New legislation has been introduced in the House of Representatives would provide economic support to the commercial real estate market, especially for businesses with Commercial Mortgage-Backed Securities (CMBS) debt, and the millions of Americans they employ.
U.S. Congressmen and members of the House Committee on Financial Services, Van Taylor, Al Lawson and Andy Barr introduced H.R. 7809, the Helping Open Properties Endeavor (HOPE) Act in a bid to protect millions of jobs that would be caused by CRE foreclosures, specifically to borrowers of commercial mortgages.
“Millions of jobs and the prosperity of entire communities depend on keeping these properties open,” said Rep. Taylor. “These industries don’t need a bailout, but they do need flexibility and support to keep their doors open, drive local their local economies, and support families across the country.”
Democratic Congressman Lawson added, “COVID-19 is causing many of our industries to experience major financial hits, and commercial real estate is no exception.
“The Helping Open Properties Endeavor Act establishes a lending facility to help the industry stay afloat — allowing borrowers to seek relief without violating their loan agreements. Without immediate action, we may see unrecoverable losses to these businesses.”
The HOPE Act would provide borrowers of commercial mortgages, who have been hit the hardest economically by COVID-19, financial assistance through the HOPE Preferred Equity lending facility. Guaranteed by the Department of the Treasury, financial institutions will originate preferred equity instruments to borrowers.
The commercial real estate market encompasses hotel, retail, multi-family housing, industrial, and commercial property, industries which support millions of jobs throughout the United States.
For example, 8.3 million jobs throughout the United States, and more than 600,000 in Texas are supported by the hotel industry while the retail industry directly supports 29 million American jobs.
As a result of the COVID-19 pandemic, businesses across the country have experienced revenue declines and cash flow shortages, making it difficult to meet monthly debt obligations and ultimately, threatening the livelihood of their business.
While Congress and federal agencies have provided assistance to many businesses experiencing financial hardship through programs such as the Paycheck Protection Program and Main Street Lending Programs, these initiatives do not fit the needs of the commercial real estate market, according to the bill’s sponsors.
Businesses with CMBS debt have a particular challenge since their loan covenants are governed by multiparty state law contracts which typically prohibit additional indebtedness. Further, CMBS borrowers have less flexibility to modify their loans since bondholders of CMBS trusts expect principal and interest payments to be maintained.
In June, Congressman Taylor led a letter, signed by 104 Members of Congress from both sides of the aisle, urging the U.S. Secretary of Treasury Steven Mnuchin and Chairman of the Federal Reserve Jerome H. Powell to provide economic support to the commercial real estate (CRE) market.
In June, the U.S. CMBS delinquency rate posted the largest single month-over-month increase since the inception of Fitch Ratings’ loan delinquency index nearly 16 years ago.
Loan delinquencies surged by to 3.59 percent from 1.46 percent a month earlier. New delinquencies of $10.8 billion in June significantly exceeded resolution volume of only $172 million.
Fitch has predicted the coronavirus pandemic will drive the delinquency rate higher over the next few months and peak between 8.25 and 8.75 percent by the end of third quarter 2020.
Fitch has also seen a greater rate of 30-day loan delinquencies rolling to 60 days, a trend likely to continue and expects the volume in special servicing will further spike over the summer.