a realtor specializing in the commercial sector for 

more than 34 years. Currently I am a partner with RSR Realtors, 

a full service real estate company in Harrisburg, Pennsylvania. I 

testify today on behalf of 1.2 million Realtors who are involved in 

all aspects of the real estate industry. 

Having a sound and well functioning commercial and multifamily 

real estate sector is critical to our country’s economic growth and 

development and to millions of U.S. businesses of all sizes that provide local communities with jobs and services. 

Many of us in the commercial real estate business have been 

warning for some time that the liquidity crisis facing our industry 

has the potential to wreak havoc on the overall economy. In fact, 

an apt description for this situation is that commercial real estate 

is the next shoe to drop. 

A crisis is looming in the commercial real estate market due to 

a confluence of issues, including deteriorating property fundamentals, declining property values and a severe tightening of the lending markets. 

Banks remain reluctant to extend loans, and the commercial 

mortgage-backed securities markets, or CMBS, which have been a 

key source of liquidity, have ceased to function. At the same time, 

hundreds of billions of dollars of commercial real estate loans from 

a variety of sources are expected to mature in 2009 and over $1 

trillion by 2012. 

Under current conditions, there is an insufficient credit capacity 

to refinance a huge wave of loan maturities. Without greater liquidity, we face a threat of rising delinquencies and foreclosures. 

13 

The biggest challenge in this environment is the inability to complete transactions due to the severe lack of liquidity in the markets. Underscoring this fact, a full 44 percent of our members reported financing as the most significant current challenge in recent 

real estate and realtor market history. 

On a personal note, I would just tell you this is a very interesting 

time for this hearing. I am in the process of refinancing a very 

small property of my own, about 10,000 square feet. When I purchased the property in 1999 the loan-to-value ratio I had was 60 

equity, 40 percent loan. Today, I am lucky if it is still at that number. At one time it was 80 percent equity, 20 percent loan. I have 

gone to three banks. I am frankly going to a credit union right now 

who is going to refinance the property. Three banks—it is a performing asset, it has been a performing loan. I have never missed 

a payment. The property has positive cash flow. It tells you the position that most of our members are in, as myself as a member. So, 

on a personal note, kind of tells you where our marketplace is right 

now. 

The overall economic downturn has taken a toll on the commercial market. As demand for space has dropped, vacancies have 

risen across all sectors, and investment activity has slowed down 

considerably. During the first quarter of 2009, nationwide only 607 

major properties exchanged hands for a total volume of $9.5 billion. 

This figure represents a 51 percent drop in investment activity 

compared to the fourth quarter of 2008. 

The troublesome market fundamentals are taking a toll on property values. Declining property values only further exacerbate the 

difficulty in securing financing. We see this reflected in the fact 

that the volume of distressed commercial properties more than doubled this year alone. 

Geographically, as Madam Chairman indicated, New York rep- resents the largest problem, Manhattan possessing nearly $8 billion distressed commercial properties. We support the development 

and implementation of innovative programs, such as the Term 

Asset-Backed Lending Facility, what we commonly call TALF, and 

the PPIP program, the Public-Private Investment Program. 

And we strongly support recent efforts to strengthen the TALF 

program, including expanding TALF to include CMBS as eligible 

collateral while also extending TALF loans to 5 years. However, 

this important program is set to expire, as Mr. DeBoer mentioned 

earlier, at the end of this year. We believe it is absolutely essential 

that the TALF program be extended for another year. This move 

will ensure that important economic recovery efforts continue. 

In addition, NAR believes it is essential to protect and promote 

policies that support securitized credit markets. This will include 

action on the part of accounting policymakers. 

With respect to the issue of mark-to-market accounting, NAR believes that the ability to value assets in inactive markets continues 

to be a serious issue. Under current conditions, clear policy guidance is needed to encourage reporting entities and auditors to look 

at alternative and appropriate methods of asset valuation, such as 

the discounted cash-flow method. 

Finally, NAR will continue to support and promote Federal tax 

policies that strengthen and support commercial real estate. The 

14 

commercial real estate market is in a state of crisis and remains 

vulnerable to any modifications to current tax rules that would result in reduced property values or investment. NAR stands ready 

to oppose any such modifications and would urge policymakers to 

do the same. 

In conclusion, I would say that, on behalf of the 1.2 million realtors that I represent today, I want to thank you for this opportunity to give this presentation. NAR stands ready to help Congress, the financial regulators and the administration in any way 

possible to find solutions to stabilize and ensure strong recovery of 

the real estate markets. 

Thank you very much for this time. 

[The prepared statement of James Helsel appears in the Submissions for the Record on page 132.] 

Chair Maloney. I thank all the panelists for your testimony, 

and regretfully, we have been called for a series of votes. So I am 

going to place this hearing in recess subject to the questions of Senator Brownback, who will then be called for votes, too. 

So we are wanted on the floor. Please excuse us, and after his 

questioning, we will be in recess and back as quickly as we can. 

Thank you very much. 

Senator Brownback. I want to thank the chairwoman for doing 

that, and I promise I won’t do a coup here. 

Chair Maloney. Helping the economy is a bipartisan effort. 

Senator Brownback. There you go. 

Thank you very much. I think it is an excellent panel. Although 

you have put me in quite bit of distress from what I hear you say. 

Mr. Helsel, I wanted to start with you. You say a 51 percent drop 

in investment activity the first quarter of this year. Is that correct? 

Am I getting your number right? 

Mr. Helsel. What I said was that 50 percent—there is a 50 percent reduction over the fourth quarter of 2008 activity and the first 

quarter of 2009. I think I am answering your question. Yes, to answer your question. 

Senator Brownback. So we are seeing half the commercial real 

estate activity the first quarter this year of what we did the last 

quarter of last year? 

Mr. Helsel. And that was based on—and I am going to go back 

to my testimony—607 of the larger transactions done in the United 

States. 

Senator Brownback. I guess what I am asking is, I have been 

in one of these before where you can’t get a price for anything because there is just nobody out there buying. And so we are talking 

about a drop in 25 percent in commercial real estate, I used the 

term; Mr. Parkus used 35 to 45, but the actual truth of the matter 

is nobody is buying. 

Mr. Helsel. That is correct. 

Senator Brownback. So there is just not much of a market 

that you can establish at this point in time, or are some properties 

moving but just at a very distressed—— 

Mr. Helsel. Mr. Brownback, there are properties that are moving. The problem is, if I find a buyer, I can’t find the financing. 

Senator Brownback. So even at that 50 percent equity, you 

were giving an example of, you think you have got a property you 

15 

have 60 percent equity in it, and you are not getting financing for 

it? 

Mr. Helsel. I thought I had one that had 80 percent equity in 

it that I own, and I am down now to probably about 50, 60 percent 

equity. I have gone to three banks. It is a performing asset. It is 

a performing loan. We have never missed a payment. It is a positive cash flow, and the banks are saying, you know what, we are 

just not lending right now. 

Senator Brownback. At any rate—— 

Mr. Helsel. At any rate, and if they do, the lending rates both 

in terms of interest and time are so severe that it makes the property almost become a nonperforming asset. 

Senator Brownback. Mr. Parkus, you studied the overall numbers on this. What is—we just don’t have it? There is just not a 

market there right now? 

Mr. Parkus. There are very, very, very few transactions taking 

place at the moment. 

Senator Brownback. Give me a number on that, can you? 

Mr. Parkus. I can’t give you an absolute number, but I can tell 

you that percentage-wise the number of commercial real estate 

transactions has dropped by roughly 95 percent or more. 

Senator Brownback. From last year or from normal? 

Mr. Parkus. Over the last 18 months. 

Senator Brownback. Over the last 18 months, you have had a 

95 percent drop? 

Mr. Parkus. That is right. 

Senator Brownback. So the only thing that is selling is something at a real fire sale or distressed, somebody just dumping on 

the market? 

Mr. Parkus. That is right. 

What we are seeing today and use as a gauge for price declines 

to the extent that we can are distressed assets like the office buildings that we have recently sold in New York for roughly one-third 

of their value over—a decline of one-third—I am sorry, a decline of 

two-thirds in their value over the past 24 months. So those are the 

magnitudes for the distressed side. 

Our best guess is that prices pretty much overall across property 

types, across markets, are down 35 to 45 percent. Many markets 

will see prices like New York office will see prices down potentially 

well in excess of 50 percent by the end. 

Senator Brownback. Now, my experience again on these 

things, everybody is bottom feeding, if you will, on these, that once 

a bottom is found, the price jumps 20 percent just because a lot of 

people are waiting, sitting on the sideline, and if I can get a good 

deal out of this, I will do it, but I am not getting in while the thing 

is still going down. And when the bottom is found—I am pulling 

that number a bit out of the air but not that much. You find a bottom, it bounces back 20 percent. But we are nowhere finding the 

bottom yet? 

Mr. Parkus. We don’t believe the bottom—I should say we believe the bottom is several years away. 

Senator Brownback. Several years away? 

Mr. Parkus. Several years away. 

16 

Senator Brownback. That was going to be my next question. 

If the Fed Chairman is right that we start to—we have had this 

real precipitous fall off in economic activity where we are going to 

start to see a less slow fall off and then a weak uptick first part 

of next year, do you know any factors as to what the length of time 

is before the commercial real estate market recovers once the economy starts to flatten out and pick back up? 

Mr. Parkus. Typically, commercial real estate fundamentals 

begin to pick up 12 to 18 months after unemployment begins to 

pick up. 

Senator Brownback. After unemployment? Unemployment lags 

the economic activity? 

Mr. Parkus. That is right. So you are typically pegged to sort 

of unemployment. 

Senator Brownback. All right. So unemployment is not projected presently to pick up until middle part of next year, I don’t 

think. 

Mr. Parkus. I would say at the earliest, that is right. 

Senator Brownback. So you are looking at a year after the 

middle of 2010. 

Mr. Parkus. Before we expect to see palpable improvements. 

Senator Brownback. So we are in the middle of 2011 before 

you would project an improvement in commercial real estate markets based on historical—— 

Mr. Parkus. I would say beyond that. 

Senator Brownback. What is that? 

Mr. Parkus. I would say beyond that, 2012, and the problem is 

that there will be, we are expecting to see—it is hard to imagine 

fundamentals improving in an environment where we are likely to 

see or beginning to see and already seeing massive increases in defaults occurring now. Commercial real estate is really, it is kind of 

between a rock and a hard place. The rock is the very, very real 

quick pick-up in current defaults, where buildings that are under 

severe cash flow constraints simply cannot meet their current 

mortgage payments. This is happening right now and at an alarming rate. 

Then you look down the road, somewhere between three to 7 

years, and you find at the maturity of these assets potentially even 

greater problems with assets failing to qualify to refinance. So 

there are problems at both ends, and in that kind of environment, 

it is difficult to have—it is certainly difficult to have valuation 

growth. 

Senator Brownback. Mr. DeBoer—I appreciate, Mr. Parkus, 

your assessment. That is one of the more bearish ones I have heard 

in this climate, but I am not discounting it. 

But, Mr. DeBoer, do you agree generally with his assessment 

from your industry’s perspective? 

Mr. DeBoer. Absolutely. First—— 

Senator Brownback. 2012 or—— 

Mr. DeBoer [continuing]. Well, it depends on what you are asking is going to happen in 2012. I guess I would start off by saying, 

both of these problems that the industry is facing, the fundamentals in the overall economy, meaning net operating incomes—if you 

own office buildings, people are not extending their office leases. 

17 

They are not committing for more office space. If you are in the 

mall business, people aren’t shopping. Retailers are having difficulties. If you are a hotel owner, business and personal travel is down. 

So net operating income across the board is down, and that is 

pushing values down, and that is not going to turn around. 

And I think Mr. Parkus has hit it correctly in terms of, it is not 

going to turn around until employment settles and starts to rise. 

And it is not going to turn around until consumers and businesses 

feel like spending money again, and so we are a lagging indicator 

in terms of the fundamentals of the asset. 

On top of that, we have this financial crisis where the box that 

is left standing, in terms of the financing system, is too small to 

fit the items that we need to put in the box, meaning all of this 

debt that is coming due. And so there is a lot of tension from that, 

and we don’t see that clearing up anytime soon. 

So, yeah, I am unhappy to associate myself with Mr. Parkus’ 

bearish comments, but I don’t think there is any other way to look 

at it. 

Senator Brownback [continuing]. But I am just trying to track 

this timeline. If we are saying an economic recovery happens, 

things bottom out the end of this year, start to pick up very slowly 

next year, unemployment usually doesn’t start following that for a 

year normally. Then a year, a year after that, we are already 2 and 

a half years out from where we are today. 

Mr. DeBoer. Yes, and so then if you want to—— 

Senator Brownback. And you agree with that? 

Mr. DeBoer [continuing]. Yes, certainly. If your metric is valuation in terms of comparing the peak of values, which were let’s 

say 2007 for commercial real estate, when will those values be back 

up at that level? I think that Mr. Parkus and others on the panel 

would agree it will be many years. 

Senator Brownback. Yeah, that is—let’s talk about policy proposals here. 

Several of you have talked about the TALF for commercial real 

estate needing to be extended and done quickly to try to help that 

market. I think that is an agreement that most people on the panel 

have. 

And then programs to incentivize I found interesting to try to get 

more capital. We need to get more equity infusion into the system. 

Some of the foreign investment rules that you were citing to, Mr. 

DeBoer, that apparently are hurting from being able to get those 

in. 

Those are the—and then I think, Mr. Parkus, you also talked 

about getting a securitization market for commercial real estate 

going again. Is that by use of the TALF or how? 

Mr. Parkus. It would be by I think making some refinements to 

TALF through the use of the PPIP program. There are a number 

of different alternative suggestions to raise in which securitization 

can be modified, different paradigms, if you will, that are out there. 

And some of those paradigms, the government, some of those paradigms envision government at least in the early stage as partner. 

There are a number of different possibilities on the table. 

But I think the critical thing is, is that, as this incredibly stressful process unfolds, we must have a financing market out there. 

18 

There will be an overwhelming number of loans that default over 

the next 5 years. Those loans have to be able to be foreclosed upon 

and sold. You can’t sell a loan, you can’t foreclose a loan and sell 

it unless there is somebody out there who can finance it somewhere. And until these issues are dealt with, the problems will remain in commercial real estate. There is no waiting this out. It has 

to be dealt with. 

Senator Brownback. In looking at past commercial real estate 

difficulties, you cited to the early 1990s, Mr. Parkus. Can we learn 

anything from past difficulties on policy moves that we should or 

should not make that can either make this easier or exacerbate it? 

And I open that up to anybody on the panel. 

Mr. Helsel. I will speak to it just quickly. I would say that the 

1986 and early 1990s tax policies that changed real estate and created the problems that we had during that time have to be looked 

at again, and we have to make sure we don’t do those things again. 

Senator Brownback. What specific—— 

Mr. Helsel. Things that affect passive loss, capital gains, depreciation, things like that, that automatically stop or do not 

incentivize investment in real estate, hurt us terribly back then. 

Senator Brownback [continuing]. So any of those that we can 

change to make it easier and make it more value on depreciation, 

or any of these investments, would be helpful? 

Mr. Helsel. If we don’t decrease the length of time for depreciation, if we increase the capital gains tax so that the capital gains 

tax that somebody who is involved in real estate pays exceeds what 

anybody else does for any other form of investment in the United 

States or if we change it so that the capital gains tax goes up, it 

stops people from buying. It stops people from selling because they 

can’t afford to sell because they pay too much in taxes. 

Senator Brownback. I sure want to invite you or any of your 

industry associations to come up with specific proposals to put forward because certainly my office would be interested in putting 

them forward. Whether we get them through or not, I think if we 

people are talking about looking at a second stimulus package, the 

one we have got to do this time, if we do something, is to stimulate 

the economy, not to stimulate the government. 

And these are the sort of things that I think we ought to be looking at anyway, that you try to give more incentivization or 

incentivizing the marketplace to work and to get people’s capital 

out here and in the system rather than taking it away. But please 

feel free to put forward those, and I hope you will. 

Mr. Helsel. We will. 

Senator Brownback. In the overall. 

Any other historical lessons? 

Mr. DeBoer. I think one positive that came out of the last real 

estate debacle in the early 1990s was the move on both debt and 

equity to a more public, more transparent world. And part of what 

I think Mr. Parkus is talking about is we need to not be afraid to 

get a securitization market going again. It has to be a new 

securitization market that has stronger underwriting features, has 

more equity involved and so forth, but securitization in and of itself 

has to be part of the solution. The TALF will be helpful, but it is 

not a panacea. The PPIP will be helpful. 

19 

Some of these other ideas, for example, I put out this notion that 

we might have a federally chartered insurance program that is financed by private issuers and users of securitization models. That 

would ensure a securitization product that would then go out and 

be attractive or more attractive to investors. 

So I just want to throw this out that in 1992, 1993, one of the 

things that really helped the commercial real estate industry and 

the overall economy get over the problems it then faced was the expansion of both debt and equity in the public or at least spreading 

of activities. Again, the system we have now is too small to absorb 

what needs to go in it. It simply won’t work the way it is. 

Senator Brownback. It is interesting, too small of a capital 

pool to absorb the problem that you are in? 

Mr. DeBoer. Yes. Well, keep in mind, if you turn the clock back, 

seven of the more significant providers of capital to the commercial 

real estate market no longer exist in terms of large financial institutions that have either been merged out of existence or have simply gone out of existence. They are gone. 

On top of that, the securities market that was providing roughly $200-plus billion a year to this marketplace last year did 12 and 

this year did zero and is expected to do zero. And so when you just 

take all of those players off the field, those that are left are not— 

they don’t have the capacity to meet the very legitimate demand. 

Even at more sustainable loan-to-value levels, at more equity infusions, it is just not going to happen. 

Senator Brownback. Mr. Greenlee, you have a comment on 

this? 

Mr. Greenlee. I would agree that if you look back at history, the 

previous cycle in 1990, 1991, the tax law change was a key driver, 

and clearly the introduction of the capital markets for commercial 

real estate properties provided a lot of liquidity and additional capital into the system. 

You know, looking at the banks, I mean, they roughly hold half 

of all outstanding CRE debt at the present time, and of those 

banks that we looked at in the stress test process, they hold roughly around $600 billion in commercial real estate loans with the 

total market being $3.5 trillion. 

You know, in terms of what we learned from the 1990, 1991 experience is, again, we put in a place, a number of regulations were 

put in place around appraisals, real estate lending standards, and 

we have also tried to, as I mentioned in my testimony, work with 

our examiners in terms of taking a balanced approach to how we 

evaluate banks’ loan portfolios in terms of making sure there is 

proper risk identification by the bank and based on real estate 

market values and realistic assumptions and not to go to too far 

in terms of taking too Draconian of a view. 

Senator Brownback. Just an excellent panel. 

Mr. Parkus, in conclusion, I just want to, what number are you 

pegging for a loss in value when we hit the bottom of this commercial real estate trough? You were saying we were falling off 35 to 

45 percent I believe from the values that were at the peak. Do you 

project a bottom on the trough? 

Mr. Parkus. Right. I would think that 40 to 45 percent on average, but that will be more severe in certain MSAs, certain cities, 

20 

locations and property types. In particular, the assets that depreciated the most during the run up, for example, New York office, 

I would expect to be down potentially significantly more. 

Senator Brownback. What about retail space, big boxes? 

Mr. Parkus. Very badly hit. Very badly hit. I think much of 

that—— 

Senator Brownback. What are you projecting on those? 

Mr. Parkus [continuing]. About 45 percent. 

Senator Brownback. But at the bottom of the trough? 

Mr. Parkus. At the bottom. 

Senator Brownback. And that is not far, so if you are going to 

have any that if they are going to be moving—— 

Mr. Parkus. Fire-sale prices are—I would prefer not to mention 

today. They are down 60 to 70 percent. 

Senator Brownback [continuing]. Today? 

Mr. Parkus. Fire-sale prices on distressed assets. As we were 

saying, these office towers in New York that are being sold under 

sort of unfortunate circumstances, some of them have vacancy 

issues. You know, any office building with a vacancy issue today 

is in a lot of trouble. 

Senator Brownback. Well, gentlemen, thank you very much for 

the information. Again, I invite you on the policy proposals to get 

them forward because they would be ones I would be interested in 

putting forward so we can get some view on it. I think, on these 

things, what we have got to do is try to stimulate money back into 

the marketplace. That is what I see our role as trying to do is help 

you get money back into the marketplace. It isn’t going to change 

the basic fundamentals of the overall situation, but it can help get 

a market to function again and hopefully help fund some of the severity. 

As the Chairperson noted, this hearing will go into recess at this 

point in time. I know the other members will be back subject to 

however—I am being told about 45 minutes to an hour. So we will 

be in recess for that period of time subject to call of the Chair. 

Thank you very much for being here. 

[Whereupon, the Committee recessed, to reconvene at 12:45 p.m.] 

Chair Maloney. My apologies to the witnesses. We had quite a 

series of votes. Thank you for being here. We are back in session, 

and we have to be out of this room very shortly. 

So I really would like to ask any of the panelists about systemic 

risks, and what are the risks about doing nothing in the commercial real estate sector? Are there concentrations of loans and securities and important banks or financial institutions that might cause 

a shock to the fragile financial sector, as the Lehman Brothers failure did? 

I would just like two of you to respond because we have to move 

on to other questions. I have quite a series, and as I said, we don’t 

have much time in the room. Is it systemic risk? Is it going to be 

a shock to our fragile financial sector? 

Mr. Helsel. 

Mr. Helsel. Yes is the short answer to your question. It is systemic, I believe. I think doing nothing, which was one of your options, will only increase the problems that already exist, exacerbate 

them. I think that if nothing happens, if we don’t move, we being 

21 

both Congress and the GSEs and everyone else involved in this 

process, if we don’t move in a manner that will begin to shore up 

what right now is a financial crisis in terms of even the simple 

availability of funds for financing, I think you will find that the 

problem will be considerably worse. 

Chair Maloney. I would like to specifically hear from the Federal Reserve since their goal is safety and soundness. Do you see 

this as a possible shock to the fragile financial sector? Do you see 

it as a systemic risk, Mr. Greenlee? 

Mr. Greenlee. Yes. If you look at the exposure on banks’ balance sheets from commercial real estate, it is roughly half of the 

total outstanding commercial real estate. It is about $1.8 trillion. 

We have been focused on this naturally as an asset class and as 

an issue for many years and have worked hard to try to expand 

our information around the markets and, you know, try to share 

that across the system. 

In the SCAP process, where we did the stress test, we looked 

specifically at the commercial real estate exposures, and we looked 

at the loss rates of about 8 percent for the CRE portfolios of the 

19 largest domestic banking organizations to, under a stress scenario, to make sure they have enough capital in reserves to, you 

know, absorb those losses and remain as viable entities. So we 

have put a lot of effort into looking at how this plays out. 

Coming out of the SCAP process, we are taking those lessons and 

those observations and are actively working now to look at how 

that would play out. 

Chair Maloney. Do you see it as systemic risk? 

Mr. Greenlee. We view it as a very key risk in the banking sector, and we have put a lot of emphasis on it. 

Chair Maloney. I would like to ask a question about regional 

effects, and Mr. DeBoer probably on this one. Is it hitting states 

and large cities like New York equally, or is there a disproportionate share of losses in some areas? I think Mr. Helsel testified 

that there was $8 billion that could be lost in Manhattan alone. I 

believe that was your testimony. If we are not—if individuals or 

companies are not able to obtain the financing to roll over their expiring loans, what will the effect be across the country? Will it be 

even across the country? Are there certain areas that will be more 

impacted? 

Mr. DeBoer. Right. Well, first of all, in my opening statement, 

I said that the problems that we are seeing on refinancing are pretty consistent across the country and pretty consistent across asset 

type. So it really doesn’t matter if you have an office building or 

a shopping mall or a hotel, and it really doesn’t matter that much 

where you are in the country. It is very, very difficult to get financing. 

Having said that, certainly regions of the country that are harder 

hit by the employment problems are going to have more difficulties 

in the fundamentals of real estate to begin with. So there will be 

some regional disparity, but the basic problem of finance runs 

across the board. 

Chair Maloney. Okay. This question is for the Federal Reserve. 

Many people have testified, several in the group here, that we need 

to extend the TALF program that just went into effect in June. Can 

22 

we extend it? What is involved in extending it? And are there other 

steps that the Fed could take to modify the TALF program that 

will address the lack of financing in the commercial real estate sector? 

What I find so troubling was the testimony that people can make 

their payments, but no one will refinance them. So, therefore, you 

are going to have a default or a bankruptcy that is going to close 

a viable business, board it up, lose jobs and roll the economy backwards. Are there other things that we could do, such as extend the 

TALF program, modify it, or have a blanket statement that possibly, in this case, commercial real estate loans could have another 

year before they become due so that we could work on changing the 

laws to address these issues. 

My time is up—but, I would just like to ask any of the panelists 

to talk about ways that we can address this to stop what would be 

a devastating blow to the overall economy. Also, what percentage 

of our economy is real estate, would you say? 

Mr. DeBoer. Well, I will take a crack at the percentage because 

it is in our statement. On a revenue basis, commercial real estate 

is measured around 13 percent of GDP, commercial real estate. 

Now, if you throw in single family, it may get a little higher and 

there are different ways to measure the relative percent per GDP. 

We have done it on revenue basis, and it is 13 percent. So reasonably significant. 

Chair Maloney. So it is huge. Solutions, Mr. Greenlee? What is 

involved in getting the TALF program extended? You have heard 

it from many of the panelists today. Do you need a bill from Congress to extend it? What do you need to extend it? Will you be extending it, and what are the other ways the Fed could modify the 

TALF program or address the financing of commercial real estate? 

Mr. Greenlee. So the TALF program was originally created to 

ease some of these pressures in the marketplace, particularly on 

the CMBS. As you noted, it has just gone into effect in June for 

the new CMBS, and July will be the first round for the legacy 

CMBS assets. 

The TALF was created and improved by the Board of Governors 

under 13(3) of the Federal Reserve Act where loans can be extended under unusual and exigent circumstances. So to extend the 

TALF would require the Board to make a finding and vote to approve to extend that. 

Chair Maloney. Okay. And other ways that we could modify or 

help alleviate this problem? Do you have any other ideas? 

And then I would like to hear from Mr. Parkus, Mr. DeBoer and 

Mr. Helsel. 

Mr. Greenlee. We look at and we have had discussions with 

various industry groups and look at the issues and how we can, 

you know, address the challenges in the financial markets. We 

have rolled out a number of these programs. We periodically look 

at how they are working and consider—the Board would consider 

how they might want to modify to address specific issues that come 

up. 

Chair Maloney. Mr. Parkus. 

Mr. Parkus. Thank you. Chairman Maloney, there is one thing 

that comes to mind in terms of the current way the TALF renew 

23 

issue operates, and I think, I guess from my perspective, I am 

mainly interested in starting—restarting markets and, therefore, 

mainly interested in TALF renew issue. 

Right now, one of the problems in getting borrowers to step up 

to TALF has to do with the cost of borrowing. The cost of borrowing 

today under TALF turns out to be roughly 8.5 to 10.5 or 8.5 to 10 

percent mortgage rates, which is quite high. In order to get borrowers to sort of step up and be interested, I think that we need 

to offer floating rate loans as well as fixed rate loans. That would 

allow us with some additional details to I believe lower the cost of 

borrowing, potentially significantly, to borrowers and potentially 

bring in significantly more interest. 

Chair Maloney. Good idea. 

Mr. DeBoer. 

Mr. DeBoer. I think what was just mentioned on the TALF is 

right on in terms of not just fixed rate but also floating. 

There is also this issue out there about downgrading of earlier 

issued or rated triple-As that are no longer triple-As, and I think 

that, obviously, given what is happening in the marketplace, downgrades are probably appropriate. I am not criticizing the downgrades, but I am saying that maybe the program should be flexible 

enough to adapt to the new market that we are seeing here to 

make the program work as well. 

I also want to reiterate what Mr. Parkus just said. The main 

focus here needs to be on new lending, new issuance going forward, 

new securitization, new lending, bringing new equity. We need to 

turn the page and get the market back working again. 

Chair Maloney. I agree with you, Mr. DeBoer, not only for commercial real estate but for our economy as a whole. We need to get 

liquidity and lending out there. I find it shocking that some of the 

most respected and successful businessmen and women from the 

district that I am honored to represent tell me they can’t get loans. 

They have been in business their whole lives. They have never 

missed a payment. They have always paid on time, and yet the liquidity’s not there. 

I had a major captain of industry suggest to me that maybe we 

should start a bank in the Fed. I almost fell out of my chair. But 

if they can’t get loans from the private sector, maybe some money 

should be put at the Federal Reserve where they can get a loan. 

So the main question is, how do we get the liquidity out there 

and the money into the system, because it is not there. It is not 

there for commercial real estate, probably more pinched than others in other areas, but the liquidity is not there. 

Maybe we need some hearings on that, Mr. Brady, on the crucial 

issue of the lack of liquidity in the economy? 

Mr. Helsel. 

Mr. Helsel. Good afternoon. I agree with what Mr. DeBoer and 

Mr. Parkus both said. 

I would add one other thing that maybe makes it clear a little 

bit, and that is, I would say we supported expanding the TALF to 

include commercial mortgage-backed securities and also extending 

TALF loans to 5 years. But, right now, as we know, the program 

dies at the end of this year. I would want to make sure it is exVerDate Nov 24 2008 10:31 Feb 04, 2010 Jkt 052674 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 C:\DOCS\53863.TXT SHAUN PsN: DPROCT
24 

tended. So that if we can collateralize the use of mortgage-backed 

securities, that would help a lot as well. 

Chair Maloney. That is a very good suggestion. 

Mr. Greenlee, what is the degree of probability of expanding it 

for mortgage-backed securities and extending it for 5 years? 

Mr. Greenlee. It is an issue that is being looked at right now 

in terms of broader asset classes, as we have started the TALF 

with student loans and auto loans and those types of things. We 

have introduced CMBS. 

Chair Maloney. Certainly the commercial loans are far larger 

and a greater threat to the economy, should there be a default, 

than the other categories. Wouldn’t you say? 

Mr. Greenlee. Well, I think that is something we have been trying to address through introducing the new CMBS and the legacy 

CMBS TALF. 

Chair Maloney. Well, I hope you will take these recommendations back to your board. 

My time has expired, and I recognize Mr. Brady for 8 minutes. 

Because I took 8 minutes, you are certainly entitled. This is a bipartisan committee effort here. You are entitled to 8 minutes. 

Thank you. 

Representative Brady. Thank you. Madam Chairman, thank 

you for holding the hearing, and I support any follow-up on this. 

There is a lot here to go into, so thank you for your leadership on 

that. 

Let me telegraph my questions in advance. What I would like to 

ask the entire panel, on the issue of liquidity, should Congress give 

clear legal authority to servicers to renegotiate commercial real estate loans within the CMBSs because they hold 25 percent of the 

capital for commercial real estate today? 

Mr. DeBoer, I wanted to have you elaborate a little on your idea 

on privately funded insurance programs, again might create liquidity within the system. 

Wanted to hear from our practitioners, Mr. DeBoer and Mr. 

Helsel, you know, do you believe the pendulum has swung too far 

on the issue of bank regulation, that there is too much pressure to 

reduce solid commercial real estate lending at the local level, even 

when the market conditions support it? 

And then, finally, for our guidance as we look at a number of tax 

proposals, can you elaborate further on the impact of repatriating 

standard U.S. profits back to U.S. to invest in real estate, the issue 

of opening up more foreign investment in real estate, and then the 

thoughts on how carried interest, which is shooting at the giant 

hedge funds but hitting the traditional real estate partnerships, 

the ones that actually we are depending upon these days and this 

hearing is about, what impact that might be, and I would open it 

up. 

Mr. Helsel. I will start. Just quickly, I would say that the question on regulation of the banks—and I forget how you exactly worded it—but the essence of it is I think that we have gone where we 

needed to go, but it has almost become a circle because, on one 

hand, we are telling the banks to lend money, and on the other 

hand, the regulators are saying, be careful what you do, don’t lend 

money. So it puts the banks in a very difficult position. If they 

25 

don’t lend the money that is out there, if they don’t use the money 

they were given under TARP and they have available to them 

through other programs now, I don’t know how we can get out of 

the cycle we are in. 

Representative Brady. This even relates though to banks that 

haven’t accepted TARP. 

Mr. Helsel. That is correct. That is absolutely correct. 

Representative Brady. Small- and medium-sized banks that 

have capital, have longstanding relationships with local lenders but 

are still being told by regulators, we want these types of loans off 

your books, which is what we are seeing. 

Mr. Helsel. Mr. Brady, you are absolutely correct. I would also 

say that I guess you raised one of the questions I wanted to speak 

to you—it seems to me that if the Federal Government, at any 

level, whether it is the GSEs, whether it is Congress, whether it 

is any of the regulators, doesn’t matter who it is, if they don’t step 

back in and encourage actions that will create financing—and I 

want to just take a side note and say, to go to a place where we 

haven’t really talked about today—much of what we have talked 

about today has dealt with large office towers, large big-box buildings, things like that. 

I don’t want the committee to forget the typical investor in the 

street every day as a practitioner who is dealing with a family who 

has a property that might be worth $300,000 to $1 million, that 

they can’t get the financing for right now either. And I don’t know 

what the range or the delta is between the total dollars of what I 

will call large and jumbo transactions versus a typical transaction 

in the marketplace today, but I can tell you those people are the 

ones who feed the small communities across the country right now, 

with tax dollars for the schools and things look that. They are not 

here either right now. They can’t get financing right now either, 

and that creates a huge problem. It goes well beyond where the 

REITs and all the other people are who are suffering as well right 

now. 

Representative Brady. All right. Thanks. 

Mr. DeBoer. 

Mr. DeBoer. Concerning overregulation or the pendulum swinging too far, I think it probably has, but I think that is probably expected. 

Part of the problem out there I think now for a bank to lend into 

the real estate world is the inability to clearly determine what the 

value of the asset is. And when we are in a situation when values 

are dropping like they are, and you are basically asking people to 

catch the falling knife, if you will, it is very hard for and understandable that people would be reluctant to lend on appraisals. 

And perhaps there could be a period of time where bank examiners 

would tell banks to lend on a cash flow basis or on a debt service 

coverage basis rather than on an appraisal basis, and that might 

help get through this temporary period of time. I just throw that 

out. 

The other issues that you suggested that I talk about, one was 

this insurance concept, and this goes to this idea of encouraging 

new lending. There may be a model that could be looked at built 

off of the FDIC model that provides insurance for deposits where 

26 

issuers and originators of loans would pay a fee into a federally 

chartered insurance corporation that would then provide insurance 

to the securities that are backed by new commercial real estate 

lending. And if that was done, you might get more issuers and new 

lenders to come into play if those securities had some insurance. 

And again, what I am talking about is a privately funded over time 

by a fee from originators and from issuers. 

And the final thing that I think you asked me to talk about was 

the whole issue of foreign investment, and I think you had two different—— 

Representative Brady. Repatriation of stranded profits, as well 

as in your testimony you talked about sort of the disparate treatment. 

Mr. DeBoer. Right. The repatriation issue, we have heard about 

that. We know that you are looking at it, and Mr. Crowley and others are looking at the idea of allowing institutions or companies 

that have their profits parked overseas, they don’t want to bring 

them back to face taxation, and there may be something there that 

if they brought the profits out of a foreign bank and put it in a U.S. 

bank, I suppose that you can make the argument that that will 

spur U.S. lending. We are anxious to look at that and learn a more 

about it, as I know you are. 

On the foreign equity side of things, we know precisely that there 

are a lot of foreign pension plans, sovereign wealth funds, wealthy 

families that would love to invest more equity into U.S. real estate, 

but because of this law that was put into place in 1980, they are 

discouraged from doing it today, and we have seen foreign investment drop now to a trickle in the U.S. where it could be 

incentivized a lot more. 

And I’ll just end with this note. We have a policy in the United 

States where foreigners can buy as much of our Treasury debt as 

they want. They can buy as much of our private debt as they want. 

They can buy as much stock as they want without paying a capital 

gains tax, but when they buy U.S. real estate or they invest equity 

in U.S. real estate, they face a capital gains tax. And all I would 

suggest is that given the situation where we are so short in equity 

and need this to rebalance loans, that now is the time for Congress 

to take a fresh look. It has been two decades or more and just take 

a look at this and see whether there is a way to bring some of this 

equity that wants to come inside our borders. 

Representative Brady. Should real estate partnerships, traditional real estate partnerships that have had no abuses, have operated for decades in virtually every community of the country, 

should they be carved out from the carried interest efforts that are 

generally focused on, you know, quote giant hedge funds, whatever 

the current phrase is? Should real estate be carved out of that because it really fits in a whole different category? 

Mr. DeBoer. I guess, you know, it is up to other people to talk 

about carve-outs. What I would say is I don’t think that it makes 

sense to apply these rules to real estate. Now, whether it makes 

sense to apply the rules to other people, I am not in that business, 

I don’t know. But for real estate to take the incentive motivation 

away from a general partner and increase their taxes by 150 perVerDate Nov 24 2008 10:31 Feb 04, 2010 Jkt 052674 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 C:\DOCS\53863.TXT SHAUN PsN: DPROCT
27 

cent, as the carried interest proposal does, will dramatically reduce 

the risk taking and entrepreneurial activities of real estate. 

The final thing that I would say is, at its core, this proposal is 

a pro- debt, anti-equity proposal. It encourages people to get debt 

from banks as opposed to getting equity from equity partners, and 

again, in a world where there is a short supply of debt and a world 

where we are in liquidity, I don’t understand why we would now 

have a policy that would tell every partnership in America to go 

out and get bank debt as opposed to equity debt. So I think it is 

questionable. 

Representative Brady. Well, my time is up, but Mr. Parkus, 

could you answer on legal authority to renegotiate commercial 

mortgage backed securities, your thoughts, and I need to turn it 

back to the chairwoman. 

Mr. Parkus. Yes, I do believe that that would be a positive to 

allow special servicers to renegotiate loans. Yes, I believe that 

would be a positive. 

Representative Brady. I know there are a lot of dynamics involved with that. 

Chair Maloney. I would be glad to join you in such a bill. We 

can work on it. 

Representative Brady. Thank you and I yield back, Madam 

Chairwoman. 

Chair Maloney. Is any Federal agency responsible for making 

sure that underwriting standards in the commercial real estate sector are sound or is it the assumption that the market will take care 

of any problems? Does anyone know? 

Mr. Greenlee. In terms of broader underwriting across the marketplace, I am not aware of any, but I do know out of the early 

1990s as part of the FDICIA Act, there were real estate lending 

standards that were established by the banking agencies. 

Chair Maloney. Do you think it would be helpful to have one 

Federal agency responsible for underwriting standards? 

Mr. Greenlee. I am not aware that the board has taken a position on that. 

Chair Maloney. Okay. Thank you. And looking at where the 

majority of defaults in the sector are, were these loans originated 

in state or federally chartered financial institutions? 

Mr. Greenlee. In terms of the real estate loans that set on 

banks books, it is a mixture of both. 

Chair Maloney. Given potential risks to tenants in apartment 

buildings, should the proposed consumer financial protection agency be responsible for monitoring underwriting standards for these 

loans? 

Mr. Greenlee. Again, I am not sure the Federal Reserve’s taken 

a position on that, and I think the multifamily runs into where you 

do have a property that then leases out to individuals. That is the 

way that works. There is a consumer aspect to it. 

Chair Maloney. Let’s look at some lessons from history. 

During the S&L crisis in the late 1980s and early 1990s commercial lending also experienced a severe contraction. Can any of you 

comment on the effect that this contraction had, especially in 

States like Texas that were severely affected and are there lessons 

learned from the S&L crisis that would help us with the current 

28 

crisis and how we could stop this from happening again? Anyone’s 

comments. 

Mr. DeBoer. Well, look, obviously what happened in Texas and 

some parts of country following the commercial real estate collapse 

of the late eighties, early nineties was devastating, you know, but 

there are a lot of reasons for that. Part of it is in the roots of the 

1980s that had overly generous lending rules, overly generous— 

some—tax rules. They were shut down abruptly. Then the regulators came in and clamped down too hard on the regulating lending policy, and it shut the whole system down in the late 1980s, 

early 1990s. 

Part of that was due to overbuilding; too much supply was on. 

That is not what we have here today. And so while the recess was 

on, Senator Brownback asked a similar question, and we talked in 

terms of re-instate—one thing that did come out of that debacle 

that was worthwhile was a move to a more transparent and public 

ownership of both debt and equity in commercial real estate, and 

we need that again. We need securitization to come back in a new, 

more safe way, and you raised some very positive questions that 

need answers about new underwriting and so forth. But the point 

is to get this stuff moving back in a new world and sounder footing. 

Chair Maloney. Yes, Mr. Parkus. 

Mr. Parkus. I just wanted to make one comment, Chair Maloney, and that is, that I think many of the panelists here today believe, along with I, that securitization is critically important to play 

a role in helping to improve the situation as we go forward and 

that there are today quite a number of proposed regulations which 

pose a significant threat to securitization, some of them, some of 

which if enacted, would probably kill CMBS, and I think that we 

need to think very carefully about those, the proposed new regulations. I think the Fed has itself come out and said that it is critical 

that securitization sort of come back to sort of life and play this 

role. 

Chair Maloney. Thank you. Thank you. 

What is the impact of defaults? If we don’t do something, we will 

be facing defaults and bankruptcies across our country. What will 

the impact of defaults or bankruptcies of commercial real estate 

mortgage holders be on tenants of these commercial buildings? Are 

there risks to renters in multifamily dwelling units of losing electricity in the heat of the summer or lack of maintenance during a 

period of time before a new mortgage holder could be found? And 

what about tenants in office buildings and retail malls if there is 

a default or bankruptcy what happens? Are they booted out, too? 

Anyone? 

Mr. DeBoer. Well, so far, certainly on the commercial side in 

the retail world, it has been—although there has been a large retail owner that has gone into bankruptcy, mall owner, that is, it 

has been more likely that the retailers themselves are having difficulty. I don’t know of any cases so far in the multifamily area 

where tenants have had their electricity or water disrupted because 

of problems by the owner, and I would share your concern and 

hope that does not be a result that we see. That is not a good outcome. Again, I don’t know of anything like that. 

29 

Chair Maloney. Any other comments? Well, my time has expired. 

Mr. Brady. 

Representative Brady. Thank you. I am convinced one of the 

reasons we continue to have capital sitting on the sidelines and we 

have not yet restored confidence in the economy is that the commercial real estate crisis is viewed as the other shoe that will drop 

here soon in the next year or two and which is, again, why I am 

so grateful for the Chairwoman to be holding this hearing. 

You know, you pointed out earlier that half of all of our commercial real estate capital comes from banks, many of them regional 

and local. A quarter comes from the CMBS, and then the rest from 

insurers and pension funds. So clearly liquidity is key in the top 

two tiers. Appraisals seem like an arcane issue to discuss, but in 

the practical standpoint, when people are trying to roll over their 

notes, it is really critical. 

The two dynamics I see today, one, we have a procyclical bias in 

our appraisals. When the market is going up, appraisals look at 

rental income. They tend to evaluate it artificially high for years 

to come, sort of encouraging the cycle to continue. In the TALF situation, like they have today, the opposite occurs where basically 

they look at low rental incomes, extrapolate it for far too many 

years and you have got artificially low values and prices. 

And the regulators today, in my view, are discounting those appraisals even further, making tougher again either for those to 

come up with massive equity calls or basically to be denied loans. 

And again, my question would be from the congressional standpoint, without micromanaging the issue of appraisals, is there another approach that can be taken that normalizes the rental income or market income of commercial properties that would create 

more of a true picture of the value of these as people go in to rollover their notes? And again, they tend to be 5-year cycles for the 

regular banks, 10-year cycles for the mortgage backed securities. 

You know, should we as Congress—what should we be looking 

at, or what approach could we take to try to get a truer value of 

appraisals that would not exacerbate the problem we have today? 

And I would open it up to the panel members. 

Mr. Helsel. Certainly a discounted cash flow model would help 

that. The problem that you speak to, Mr. Brady, is serious, especially right now in the refinancing situation. It is also bad when 

it comes to just new financing, but the fact of the matter is—and 

I am a former appraiser so I understand the methodology a little 

bit probably. I would tell you that appraisers I think have a little 

bit of a conundrum themselves right now to the extent that they 

look at what is happening around them, they try and estimate 

what is going to happen as it relates to cash flow. They see a building go a little bit dark. They get worried that that might go further 

dark, and it almost self-perpetuates itself. 

So if they don’t begin to look at, for instance, discounted cash 

flow, if they don’t take—and I don’t mean to say that they should 

take an optimistic attitude when they are doing an appraisal that 

creates a false value that doesn’t exist, but I think if they continue 

to take a pessimistic attitude, it is a little bit of a problem. It 

drives the values down, which just exacerbates everything else we 

30 

have talked about today. Whether Congress should step in and tell 

an appraiser how to do appraisals is a different issue. I don’t think 

that is the right thing to do. 

Representative Brady. I don’t either. 

Chair Maloney. Gentlemen, we are running out of time and I 

want to recognize Mr. Campbell for his 5 minutes, but first I would 

like to place in the record Congressman Burgess’s statement. 

[The prepared statement of Representative Michael C. Burgess 

appears in the Submissions for the Record on page 139.] 

Chair Maloney. And I will be submitting additional statements 

and questions for the record. 

[A letter from Chair Maloney to witness Greenlee appears in the 

Submissions for the Record on page 140.] 

[A letter from witness Greenlee in response to Chair Maloney appears in the Submissions for the Record on page 141.] 

Chair Maloney. Mr. Campbell will have to be the last one to 

speak because we need to move out of this room for the next committee meeting. 

You are recognized for 5 minutes. 

Representative Campbell. Thank you, Madam Chair, and I 

apologize for missing the other questions if I am asking something 

that has been asked already. 

The first question I have generally for the panel, as a number 

of people deep in the commercial real estate market that I have 

spoken to have said this—interestingly used the same analogy, 

have had at least three different ones use it—say that we are in 

the third inning, that if this were a baseball game, we are in the 

third inning of the crisis, if you will, within commercial real estate 

and the CMBS and so forth. Do you all generally agree with that 

or not? 

Mr. Parkus. No. 

Representative Campbell. I see a big no from Mr. Parkus. 

Please. 

Mr. Parkus. Congressman Campbell, I think we are in the first 

inning. 

Representative Campbell. Oh, wow. 

Mr. Parkus. This has a long time to go. We are just now—it is 

only over the past 12 months that we have seen severe stress in 

rents and vacancies, prices declining, and delinquencies shooting 

up. We know from historical experience that commercial real estate 

performance lags economic activity with a 12- to 18-month lag. So, 

no. Maybe we are somewhere between the first and the second inning. We are definitely not in the third inning. 

Representative Campbell. Is there anyone who believes we are 

in the fourth inning or beyond then? All right. So we have got a 

ways to go. 

Next question, I think for Mr. Greenlee and Mr. Parkus. What 

if we do nothing here? What if there is no activity from Congress 

or the government whatsoever and this situation runs its natural 

course, what is the effect of that? What is the economic effect, the 

broader macro effect on banks or whoever? What effects do you 

see? 

Mr. Greenlee. Well, in terms of the exposures in the banking 

system, it is roughly about $1.8 trillion is what banks hold in terms 

31 

of commercial real estate. So if there is a continued decline in values and problems and delinquencies and bankruptcies, we will see 

more losses that banks take. It could threaten the viability of certain institutions, and we have tried to—again, we went through the 

stress test, the SCAP process, recently to look at the 19 largest. We 

looked at the CRE exposures there to ensure they had enough capital and reserves to absorb those losses over that time period. 

Representative Campbell. In the stress test, have you factored 

in it running its course then? 

Mr. Greenlee. We looked over a 2-year time horizon. We are 

taking that as observations and lessons we have learned from the 

SCAP, looking at other organizations that we supervise, as well as, 

you know, we will be thinking about a longer horizon at some 

point, depending on how things play out. 

Representative Campbell. Mr. Parkus, do you have a comment? 

Mr. Parkus. I think what Congress can potentially do here that 

would be extremely valuable is to help restart financial markets. 

So I guess I take your question to mean what would the difference 

in outcomes be between going through this process with poorly or 

ill-functioning financing markets versus one where we—— 

Representative Campbell. My question is simply trying to get 

you to explain better to us. Oftentimes CMBS, commercial, all 

seems very abstract, and so to try and say what is the effect on 

the financial system, on the banking system, on employment, on 

anything that, you know, those sorts of things out there that are 

less abstract. 

Mr. Parkus [continuing]. Right. Well, I think that the effect will 

be much more severe if we do not have a viable commercial real 

estate financial system, financing market, operating as we proceed 

through this. 

Representative Campbell. Okay. And then my final question 

for Mr. Helsel and Mr. DeBoer would be, you both mentioned either in your verbal testimony or your written testimony some 

thoughts that I think you have five or various ideas, thoughts, different things that Congress should do, that we should be looking 

at doing. Let me ask you, what is the most important? And I know 

sometimes people hate this question. I mean, if there is the single 

most important thing we could do that would have the most impact 

in softening the effects that we are going to have through the next 

eight innings of this process, what would that be? 

Mr. Helsel. Increased liquidity, get more liquidity into the marketplace. Find a way to get the money to the banks and get the 

banks to lend the money to people who need the money to stop the 

foreclosures and to stop defaults. 

Representative Campbell. Commercially regulated banks you 

are saying? 

Mr. Helsel. Yes. 

Representative Campbell. Okay. 

Mr. DeBoer. I mean, what is within the authority of Congress 

to do versus the regulators, I think those are different questions. 

You know, the TALF needs to be extended. It needs to be made to 

be reactive to changing market conditions, and it will be helpful, 

32 

but we need something to, as Jim said, to restart the lending process. We need some sort of a program to start new lending. 

As far as what Congress can actually do, I think that this issue 

of equity investment from foreigners is well within the purview of 

Congress. Simple reforms there would go a long way to bring about 

new liquidity. 

I will say one other thing on the RIMIC issue that was brought 

up. There is a request pending at the Treasury Department to provide more flexibility for servicers to renegotiate mortgages that 

have been securitized. It was done on the residential side. It should 

be done on the commercial side. And thank you for your comments. 

Representative Campbell. Thank you, panel. 

Thank you Madam Chair. 

Chair Maloney. I thank you. 

And the final question is really an issue that was brought up by 

the Special Inspector General for TARP when he testified before 

this committee earlier. He testified that there were potential pitfalls in pitting the PPIP program and the TALF together, and he 

basically made the point that he was concerned that taxpayers will 

be on the hook for losses if those two could leverage and work together. Are you familiar with the points that he was making? If 

not, maybe you should read his testimony and get back to us and 

tell us your concerns. 

Mr. Greenlee. 

Mr. Greenlee. I am not specifically familiar with that point. I 

do know how the TALF was set up was, we are only going to take 

the highest quality CMBS securities, and there will be, you know, 

a haircut taken in the lending process to ensure that the taxpayers 

aren’t exposed to any potential losses. 

Chair Maloney. Well, the Chair would appreciate, and I am 

sure the members, if you take a look at his testimony and respond 

to the concerns that he raised on those two programs. 

I would like to thank the panelists and thank all of our witnesses 

for being here today to examine the potential solutions to the commercial real estate time bomb which risks posing a systemic risk 

to our economy. 

And I thank my colleagues. This meeting is adjourned. Thank 

you. 

[Whereupon, at 1:30 p.m., the committee was adjourned.] 

(33) 

SUBMISSIONS FOR THE RECORD 

34 

PREPARED STATEMENT OF REPRESENTATIVE CAROLYN B. MALONEY, CHAIR

Good morning. I would like to thank our distinguished experts for agreeing to testify today on the growing financing problems we are facing in the commercial real 

estate market and the extent to which they pose a systemic threat. 

The current financial crisis is the result of significant losses experienced by key 

financial institutions with large exposures to residential mortgage assets. But banks 

now face a second wave of losses as commercial real estate loans issued at the 

height of the real estate bubble are coming due for refinancing. 

Tenant rent payments are often not sufficient to cover the loan payments and 

many borrowers’ commercial mortgages are underwater because the property simply 

isn’t worth today what they paid for it a few years ago. 

The decline in property values is astounding, particularly when you look at my 

home city of New York. For the year ending in March 2009, prices on commercial 

office space properties have dropped almost 13 percent. Deutsche Bank reportedly 

sold Worldwide Plaza in Manhattan for less than $400 per square foot, which I understand is less than one-third of the price the property could have commanded 

back in 2006. The bubble has burst, but a 60 to 70 percent collapse in prices poses 

a tremendous obstacle to the refinancing process. 

Moreover, in this highly constrained credit market that we now live in, even borrowers with performing C.R.E. loans who have equity in their properties report to 

me that they are having trouble getting refinancing. The commercial real estate time bomb is ticking. An estimated $400 billion in commercial real estate debt is set to mature this year with another $300 billion due 

in 2010. If mortgagers are unable to refinance or otherwise pay their large balloon 

payments, we could expect to see the default rate soar. That in turn translates into 

potentially crippling bank losses—especially among smaller and regional banks. 

Doing nothing is not an option, because this looming crisis in commercial real estate lending could lead to an all-too-familiar predicament, where banks suffer significant losses, major owners of hotels and shopping centers are forced into bankruptcy, foreclosed properties push commercial real estate prices further downward, 

and a perfect storm of all these factors combine to inhibit prospects for a sustained 

economic recovery. 

In recent speeches, New York Fed President William Dudley and San Francisco 

Fed President Janet Yellen raised concern about the potential systemic threats due 

to C.R.E. defaults and the need to reactivate the secondary market, in part through 

the TALF—the Term Asset-Backed Securities Loan Facility. 

The Federal Reserve has announced that it will extend the TALF to include both 

new and ‘‘legacy’’ commercial mortgage-backed securities (C.M.B.S.), in hopes that 

the July auction will be more successful than the June auction which drew no takers. The expansion of TALF into legacy C.M.B.S. should increase the supply of credit to the commercial real estate market, which remains frozen with no new securities issued in over a year. 

Additionally, further details about the Public Private Investment Program are 

emerging, which could potentially help with this problem. 

I also look forward to working with the Treasury on what has been referred to 

as ‘‘Plan C’’—efforts to head off looming problems—such as commercial mortgage defaults, rising homeowner delinquencies and solvency issues at community and regional banks—before they cascade into a crisis. 

But as we evaluate proposed solutions, we must be wary of potential pitfalls. For 

example, the TALF program is set to expire at the end of this year, which may cut 

short the program’s effectiveness just as it begins to ramp up. Credit rating downgrades for CBMS could significantly limit the impact that the legacy TALF auctions 

have in providing liquidity to that market. 

Uncertainty about the PPIP’s future has reportedly kept some on the sidelines, 

so there is some urgency to the Treasury providing additional clarity about the program. 

We are all watching closely to see if these measures help to restart the commercial real estate market, but we need to be ready in the event they fall short. 

I look forward to the testimony from our panel to help us find the keys to 

unlocking the commercial real estate loan market. 

PREPARED STATEMENT OF REPRESENTATIVE KEVIN BRADY, SENIOR HOUSE

REPUBLICAN

I am pleased to join in welcoming the witnesses before the Committee this morning. The spreading crisis in the commercial real estate sector poses a serious threat 

to our financial system and economic recovery. 

35 

What I have heard repeatedly from people associated with the commercial real 

estate industry is that they are unable to refinance outstanding mortgage loans 

when they mature. While officials here in Washington talk about the need to boost 

the economy, federal regulators are pressuring banks to reduce their exposure to 

commercial real estate loans. The result is that even some profitable commercial 

real estate firms that cannot rollover their debt now face bankruptcy proceedings. 

The magnitude of this problem is huge, with at least $1 trillion of commercial real 

estate debt requiring refinancing over the next several years. Bank loans typically 

have a maturity of five years or less. Loans in commercial mortgage-backed securities typically have longer terms. These loans were made when credit conditions were 

very favorable and now will have to be refinanced during the most serious liquidity 

crisis in many decades. 

The economic weakness resulting from the bursting of the credit bubble has reduced the market value of shopping centers, hotels, and office buildings. Consumers 

are cutting back purchases, and companies are retrenching to cut costs. Higher vacancy rates are boosting delinquency rates on commercial mortgage loans. Although 

the commercial real estate crunch began after the housing bubble burst, there is little doubt that the financial crisis has now spawned another dangerous threat to the 

prospect of economic recovery. 

Consequently, now is the time to repeal the punitive tax treatment of commercial 

real estate, including provisions taxing foreigners on U.S. capital gains from real estate sales. Congress should consider reducing the depreciation period for commercial 

real estate and reject proposed tax increases that will undermine a potential economic recovery. 

Another problem affecting commercial real estate relates to depressed appraisals 

of property. Obviously, low appraisals on property being refinanced are only going 

to make mortgage rollovers even more difficult in a liquidity crisis. Although it is 

understandable that appraisals will be affected by current depressed conditions in 

the industry, perhaps there is an alternative to valuing a long-lived asset in the 

trough of a severe recession. If a longer period of time were used as the basis for 

a property appraisal, a more accurate view of its long-term value might be available. 

In conclusion, the problems in the commercial real estate industry are a serious 

threat to the economy. Congress should consider policies to increase financial liquidity in the industry and avoid policies such as tax increases that will only aggravate 

the financial and economic distress. 

WITNESS BIOGRAPHIES

JON D. GREENLEE, ASSOCIATE DIRECTOR, BOARD OF GOVERNORS OF THE FEDERAL

RESERVE SYSTEM, DIVISION OF BANKING SUPERVISION AND REGULATION

Jon D. Greenlee is currently the Associate Director for Risk Management in the 

Division of Banking Supervision and Regulation at the Board of Governors. In this 

capacity, he oversees the strategic direction and work of the Board’s credit, market 

and liquidity, operational, and compliance risk sections. His responsibilities include 

the identification and analysis of current and emerging risks in his capacity as 

Chair of the Division’s Risk Committee, and for ensuring the Federal Reserve has 

appropriate supervisory guidance and policies in place. In addition, he has responsibility for coordinating supervisory activities related to key risks and risk management issues across the organizations supervised by the Federal Reserve System. 

Mr. Greenlee has over twenty-two years of experience as a regulator and most recently was the Deputy Associate Director for the Board of Governors Large Banking 

Organization section. He joined the Board in 2001 as the manager of the Regional 

Banking Organization and was appointed to the official staff in 2003. Prior to joining the Board of Governors, he was an examiner at the Federal Reserve Bank of 

San Francisco for 12 years. He also worked for the Office of the Comptroller of the 

Currency and the Indiana Department of Financial Institutions prior to joining the 

San Francisco Reserve Bank. Mr. Greenlee has a BS degree in Finance from Indiana State University. 

RICHARD PARKUS, GLOBAL HEAD OF CMBS RESEARCH, DEUTSCHE BANK SECURITIES

Richard Parkus has been Global Head of CMBS Research at Deutsche Bank Securities in New York since joining the firm in 1998. Prior to this, Richard worked for 

Lehman Brothers in London as head of non-dollar exotic option trading from 1994 

though 1998. Prior to that, Richard was Co-Head of the Quantitative Mortgage Research group at Lehman Brothers in New York. 

36 

Richard graduated summa cum laude with a B.A. in Economics in 1981 and an 

M.A. in Mathematics in 1983 from the University of Michigan. Richard attended the 

Ph.D. program at the University of Chicago’s Graduate School of Business, and received his M.B.A. in 1989. 

JEFFREY D. DEBOER, PRESIDENT AND CHIEF EXECUTIVE OFFICER, THE REAL ESTATE

ROUNDTABLE

Jeff DeBoer is the founding President and CEO of The Real Estate Roundtable. 

The Real Estate Roundtable represents the leadership of the nation’s top 100 privately owned and publicly-held real estate ownership development, lending and 

management firms, as well as the elected leaders of the 16 major national real estate industry trade associations. Collectively, Roundtable members’ portfolios contain over 5 billion square feet of office, retail and industrial properties valued at 

more than $1 trillion; over 1.5 million apartment units; and in excess of 1.3 million 

hotel rooms. 

Mr. DeBoer has served as President and CEO of The Real Estate Roundtable 

since 1997, and through a variety of positions, he has been at the forefront of every 

major piece of legislation affecting the real estate industry during the last twentyfive years. 

In addition to his position at the Roundtable, Mr. DeBoer serves as Chairman of 

the Real Estate Industry Information Sharing and Analysis Center (RE-ISAC), an 

organization dedicated to enhancing the two-way communication between the industry and federal policymakers on matters relating to building security, terrorist 

threats, and incident reporting. He also serves as co-chairman of the Advisory Board 

of the RAND Corporation’s Center for Terrorism Risk Management Policy, and is 

chairman of the National Real Estate Organizations, a coalition of real estate trade 

associations working together to enhance the coordination of the industry’s overall 

Washington advocacy efforts. He is also a founding member of the steering committee of the Coalition to Insure Against Terrorism (CIAT). 

Mr. DeBoer has discussed real estate and economic policy issues on FOX News, 

Bloomberg Television and CNBC; and his editorials have been published in the Wall 

Street Journal and USA Today. 

He is a member of the Virginia Bar Association and the American Bar Association. A native of Rapid City, South Dakota, Mr. DeBoer earned a law degree from 

Washington and Lee University in Lexington, Virginia, and an undergraduate degree from Yankton College in Yankton, South Dakota. Mr. DeBoer and his wife, 

Joan, and son, Mitchell, live in Alexandria, VA. 

JAMES L. HELSEL, TREASURER, NATIONAL ASSOCIATION OF REALTORS

James L. Helsel, Jr., a REALTOR from Lemoyne, Pa., is 2009 Treasurer of the 

National Association of REALTORS. Helsel holds the professional designations of 

Certified Property Manager, Graduate, Realtor Institute, and Certified Commercial 

Investment Member. 

On the national level, Helsel was treasurer in 2008 and a member of the NAR 

Board of Directors from 1989 until 1999 and joined again in 2001. He was a member 

of NAR’s Finance Committee in 2002 and 2003, and again from 2005 to 2007. He 

chaired the Real Property Operations Committee in 2002 and 2003, which was responsible for building NAR’s award-winning Washington, D.C. headquarters. He has 

served on NAR’s Executive Committee and Strategic Planning Committee as well 

as numerous Presidential Advisory Groups. 

In 2001, he was selected ‘‘REALTOR of the Year’’ by his state peers. 

PREPARED STATEMENT OF JON D. GREENLEE

Chair Maloney, Vice Chairman Schumer, Ranking Members Brownback and 

Brady, and other members of the Committee, I am pleased to be here today to discuss several issues related to commercial real estate (CRE) lending in the United 

States. I will start by describing the current conditions in CRE markets, then discuss Federal Reserve efforts to help revitalize CRE markets and promote lending 

to creditworthy borrowers. I will also outline Federal Reserve supervisory actions 

relating to CRE, and discuss the need to ensure a healthy balance between strong 

underwriting, risk management, and financial institution safety and soundness on 

the one hand, and credit availability, on the other. 

37 

1Loans 30 or more days past due. 

CURRENT CONDITIONS IN CRE AND CMBS MARKETS

Financial market dislocations and the continuing economic downturn are clearly 

challenging CRE markets. The pace of property sales has slowed dramatically since 

peaking in 2007, from quarterly sales of roughly $195 billion to about $20 billion 

in the first quarter of 2009. Demand for commercial property is sensitive to trends 

in the labor market, and, as job losses have accelerated, tenant demand for space 

has declined and vacancy rates have increased. 

The decline in the CRE market has been aggravated by two additional factors. 

First, the values of commercial real estate increased significantly between 2005 and 

2007, driven by many of the same factors behind the residential housing bubble, resulting in many properties either purchased or refinanced at inflated values. Prices 

have declined about 24 percent since their peak in the fall of 2007 and market participants expect significant further declines. Second, the market for securitized commercial mortgages (CMBS), which accounts for roughly one-fourth of outstanding 

commercial mortgages, has been largely dormant since early 2008 while many 

banks have substantially tightened credit. The decline in property values and higher 

underwriting standards in place at banks will increase the potential that borrowers 

will find it difficult to refinance their maturing outstanding debt, which often includes substantial balloon payments. 

The higher vacancy levels and significant decline in value of existing properties 

has also placed pressure on new construction projects. As a result, the construction 

market has experienced sharp declines in both the demand for and the supply of 

new construction loans since peaking in 2007. 

The negative fundamentals in the commercial real estate property markets have 

broadly affected the credit performance of loans in banks’ portfolios and loans in 

commercial mortgage backed securities. At the end of the first quarter of 2009, there 

was approximately $3.5 trillion of outstanding debt associated with commercial real 

estate. Of this, $1.8 trillion was held on the books of banks, and an additional $900 

billion represented collateral for CMBS. At the end of the first quarter, about seven 

percent of commercial real estate loans on banks’ books were considered delinquent.1 This was almost double from the level a year earlier. The loan performance 

problems were the most striking for construction and land development loans, especially for those that finance residential development. Notably, a high proportion of 

small and medium-sized institutions continue to have sizable exposure to commercial real estate, including land development and construction loans, built up earlier 

this decade, with some having concentrations equal to several multiples of their capital. 

The Federal Reserve’s Senior Loan Officer Opinion Survey regularly provides useful information about lending conditions. In the most recent survey, conducted in 

April of this year, almost two-thirds of the domestic banks surveyed reported having 

tightened standards and terms on commercial real estate loans over the previous 

three months. Additionally, almost two-thirds of the respondents reported weaker 

demand for CRE loans, the highest net percentage so reporting since the survey 

began tracking demand for CRE loans in April 1995. 

The current fundamentals in CRE markets are exacerbated by a lack of demand 

for CMBS, previously a financing vehicle for about 30 percent of originations. New 

CMBS issuance has come to a halt as risk spreads widened to prohibitively high 

levels in response to the increase in CRE specific risk and the general lack of liquidity in structured debt markets. There has been virtually no new issuance since the 

middle of 2008. Increases in credit risk have significantly softened demand in the 

secondary trading markets for all but the most highly rated tranches of these securities. Delinquencies of mortgages in CMBS have increased markedly in recent 

months and market participants anticipate these rates will climb higher by the end 

of this year, driven not only by negative fundamentals but also borrowers’ difficulty 

in rolling-over maturing debt. In addition, the decline in CMBS prices has generated 

significant stresses on the balance sheets of institutions that must mark these securities to market. 

FEDERAL RESERVE ACTIVITIES TO HELP REVITALIZE CRE MARKETS

U.S. government agencies have taken a number of actions to strengthen the financial sector and to promote the availability of credit to businesses and households. 

In addition to aggressive actions related to monetary policy, the Federal Reserve has 

taken strong actions to improve liquidity in financial markets by establishing numerous liquidity facilities. One of the more recent liquidity programs is the Term 

38 

Asset-Backed Securities Loan Facility (TALF), begun in November 2008, to facilitate 

the extension of credit to households and small businesses. 

In an effort to target CMBS markets, in May of this year, the Federal Reserve 

announced that, starting in June 2009, certain newly issued high quality CMBS 

would become eligible collateral under the TALF, followed in July by high quality 

‘‘legacy’’ CMBS issued before January 1, 2009. The provision of TALF financing for 

newly issued CMBS was intended to support new lending for creditworthy properties, especially those whose loans are set to mature soon. TALF financing for legacy CMBS was intended to lower secondary market spreads and enhance liquidity. 

Lower spreads should then encourage new lending and ease the balance sheet pressures on owners of CMBS. The resulting improvement in CMBS markets should facilitate the issuance of new CMBS, thereby helping borrowers finance new purchases of commercial properties or refinance existing commercial mortgages on better terms. 

TALF loans will be offered to finance new issuances of CMBS and purchases of 

legacy CMBS once a month. No TALF loans collateralized by new CMBS have been 

made yet, in part because CMBS take some time to arrange. The first subscription 

to include legacy CMBS will be on July 16, 2009. 

FEDERAL RESERVE SUPERVISORY ACTIVITIES RELATED TO CRE

The Federal Reserve has been focused on commercial real estate (CRE) exposures 

at supervised institutions for some time. As part of our supervision of banking organizations in the early 2000s, we began to observe rising CRE concentrations. Given 

the central role that CRE lending played in the banking problems of the late 1980s 

and early 1990s, we led an interagency effort to issue supervisory guidance on CRE 

concentrations in 2006. In that guidance, we emphasized our concern that some institutions’ strategic- and capital-planning processes did not adequately acknowledge 

the risks from their CRE concentrations. We stated that stress testing and similar 

exercises were necessary for institutions to identify the impact of potential CRE 

shocks on earnings and capital, especially the impact from credit concentrations. 

As weaker housing markets and deteriorating economic conditions have impaired 

the quality of CRE loans at supervised banking organizations, we have devoted significantly more supervisory resources to assessing the quality of regulated institutions’ CRE portfolios. These efforts include monitoring carefully the impact that declining collateral values may have on institutions’ CRE exposures as well as assessing the extent to which banks have been complying with the interagency CRE guidance. Reserve Banks with geographic areas suffering more acute price declines in 

real estate have been particularly focused on evaluating exposures arising from CRE 

lending. We have found, through horizontal reviews and other examination activities, that many institutions would benefit from additional and better stress testing, 

improved management information systems, and stronger appraisal practices, and 

that some banks need to improve their understanding of how concentrations—both 

single-name and sectoral/geographical concentrations—can impact capital levels during shocks. 

The recently concluded Supervisory Capital Assessment Process (SCAP) provides 

a perspective of the risks of CRE exposures. The 19 firms reviewed in the SCAP 

had over $600 billion in CRE loans, of which more than half were for nonfarm/nonresidential properties, and about one-third were related to construction and land development. The SCAP estimated that cumulative two-year CRE losses under the adverse scenario, in which residential house prices would continue to fall dramatically 

in 2009 and 2010, would be more than eight percent of total CRE exposures, with 

losses on construction loans significantly higher. Using information gained from the 

SCAP simulation exercise, we are also working with smaller firms that have substantial CRE exposures to ensure that their risk management practices are adequate and that they continue to maintain appropriate reserves and capital to support an expected increase in CRE losses. 

As part of our ongoing supervisory efforts related to CRE, we implemented additional examiner training so that our examiners are equipped to deal with more serious CRE problems at both community and regional banking organizations on a consistent basis. Further, we have enhanced our outreach to key real estate market 

participants and obtained additional market data sources to help support our supervisory monitoring activities. We have also issued guidance to our examiners on real 

estate appraisals, proper use of interest reserves in construction and development 

loans, evaluation of loan loss reserving methodologies, and troubled debt restructuring practices. 

39 

2 ‘‘Interagency Policy Statement on the Review and Classification of Commercial Real Estate 

Loans,’’ (November 1991); www.federalreserve.gov/boarddocs/srletters/1991/SR9124.HTM. 3 ‘‘Interagency Statement on Meeting the Needs of Credit Worthy Borrowers,’’ (November 

2008); www.federalreserve.gov/newsevents/press/bcreg/20081112a.htm. 

MAINTAINING BALANCE IN THE SUPERVISORY PROCESS

The Federal Reserve has long-standing policies and procedures in place to promote institutions’ risk identification and management practices that support sound 

bank lending and the credit intermediation process. In fact, guidance issued in 1991, 

during the last commercial real estate crisis, specifically instructs examiners to ensure that regulatory policies and actions do not inadvertently curtail the availability 

of credit to sound borrowers.2 The 1991 guidance also states that examiners are to 

ensure that supervisory personnel are reviewing loans in a consistent, prudent, and 

balanced fashion. 

The 1991 guidance covers a wide range of specific topics, including the general 

principles that examiners follow in reviewing commercial real estate loan portfolios, 

the indicators of troubled real estate markets, projects, and related indebtedness, 

and the factors that examiners consider in their review of individual loans, including the use of appraisals and the determination of collateral value. Credit classification guidelines were also addressed. 

This emphasis on achieving an appropriate balance between credit availability 

and safety and soundness continues, and applies equally to today’s CRE markets. 

Consistent with the 2006 CRE guidance, institutions that have experienced losses, 

hold less capital, and are operating in a more risk-sensitive environment are expected to employ appropriate risk-management practices to ensure their viability. 

At the same time, it is important that supervisors remain balanced and not place 

unreasonable or artificial constraints on lenders that could hamper credit availability. 

As part of our effort to help stimulate appropriate bank lending, the Federal Reserve and the other federal banking agencies issued regulatory guidance in November 2008 to encourage banks to meet the needs of creditworthy borrowers.3 The 

guidance was issued to encourage bank lending in a manner consistent with safety 

and soundness—specifically, by taking a balanced approach in assessing borrowers’ 

ability to repay and making realistic assessments of collateral valuations. 

More generally, we have directed our examiners to be mindful of the pro-cyclical 

effects of excessive credit tightening. Across the Federal Reserve System, we have 

implemented training and outreach to underscore these intentions. We are mindful 

of the potential for bankers to overshoot in their attempt to rectify lending standards, and want them to understand that it is in their own interest to continue making loans to creditworthy borrowers. 

CONCLUSION

Financial markets in the United States continue to be somewhat fragile, with 

CRE markets particularly so. Banking institutions have been adversely impacted by 

recent problems in CRE markets. The Federal Reserve, working with the other 

banking agencies has acted—and will continue to act—to ensure that the banking 

system remains safe and sound and is able to meet the credit needs of our economy. 

We have aggressively pursued monetary policy actions and provided liquidity to help 

repair the financial system. The recent launch of the CMBS portion of the TALF 

is an effort to revitalize lending in broader CRE markets. In our supervisory efforts, 

we are mindful of the risk-management deficiencies at banking institutions revealed 

by the current crisis and are ensuring that institutions develop appropriate corrective actions. Within the Federal Reserve, we have been able to apply our interdisciplinary approach to addressing problems with CRE markets, relying on supervisors, economists, accountants, quantitative analysts, and other experts. 

It will take some time for the banking industry to work through this current set 

of challenges and for the financial markets to fully recover. In this environment, the 

economy will need a strong and stable financial system that can make credit available. We want banks to deploy capital and liquidity, but in a responsible way that 

avoids past mistakes and does not create new ones. The Federal Reserve is committed to working with other banking agencies and the Congress to promote the 

concurrent goals of fostering credit availability and a safe and sound banking system. 

40 

PREPARED STATEMENT OF RICHARD PARKUS

Chair Maloney, Vice Chairman Schumer, Ranking Members Brownback and 

Brady, and other distinguished members of the Committee: 

My name is Richard Parkus. I am a research analyst working for Deutsche Bank 

Securities Inc. in New York. I have been employed by Deutsche Bank since 1998 

to provide research coverage of the securitization markets, with a focus on the commercial mortgage backed securities (CMBS) market. It is a privilege for me to testify 

at this important hearing to explore the current state of commercial and industrial 

lending, and to discuss the effectiveness of government efforts to restart credit markets. 

My testimony today will focus on three research reports that I recently published. 

The first report, published on April 23 of this year, titled ‘‘The Future Refinancing 

Crisis in Commercial Real Estate,’’ addresses what I believe will be widespread refinancing problems for commercial mortgages over the coming decade. The other two 

reports, both published in May of this year, provide my views on the likely efficacy 

of the TALF programs, both for legacy CMBS and for new issue CMBS. All three 

of these reports have been provided to the Panel as my written submission. With 

the Chair’s permission, I would also like to submit as part of the written record a 

forthcoming report to be issued this month, focusing on the potential impact of commercial real estate loan defaults on banks. 

Before addressing my research, I must note that the views I express today are 

my own and do not necessarily represent those of Deutsche Bank or any of its staff 

members. 

The commercial real estate sector is currently under greater stress than at any 

time since the crash of the early 1990s. In fact, I believe that the severity of the 

current downturn is likely to exceed, possibly by a large magnitude, that of the 

early 1990s. The problems are two-fold. First, the extraordinarily severe economic 

recession has resulted in vacancy increases and rent declines that are already of a 

similar magnitude to what occurred in the previous episode. This has pushed default rates to levels approaching those of the 1990s. The second problem, one that 

is potentially even more serious, is that for those loans that do make it to maturity, 

a very large percentage, perhaps in excess of 65%, may not qualify for refinancing 

under the dramatically tighter new underwriting standards, particularly in view of 

the fact that commercial real estate prices on stabilized properties have declined by 

35–45% or more from their peak in 2007, and almost surely have further to go. 

On the whole, I expect that total losses in CMBS will be approximately 9–12% 

of the outstanding CMBS loan universe, or about $65–$90 billion. For the 2005– 

2007 vintage loans, my estimate of total losses is somewhat higher, about 12–15%. 

For the 2007 vintage alone, I expect in excess of 20% losses. This compares with 

approximately 10% total losses for the worst performing vintage—the 1986 vintage—in the early 1990s. 

In order to manage through this extremely stressful process, it is critical that 

commercial real estate financing markets begin functioning again with some degree 

of normalcy. By this I mean that loans which qualify for refinancing must be able 

to obtain financing. At the moment, this is not the case. Commercial real estate financing markets are effectively closed, at least for loans in excess of $25–$35MM. 

Smaller loans on properties that are performing well have continued to have some 

degree of success refinancing, mainly with regional banks. However, we believe that 

this source will continue to deteriorate as problem loans mount in bank portfolios. 

Within the larger commercial real estate finance sector CMBS has roughly a 25– 

30% market share, while banks have about 50% market share, life insurance companies about 10% and pension funds about 10%. One common misconception, in my 

view, is that commercial real estate problems started in CMBS and somehow migrated to banks and other sectors. In fact, I believe that banks will, once again, 

prove to be the epicenter of commercial real estate loan problems. 

When looking at ‘‘commercial real estate’’ exposure in banks, one must distinguish 

between three categories of loans: construction and land development loans, core 

commercial real estate loans, and multifamily loans. In aggregate, banks have exposure to about $550 billion in construction loans, $1.1 trillion of core commercial real 

estate loans and $150 billion of multifamily loans. By far the most problematic of 

these are the construction loans, which contain high proportions of both loans to 

home builders and condo construction loans. Moreover, exposure to construction 

loans rises rapidly as one moves from large money center banks to smaller regional 

and local banks—the four largest US banks have an average exposure of less than 

2% of total assets, while the 31–100 largest banks have an average exposure of 

about 12%. Given that prices are down 40–45% on stabilized commercial properties, 

they must be down vastly more than this on newly completed or only partially comVerDate Nov 24 2008 10:31 Feb 04, 2010 Jkt 052674 PO 00000 Frm 00044 Fmt 6601 Sfmt 6621 C:\DOCS\53863.TXT SHAUN PsN: DPROCT
41 

pleted properties. I expect that loss severities on defaulted construction loans could 

approach 80–90% in many cases. 90+ day delinquency rates are currently in the 

12% range for construction loans in bank portfolios, but are somewhat higher for 

construction loans in regional bank portfolios. In fact, I am perplexed by the fact 

that construction loan delinquency rates are only 12% at this point. However, I believe that this can be explained by the fact that they are typically structured with 

interest reserves which are sufficient to cover interest payments until the expected 

completion of the project. Thus, construction loan delinquency rates are currently 

artificially low due to interest reserves, but will likely rise dramatically within the 

coming 6–12 months. In my view, losses on construction loans are likely to be in 

excess of 25%, possibly well in excess, which would imply losses of at least $140 billion. This, of course, would be disproportionately borne by regional and local banks. 

In terms of core commercial real estate, the story is much the same, at least 

qualitatively. Again exposures are much higher for regional and local banks than 

for the largest money center banks. The four largest banks have an average exposure of 3–4% to commercial real estate loans, while smaller regional banks have an 

average exposure of 15–20%. I also believe that core commercial real estate loans 

in bank portfolios are likely to be riskier than those in fixed rate CMBS. There are 

two main reasons for this view: First, bank loans tend to have fairly short terms, 

typically 3–5 years, while fixed-rate CMBS loans have much longer terms, typically 

7–10 years. As a result, a much higher percentage of bank loans will have been 

made at the peak of the market and will come up for refinancing at the bottom of 

the market, the 2010–2012 period, when they are least likely to qualify. Second, 

bank loans tend to be used to finance transitional properties, while fixed-rate CMBS 

loans typically finance stabilized properties. Loans on transitional properties are 

generally riskier than loans on stabilized properties, particularly in a economic 

downturn. 

The view that core commercial real estate loans in bank portfolios are likely to 

underperform those in CMBS is supported by the fact that delinquency rates for 

bank loans have for many years far exceeded those of CMBS loans. As of the end 

of Q1 2009, the delinquency rate on bank commercial real estate loans was approximately two and a half times that on CMBS loans. 

In terms of specific loss estimates, it is reasonable to assume that loss rates on 

core commercial real estate loans in bank portfolios will be at least as large as those 

of the 2005–2007 vintage CMBS loans—which I expect will be in the 12–15% range. 

This would imply losses of at least $120–$150 billion on banks’ core commercial real 

estate loan portfolios. 

The problems facing commercial real estate are severe and will likely take many 

years to resolve. There are no easy solutions. However, there are measures that can 

be taken that will help mitigate the pain and disruption of this process. By far the 

most important of these are steps that promote the recovery of commercial real estate financing markets. In my view, these should focus on reviving the public 

securitization market. I expect that over the coming decade the amount of capital 

from traditional sources (e.g., banks, insurance companies, pension funds) committed to financing commercial real estate will decline significantly. It is absolutely 

critical that a revitalized CMBS market be able to step in and fill the void. The 

CMBS market worked effectively and efficiently for well over a decade and, with the 

right changes, is capable of playing a vital role again in the future. 

I thank you for your time and am happy to answer any questions you may have. 

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139 

PREPARED STATEMENT OF REPRESENTATIVE MICHAEL C. BURGESS

Thank you Madam Chair, and I would like to thank the witnesses for testifying 

here today. 

Loan defaults in the commercial real estate market are one of those issues that 

have been on the fringe of the financial crisis since the beginning of the financial 

collapse. The observed lack of ability to securitize home mortgages in the secondary 

market was certainly an indicator that the commercial markets were in a similar 

position, yet, they’re not fixed. So, I’m interested to hear the witnesses’ suggested 

approach to address this very complex problem. 

In my observation, the situation in commercial real estate has the potential to 

cause equal or more collateral damage than the problems in the residential mortgage market because a default by a developer on a major multi-unit apartment complex or double-decker shopping mall obviously affects more lives than a default on 

a single family home. You can clearly see the domino effect from a default of that 

nature which leads me to believe that these probable defaults do carry the systemic 

risk gene if not the ‘‘Too Big to Fail’’ factor we’ve heard so much about in this committee. As Mr. Parkus points out in his testimony, commercial real estate financing 

markets are closed for loans in excess of $25–$35 million, so from that assessment 

it appears the biggest firms are most at risk of failure here. 

Placing the potential back-end collateral damage aside for a moment, it seems the 

only probable solution is some form of government guarantee or a regulation to extend all properly performing commercial mortgages to an unknown point in the future when these financing markets are functioning again. Either choice carries some 

serious government intrusion into commerce and into the relationship between contractually bound parties. I agree with Ranking Member Brady’s assessment that we 

need to repeal punitive tax treatments and tax increases that will undermine economic recovery efforts. 

After what we’ve witnessed over the last 10 months in the financial markets, I’m 

concerned that Congress simply doesn’t have the tools, the resources, or the will of 

the public to use the government to back another private market and their participants. Our guarantee is tarnished, and as a result, this will be a very tough situation to deal with legislatively. 

I do hope we have a constructive and informative dialogue about this problem and 

with that, I yield back my time. 

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