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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   November 2016

Viewpoint: Striking a Regulatory Balance

Policymakers must find a way to regulate without strangling the market

 At a Glance

Major regulators that impact the commercial mortgage market

  • Federal Deposit Insurance Corp.
  • Federal Reserve Board
  • Office of the Comptroller of the Currency
  • Consumer Financial Protection Bureau
  • Department of Housing and Urban Development
  • U.S. Securities and Exchange Commission
  • U.S. Treasury Department
  • Various state agencies

Commercial real estate is vital to our economy and communities. Office, retail, multifamily, industrial, hospitality and other property types are essential to the  operation of all types of businesses. The commercial property sector provides rental housing to more than 18 million households and helps form the infrastructure of communities across the United States. 

Just as commercial real estate consists of diverse types of income-producing properties, the nearly $3 trillion in outstanding commercial mortgage debt has been provided through a range of financing sources, including banks, life insurance companies, commercial mortgage-backed securities (CMBS) conduits, real estate investment trusts and pension funds.

Also in the mix are lenders that work with the government-sponsored enterprises (GSEs) and the Federal Housing Administration (FHA) to provide liquidity to this crucial market. Mortgage bankers, with the help of commercial mortgage brokers, serve as intermediaries across these capital providers to deliver financing that enables property acquisitions, refinancing, construction and improvements to real estate.

Varied business models and funding sources contribute to a competitive lending market. The diversification among capital sources enables risk to be dispersed across numerous market participants and financing structures. The fundamental role played by commercial real estate finance in the economy underscores the importance of paying attention to the rules and regulations that govern it.

Layers of regulation

Each major capital source for commercial real estate is subject to distinct government rules and regulations. Banks, for instance, are regulated by banking regulators — the Federal Reserve Board, the Office of the Comptroller of the Currency and/or the Federal Deposit Insurance Corp. CMBS issuers are regulated by the U.S. Securities and Exchange Commission and often banking regulators. Life insurance companies are regulated primarily under state laws. 

The number and scope of various regulatory regimes can lead to overlapping sets of rules and rules that operate in silos, which can negatively impact the ecosystem of commercial real estate finance. The core purpose of the Home Mortgage Disclosure Act (HMDA), for example, is to mandate reporting on consumer-facing lending, rather than business-to-business lending on commercial real estate. The recently expanded HMDA rules, however, impose considerable reporting obligations on a wide range of institutions that lend on commercial/multifamily real estate. This regulatory expansion arguably presents significant concerns across the multifamily sector, without delivering a commensurate public-policy benefit. 

If some regulations can be problematic because they are overbroad, others present challenges because they are developed within silos that can have ripple effects across markets. Regulatory capital requirements, including those advanced by the Basel Committee on Banking Supervision, have led to uncertainty about balance-sheet lending, as well as construction lending under the High Volatility Commercial Real Estate rules. The Basel Committee’s Fundamental Review of the Trading Book, if adopted by U.S. banking regulators, could be detrimental to the CMBS market by imposing prohibitive capital requirements on securities held in trading books, threatening liquidity in the CMBS market. Similarly, for some life insurance companies, additional federal regulations could be layered on top of the state-level regulation already in effect.

Liquidity threat

The risk-retention rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act will become effective for commercial real estate finance this December. Although the regulations reflect significant improvements since they were initially proposed, concerns remain about the viability of securitizations that are subject to risk retention. This, in turn, has raised questions about whether the liquidity needs in commercial real estate can be sufficiently met in a future regulatory state.

Multifamily capital sources that support workforce and affordable rental housing are impacted as well, as the mortgage market continues to cope with the GSEs’ conservatorship, which has been ongoing for the past eight years without Congressional resolution. This tentative state of existence creates political uncertainty with respect to the GSEs’ role as a major source of liquidity for the mortgage market. For lenders that work with FHA, regulatory barriers have constrained the ability to finance multifamily and residential health care properties.

Although effective regulation is fundamental to healthy and transparent markets, it is equally true that overbroad, uncertain or excessive regulation can threaten those very markets. This can take the form of individual regulations, as identified above, or the cumulative impact of numerous overlapping rules.

•  •  •

Policymakers must consider the consequences of any given regulatory action on both the institutions they oversee and other segments of the market in which those institutions operate. They must recognize the interplay among these variables. Striking a regulatory balance will be crucial to fostering a sound, vibrant and resilient commercial real estate finance ecosystem.  


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