Preventing Covid-19 From Infecting the Commercial Mortgage Market

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

Repurchase Financing — an Engine for Commercial Real Estate

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

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

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

Avoiding a 21st-Century Great Depression

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

A Collaborative Policy Solution

  • 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.

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Thomas J. Barrack

Thomas J. Barrack

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