Dodd’s bill worries real estate markets

As broad financial legislation heads to a Senate vote, real estate and financial lobbyists say a specific provision in the bill could slow the economic recovery.

The Obama administration and congressional lawmakers are pushing legislation requiring lenders to keep on their books 5 percent of the value of their loans. By requiring them to retain part of the risk, lawmakers aim to raise loan standards and force lenders to keep “skin in the game,” instead of passing along all the risk.

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Shopping-center developers, mortgage bankers, commercial real estate investors and others say the measure could threaten the economic recovery by slowing the flow of credit. Along with new accounting rules, the retention requirement, they say, could hurt the already crippled markets for securities backed by residential and commercial loans.

The CRE Finance Council, Real Estate Roundtable, American Hotel & Lodging Association, International Council of Shopping Centers and nearly 20 other groups have been raising concerns on Capitol Hill in recent weeks. Lobbyists have scheduled dozens more meetings to urge senators on and off the Senate Banking Committee to tread carefully and consider alternatives.

“There is a real desire to raise attention to these issues and make sure the totality — legislation and accounting — is considered,” said Brendan Reilly, senior vice president of government relations at CRE Finance Council.

The provision is one part of much broader financial legislation Democrats are looking to pass in the next few months. Senate Majority Leader Harry Reid (D-Nev.) and Senate Banking Committee Chairman Chris Dodd (D-Conn.) have both said they intend for the Senate to consider the bill before the Memorial Day recess. The House passed its financial bill in December on a party-line vote.

The risk retention measure has received relatively little attention compared to higher-profile battles over a consumer financial protection office and a system to dissolve failing financial firms.

“Seemingly small issues like risk retention with lots of unintended consequences haven’t gotten enough attention,” said Jennifer Platt, director of federal government relations at the International Council of Shopping Centers.

The provision may have its biggest impact in the market for commercial real estate loans and securities based on those loans. Over the past year, the commercial real estate market has been hammered and many expect the problems to continue or even worsen.

Earlier this year, the Congressional Oversight Panel on the $700 billion bailout of the financial industry predicted heavy losses in the commercial loan market. The panel said over the next four years the U.S. economy faces up to $300 billion in losses tied to commercial real estate.

Elizabeth Warren, head of the panel, said in February the losses could “dump sand in the gears of our economic recovery.”

Meanwhile, the market for new commercial mortgage-backed securities (CMBS) has seized up. The total value of new deals plunged from $230 billion in 2007 to just $3 billion in 2009, according to CRE Finance Council.

The associations are concerned new legislation and regulatory changes could throw more uncertainty into the markets.

“There is a lot of concern that these reforms in totality would cripple the CMBS market,” Reilly said.

Sen. Bob Corker (R-Tenn.) recently suggested lawmakers should be careful about the retention provision and has repeatedly expressed an interest in focusing on crafting higher underwriting standards.

Some groups in the asset-backed securities market support an alternative requirement for lenders to be on the hook if and when a loan goes bad instead of an upfront retention requirement.

The lobbying groups saw some success in the House bill, which would give regulators flexibility in how they impose the retention requirement on different types of loans: commercial, residential and auto, among others. A bipartisan group of House members pushed for an amendment in the House Financial Services Committee that allowed for more flexibility, particularly in the commercial loan market.