Aid boost sought for real estate

House and Senate lawmakers are making a new push to revitalize the commercial real estate market, which faces hundreds of billions of dollars in possible losses.

Rep. Walt Minnick (D-Idaho) wants to restart the market through a new federal program to help banks suffering under the weight of real estate loans that are plummeting in value because of the financial crisis.

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Minnick is leading an effort with lawmakers from both parties to push legislation creating a Treasury-run program that would provide between $15 billion and $25 billion in guarantees for commercial real estate investments. The guarantees are meant to boost liquidity and confidence.

“It’s intended to jumpstart the market and to have the private sector, once a few deals have gone through, take it away,” Minnick told The Hill on Thursday. The market for commercial real estate securities has been virtually frozen even as the broader economy begins to recover.

The House Financial Services Committee is holding a hearing next week on the issue. Minnick has been in close contact with officials at the Treasury Department and Federal Reserve on the proposal, although the administration and regulators have yet to express public support.

In a June hearing, Treasury Secretary Timothy Geithner said he recognized “challenges” in the market but did not call for any new programs or legislation. Minnick is also working closely with Democrats and Republicans on the Senate Banking Committee to craft a companion bill. 

Banks face $200 billion to $300 billion in potential losses on commercial real estate, with most problems happening over the next seven to nine years, according to the congressional oversight panel for the financial bailout package. Elizabeth Warren, head of the panel, warned in February that those losses on loans for shopping centers, offices, hotels and other properties could “dump sand in the gears of our economic recovery.”

In recent months, regulators have urged banks to boost the amount of capital they hold against the risk that the loans lose value. By doing so, banks are taking capital away from new loans.

Minnick’s proposal aims primarily to help banks with $10 billion or less in assets that issue loans of $10 million or less. Before the crisis hit, those and bigger loans were bundled through the securitization process into larger pools called commercial mortgage backed securities (CMBS).

That market has been at a virtual standstill since late 2007, the beginning of the recession. Under Minnick’s plan, the Treasury Department would issue federal guarantees on the bonds as an incentive to spur the market.

A board of federal regulators, the Treasury Department and industry experts would set guidelines for the types of loans that could take part in the program. The plan also calls for a 2 percentage point fee to cover the cost of the program.

“I don’t think we are putting any taxpayer money at risk,” Minnick said. “We are not injecting any taxpayer money into any financial institution.”

The proposal is designed specifically to be separate from the $700 billion bailout program as an effort to garner bipartisan support. Minnick’s bill is co-sponsored by Reps. Heath Shuler (D-N.C.), Mike Simpson (R-Idaho), Suzanne Kosmas (D-Fla.), Steven LaTourette (R-Ohio) and Martin Heinrich (D-N.M.).

The proposal is beginning to garner support from financial industry groups.

Paul Merski, chief economist of the Independent Community Bankers of America, said that some of the statistics of possible losses are “sensationalized” but that there are risks to small banks.

“It’s a concern, but it’s not going to be like the housing bubble bursting,” Merski said, adding that the association supports proposals such as Minnick’s.

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