Colony Capital CEO Thomas J. Barrack Jr. has penned a column warning that the financial infrastructure underpinning the commercial real estate industry was at high-risk of imploding unless immediate policy action was taken. The CMBS market has all but shut down, he noted, as significant margin calls on repurchase agreements has resulted in a severe liquidity crisis over 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,” he wrote. “The long-term impact on the economy could be catastrophic.”
Barrack did offer several suggestions that could ease the tensions in the market.
- The SEC could put on temporary holiday mark-to-market rules which would free up billions of dollars in liquidity overnight. Mark-to-market rules have, in the past week, wreaked havoc on repo transactions, he said.
- 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. (On Sunday, regulators gave banks more leeway in modifying loans for borrowers hit by the coronavirus without having to label the loan as a TDR.)
- Suspend the accounting rule CECL for banks. Barrack said 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.”
- Do more to allow banks to forbear on repoing collateral without triggering liquidity coverage ratios. 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, he said. “The fractured bank regulatory environment — Fed, OCC, and FDIC — should be streamlined for faster future decision-making.”
Without some action, the consequences will be dire, Barrack warned.
“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.”
Barrack is not the only player that sees weakness in the commercial markets. Earlier this month, investor Carl Icahn told CNBC that he is shorting the commercial mortgage bond market in anticipation of a collapse of the commercial real estate market. Specifically, he is shorting credit default swaps — assets that back mortgages of corporate offices and shopping malls.