Preventing Covid-19 From Infecting the Commercial Mortgage Market

Thomas J. Barrack
13 min readMar 22, 2020


As a major participant in the non-bank real estate lending industry, I am fully supportive of the nation’s extraordinary response to contain COVID-19. The profound impact of the COVID-19 pandemic on the public health and safety of all Americans is unprecedented and the response measures being taken by federal, state, and local government agencies are essential and critical. One aspect of this all-out assault on an invisible enemy — in the effort to suppress the contagion and manage the precious resources of our medical community and first responders — has been the unfortunate but necessary cessation of general commerce nationwide. Now everyone, from corporations and small and mid-sized businesses to employees and laborers from all walks of life, has been displaced from the normal chain of revenue generation, cash flow, and income necessary to meet their obligations, from payment of salaries, rent payments, mortgage payments, and all other debts and bills required in the daily life of every business and every American. As a direct consequence of the necessary response measures to COVID-19, high performing mortgage loans across the entire commercial real estate sector (approximately $16 trillion in aggregate), which had previously been grounded in solid economic fundamentals, are suddenly experiencing a temporary meltdown in cash flows. We are seeing the beginning of a second crisis that will occur in the financial markets that underpin the lifeblood of these employees, workers, and businesses. Based on my own personal past experiences I would like to share with you some thoughts on how to alleviate the potential blockage in the commercial mortgage market which is beginning to raise its perilous head. Addressing this major looming crisis in liquidity in a coordinated manner will be essential in averting a crisis in credit and a long term economic recession.


Due to the COVID-19 crisis, liquidity in the markets has dried up while businesses are experiencing a temporary cash flow deficit as revenues rapidly decline. American businesses are unable to access dollars and liquidity, consequently they are unable to fund employee wages and worker benefits, cover day-to-day operating expenses, support increasing borrowing costs, and make capital expenditures benefiting the American economy. As revenues fall further, layoffs will accelerate, consumption will evaporate, and almost every American will be financially challenged to a degree not experienced since the Great Depression. Depressed revenues will increasingly depress, and when combined with hiccups in the credit markets, borrowing costs will continue to skyrocket, further compounding the inability of businesses to support jobs. Without jobs, Americans will be unable to make payments on their mortgages, rent, credit cards, and automobiles; to acquire goods and services; and, to spend money at restaurants and coffee shops and in support of the gig economy. If not immediately addressed, this cycle cascades into chaos. The unemployment lines have elongated, and on April 1st, the length of these lines will explode.


Our current crisis is a crisis of trust in two distinct but critical silos: health and finance. The COVID-19 pandemic has caused widespread confusion, fear and hysteria with regard to its’ effect, treatment and longevity, and the global response to effectively halt this virus has completely stopped commerce and social interaction. As a result of the government fiat, America has endured a shutdown of our GDP, and an attendant unstoppable chain of financial calamities. There is no doubt that in order to ensure safety and conservatism during our health crisis we have to prepare and perhaps overshoot for the worst; however, the unintended consequence of responding to the pandemic is a pandemic of mistrust in our financial system. We need to rebuild trust in our system and prepare for the unknown, unknowns. In order to restore this trust, ensure cooperation, social obedience, and adherence to the government plan to combat COVID-19, we need to provide a menu of comprehensive financial subsidies, regulatory reliefs, forbearances, liquidity support, and monetary time outs for the monetary obligations of the American people who are being told to stop their livelihood in order to save the lives of others and perhaps their own.

Immediate Action Needed to Avoid the Interruption of the Commercial Real Estate Financing Market

The market for commercial real estate mortgage loans in the United States stands on the brink of collapse. The profound impacts of both the COVID-19 pandemic and the public health measures taken in response to it on the American economy have caused high-performing mortgage loans, grounded in solid economic fundamentals, to suddenly and sharply decline in value. As a consequence, banks, publicly traded mortgage REITs and other non-bank lenders now find themselves at a precarious juncture. The actions that they will take in the coming days and weeks carry significant implications for the American economy as a whole. If these institutions are not permitted to maintain the flexibility and patience needed to undertake the loan restructuring efforts that will be critical to weathering the COVID-19 crisis, loan repayment demands are likely to escalate on a systemic level, triggering a domino effect of borrower defaults that will swiftly and severely impact the broad range of stakeholders in the entire real estate market, including property and home owners, landlords, developers, hotel operators and their respective tenants and employees. At a moment when liquidity is essential to avert public panic and to facilitate investments that respond to rapidly-changing and unprecedented economic conditions, the real estate financing market is in danger of inciting a liquidity freeze. A market collapse of this magnitude would have catastrophic follow-on effects across the American economy.

Immediate concerted action must be taken to fend off this crisis and avoid the need for a taxpayer-funded bailout of the real estate market and banks. In particular, the banks, mortgage REITs and debt funds must agree on a collaborative solution — implemented with the reinforcement and support of federal government policy — to ensure stability moving forward. Among other measures that may be taken, a key element will be averting rushed and widespread margin calls and other “mark-to-market” measures for a period of time under the real estate whole loan and commercial mortgage-backed securities (CMBS) repurchase agreements that lenders rely on to provide liquidity in the market. Doing so will enable the mortgage REITs and debt funds to restructure the mortgage loans with their borrowers, which, in turn, will give their borrowers the breathing room they need to operate their businesses and align their residential and commercial leases with the current climate to allow companies to preserve millions of jobs.

Repurchase Financing — an Engine for Commercial Real Estate

The repurchase financing market is a critical component of the commercial real estate industry, which is a primary driver of the United States economy. In 2019, the development and operation of office, industrial, warehouse and retail buildings contributed more than $1.14 trillion to U.S. GDP, supported 9.2 million jobs, and generated more than $396.4 billion in salaries and wages for American workers.¹ Notably, these statistics only capture a portion of the impact of commercial real estate, as they do not account for multifamily residential assets, which represent 18% of the estimated $16 trillion total commercial real estate value in the United States.²

Across the entire real estate ecosystem including construction, retail, healthcare, leisure and hospitality, and real estate services there are almost 63 million jobs at stake. This real estate ecosystem represents ~$7.1 trillion of GDP, out of $20.3 trillion total US GDP.

A key driver of this economic output is the commercial real estate financing market. As of year-end 2019, commercial and multifamily mortgage debt outstanding in the United States totaled a record high of $3.66 trillion.³

In recent years, publicly-traded mortgage REITs and debt funds have taken on an increasing role in providing commercial real estate financing. This increase is due in part to federal regulatory measures taken in response to the 2008 financial crisis, as financial regulations taken at that time were designed to reduce exposure of banks to certain categories of commercial mortgages, such as construction or bridge loans, by making these loans more expensive from a capital perspective and imposing more stringent and burdensome underwriting standards. Repurchase financing arrangements, through which banks purchase a portfolio of commercial mortgage loans from mortgage REITs or debt funds who agree to buy back the loans at a future date, have enabled banks to provide liquidity for commercial real estate borrowers while complying with the new regulations. Repurchase facilities also offer banks protection through the cross-collateralization of a diverse loan pool that spans multiple asset classes, mitigating exposure in the event of a downturn in a particular segment of the commercial real estate market.

Aggregate Originations and Repurchase Borrowings of Top Public Mortgage REITs. Source: Thomas J. Barrack (proprietary)

Since 2013, bank financing through repurchase agreements has surged — the top six publicly-traded mortgage REITs alone reported over $42.5 billion in total loan originations and $20 billion in repurchase borrowings in 2019. Financing by mortgage REITs and debt funds is also supported by corporate credit agreements extended by a network of national, regional and local banks, several of which are affiliated with the banks that provide repurchase financing. Mortgage REITs and debt funds today account for hundreds of billions of dollars of commercial real estate debt, including with respect to critical development projects which rely on mortgage REITs’ and debt funds’ future funding commitments for continued investment.

Common Characteristics of Repurchase Arrangements for Commercial Real Estate Mortgage Loans and Resulting Effects on the U.S. Economy During a Global Downturn

Central to the fundamental credit structure of repurchase arrangements is each bank’s ability to “mark-to-market” the loans or CMBS the bank is financing and require the mortgage REIT or debt fund to satisfy any resulting “margin call” by partially paying down the advances on the affected loans, typically within only one or two days. Many repurchase arrangements also give banks the discretion to declare mandatory acceleration events based on the occurrence of certain loan-level events (such as defaults by underlying mortgage borrowers or the failure of the underlying property to satisfy minimum debt yield tests). In addition, repurchase agreements typically contain payment guarantees from mortgage REIT and debt fund sponsors that impose minimum liquidity requirements, the breach of which trigger cross-defaults connecting the sponsors’ other repurchase agreements, corporate credit agreements, and contractual obligations, creating a cascading effect that would spur a rash of mortgage REIT and debt fund insolvencies.

While these protective measures have become commonplace in the commercial real estate finance market given their effectiveness in curtailing the negative impact of isolated cases of non-performing loans, a systemic trigger of these measures across the entire market will have unintended but dire consequences. In the early days of the 2008 financial crisis, banks’ rushed and widespread use of “mark-to-market” remedies in order to rapidly reduce exposure to commercial real estate mortgage loans caused a systemic liquidity crisis in the commercial real estate lending industry, resulting in widespread economic distress and the drying up of credit markets.

That same panic has already resulted in significant margin calls over the past week on CMBS repurchase transactions, resulting in a severe liquidity crisis across the entire real estate finance market. If these actions continue in the CMBS market and spread to the broader commercial real estate whole loan market, the economic impact, magnified by widespread total industry shutdowns throughout the American economy, could be exponentially worse than the economic effects of the 1987 crash, September 11th attacks and 2008 recession, combined. The long-term impact on the economy could be catastrophic.

Commercial Real Estate Market Response to Covid-19. Source: Thomas J. Barrack (proprietary)

The current economic crisis facing the U.S. requires coordinated patience and flexibility among the key institutions within the commercial real estate finance market. As hundreds of millions of Americans face uncertain economic prospects and a fundamentally altered way of life in the coming months, it is imperative that real estate lenders are not forced by their financing sources to meet their borrowers with rigidity during this time of heightened need. Under most repurchase arrangements, bank consent is required for mortgage REITs and debt funds to grant material waivers, concessions and modifications requested by their borrowers in order to adapt to the changing economic landscape, ultimately enabling a return to pre-pandemic operations. Flexibility and compromise among the banks, mortgage REITs and debt funds is critical for the restructuring of their borrowers’ mortgage loans, which will be necessary for such borrowers to navigate the COVID-19 crisis and, in turn, create solutions and provide accommodations to their commercial and multi-family tenants helping to ensure the security of job and housing markets.

Avoiding a 21st-Century Great Depression

Absent immediate intervention, the effect of the COVID-19 pandemic on the entire real estate market, particularly property values, could dwarf the impacts of the Great Depression. While there is no precedent for our current economic reality — a widespread federal and state-mandated shutdown of multiple areas of industry and commerce for a prolonged period of time — data from the 2008 financial crisis indicates that the threat posed by COVID-19 is unlike any that the United States has ever faced.

Consider, for example, the American hotel industry — a sector that was hit particularly hard during the 2008 financial crisis. From January 2008 to January 2009, hotel occupancy dropped to less than 60%. This reduction in occupancy caused the losses of hundreds of thousands of jobs supported by the hotel industry, including direct jobs at hotels as well as indirect jobs supported by hotel employee wages, the hotel-related supply chain, and ancillary spending by hotel guests. Currently, in the dawning hours of the COVID-19 crisis, hotel occupancy rates are approaching 0% and are likely to remain at those levels for the foreseeable future. Even assuming an optimistic estimate of 25% hotel room occupancy in the coming months, job losses are projected to total between 2.8 and 3.5 million — a roughly eight-fold increase compared to the 2008 financial crisis.⁴

Projected Hotel Occupancy and Related Job Losses Due to Covid-19. Source: Thomas J. Barrack (proprietary)

Similar impacts can be expected across other sectors of the United States economy, as business closures and shelter-in-place mandates to stem the spread of COVID-19 halt consumer spending, drying up cash flows to businesses and leading to layoffs or furloughing of millions of American workers. Though the agreements that govern repurchase financings contain safeguards to maintain liquidity in down markets, they do not contemplate this kind of systemic collapse. If unchecked, margin calls will take hold of the repurchase financing market and the liquidity constraints of lenders will force borrowers and their tenants to divert scarce capital resources towards loan and rent payments — a particularly grave concern in a pandemic context when capital must be allocated towards ensuring that businesses stay solvent and that health-related needs are met. Even worse is the prospect of mass foreclosures and evictions caused by a market-driven liquidity crunch. Long after the peak of the COVID-19 pandemic, the effects of such a market failure would continue to be felt, perhaps most acutely by an already beleaguered population as banks, now holding hundreds of billions of dollars of defaulted mortgage loans on their balance sheets, begin to fail and scarce tax-payer money gets diverted toward bank bailouts and further stimulus spending.

A Collaborative Policy Solution

Successfully navigating the challenges posed by COVID-19 will require thoughtful, coordinated action and maintaining a sense of calm. This principle is not only applicable to America’s public health response, but it is also critical to ensuring the stability of our economy in the weeks and months to come. As the United States learned in the aftermath of the 2008 financial crisis, panicked economic decision-making by large financial institutions can result in a domino effect that swiftly and directly impacts the U.S. economy at large and the daily lives of all Americans. Faced with an unimaginable economic catastrophe, the White House, Congress, Federal Reserve, FDIC and supporting regulatory institutions can work to mitigate this crisis by bringing the banks, public REITs and private debt funds together to reach a solution that provides the liquidity necessary to sustain the commercial real estate market and broader economy. Such a deal would provide reassurance in a time of unprecedented economic peril, and enable the lending market to provide the loan restructurings and investments that are needed for the U.S. economy to endure and overcome the COVID-19 pandemic.

Below are My Suggestions for Partial Solutions:

1. Support for CARES (“Coronavirus Aid, Relief, and Economic Security Act”)

Encourage Congress to provide an amount up to $500 billion to the Secretary of the Treasury to support programs or facilities for the purpose of providing liquidity to the financial system including the purchase of obligations from issuers and secondary markets, as well as making loans or other advances secured by collateral or entering into repurchase contracts as permitted under Section 13(3) of the Federal Reserve Act.

2. Regulatory Streamlining

Here are some regulatory recommendations that could be implemented to aid in the recovery:

  • The strong leadership in the SEC could investigate a temporary holiday on mark-to-market rules which would free up billions of dollars in liquidity overnight. Unlike the 2008 crisis when collateral values were inflated by overleveraging, pricing in the pre-COVID economy was very efficient. But mark-to-market rules have, in the past week, wreaked havoc on repo transactions.
  • Suspend the requirements under US GAAP for loan modifications related to COVID-19 that otherwise would be classified as a TDR. Furthermore, suspend any determination of a loan modification as a result of the effects of COVID-19 as being a TDR.
  • Current Expected Credit Losses (CECL) / FASB Update №2016–13. We are in the middle of the rollout of FASB’s new CECL rule; its impact is incredibly procyclical, which is not helpful at a time when we need lending to flow, not diminish. A suspension of CECL to at least 2024 will allow banks and non-bank SEC filers to make billions of dollars available to borrowers by releasing regulatory capital from their balance sheets.
  • Liquidity Coverage Ratio (LCR). Prudent bank regulators have in recent days encouraged banks to use their liquidity and capital buffers and the Fed’s discount window to provide assistance to their customers, but more can be done to allow banks to forbear on repoing collateral without triggering LCR violations. The fractured bank regulatory environment — Fed, OCC, and FDIC — should be streamlined for faster future decision-making.

All of the above is simply a menu of concepts and ideas for discussion amongst industry regulators, and other stakeholders. These are my personal statements and not necessarily reflective of the companies in which I am a participant.

Thomas J. Barrack