Rich Carlson: What happens when commercial real estate finance meets Capitol Hill? KrefC recently brought more than 30 members and staff to Washington for more than 20 meetings with congressional offices for our annual DC fly-in, talking about some of the policy issues shaping the CRE finance industry. What's the issue? Why does it matter? And what does it mean for commercial real estate finance? let's get into it. Welcome to Krefsi Signal. In this episode, we take listeners inside Krefsi's 2026 Fall DC fly-in, where more than 30 Krefsi members and staff held over 20 meetings with congressional offices. I'm Rich Carlson, Senior Director Servicing Liaison here at Krefsi, and I will be today's host. I'll be joined by Syra Berkey, Managing Director and Head of Regulatory Affairs, David McCarthy, Managing Director, Chief Lobbyist, and Head of Legislative Affairs. And Raj Aidasani, Managing Director Research. Our conversation will break down several key issues Krefsi is bringing to policymakers, including TRIA reauthorization, bank capital requirements, implementation of the Road to Housing Act, and SEC regulation of CMBS, exploring why they matter to CRE finance, what policymakers need to know. And what the industry should be watching next. One of the goals of the Flying is to explain something that might get lost in Washington. Congress understands real estate, but the finance behind it is less familiar. We've selected several of the issues Krebsy is working on in Washington and will walk through them the way we do with a member of Congress or congressional staff.
Sairah: With two big.
Rich Carlson: What's the issue? Why does it matter? And what does it mean for CRE finance? Syra, why is it important to KrefC and its members to be having these conversations directly with policymakers?
Sairah: Sure, thanks Rich. Happy to be here. Most of my day-to-day work is with the regulators, mostly the the Fed, the FDIC, the OCC, and the SEC, both you know, directly in meetings with staff, leadership, and of course through the all-important comment letter. It's obviously critically important they understand the implications of proposed regulations on our markets. Also share with them when certain regulations aren't working the way they do or never have. But increasingly, decisions that affect our industry are being made in Congress. And that's one of the reasons David and I work closely together. The Road to Housing Act is a good example. It came out of Congress, not a regulatory agency. So we need members and their staff to understand how commercial real estate finance actually works. And then there's a second reason. When we're pushing on a regulatory issue, it really helps to have members of Congress who understand. this issue and who can weigh in with the agencies. Congress oversees these regulators and a letter or a question at the hearing from a member carries real weight. So our Hill meetings aren't all that separate from a regulatory work. They make it stronger. Let me hand it over to David.
David McCarthy: Thanks, Syra. you know, I echo what Cyrus says. Lawmakers like hearing from people directly, especially ones who know what they're talking about. So Syra and I bring these messages from our members day in and day out, what we with what we do here in DC. But hearing it directly from those people in the business can really drive that message home. there's also just this natural in-person aspect when you're there meeting with people. In their offices in DC, it creates a different dynamic for everybody involved. You know, you can ask those follow-up questions, you can see their demeanor, you can respond to things, and you can kind of go to things that aren't on the agenda where a virtual meeting or even over email just doesn't hit the same. So ultimately, this makes my job a lot easier because it shows that the Cref C members who show up for the fly-in back. What we say every day in DC. It gives us and the organization credibility and authority because those lawmakers, those regulators, those staffers know that we're connected to these leaders, these business folks, and we're talking with them day in and day out.
Rich Carlson: Excellent. Yeah, that's the those are great points. Thank you both. Raj, from the research perspective, what does the market data help us explain to policymakers that they might not otherwise see?
Raj Aidasani (CREFC): thanks, Rich. Happy to be here. I would say there there are three things. first, it makes the financing visible. a member can see the buildings in a district, but what they can't see is the capital behind them. For this fly-in, we built a one-page snapshot for each of the 28 offices on our meeting list. So across the 22 states, those pages cover, there's about 1.35 trillion. of securitized commercial and multifamily debt. So that's C B S, C R E C L O's, and the agencies. Second, it's mostly housing. Seventy one percent of that total is
Sairah: I
Raj Aidasani (CREFC): apartments, seniors housing, and manufactured housing communities. Even in New York, where office is 29% of the state, housing is still half the market. third, the pages name the actual properties Garden State Plaza in Paramus, Willis Tower in Chicago, Park Meadows Mall outside Denver, and apartments near the University of Nebraska in Lincoln. so that I think that's when it clicks for the policymakers. This affects a building that they drive past.
Rich Carlson: Yeah, that's a great point. And interesting fact about New York, I wasn't aware of how much of commercial real estate in New York is housing. So very interesting. All right, so now we're gonna talk a little bit about how Krefsi approaches a hill meeting. So when we walk into a congressional office, we have relatively short amount of time to explain a pretty complicated industry. So David, if you're sitting across the table from a congressional staffer, what's your approach? What do you want them to understand by the end of the meeting?
David McCarthy: Yeah. So in any of this, knowing your audience is always priority number one. And that's kind of a combination of the politics, the policy focus, their background in terms of the office, the member of Congress. Sometimes you have people who were commercial real estate
Sairah: Yeah.
David McCarthy: professionals or commercial real estate borrowers. And then also just their approach to legislating and legislation. So some people are always looking to do something. Some people will want to sign a letter. Some people want to introduce legislation. So knowing all that and going in helps you kind of prepare for what that meeting is going to be like. And usually I will say that members of Congress and their staffs are kind of preconditioned to expect an ask. They're always being asked for something, right? Like vote for this, sign on to this, sponsor this. you know, sometimes we always we don't have like a clear ask. Sometimes it's like pay attention to this. at the end of the meeting, what do we want them, what state do we want them to be in? I need them to understand that they know what I'm talking about, why they should care about it, and what they can or should do about it.
Rich Carlson: That's great. hey Sarah, how do you take something as complicated as, let's say, bank capital regulation and make it understandable to someone who isn't as immersed in commercial real estate finance every day?
Sairah: Sure. Yeah. I mean the people we meet with when we're at the fly in or if I happen to accompany David to s you know, one of his outside fly in meetings, the folks we meet with care very much about the cost and availability of financing. They Want their constituents from consumers to businesses large and small to be able to access financing at a at a fair and reasonable price. So if you look at the bank capital examp example, we give them kind of a overarching framework using Raj's data. We show them that banks hold nearly half of the debt that's financing commercial real estate. So If it costs more for a bank to hold certain types of loans, it will naturally cost more for the borrower if you kind of work it all the way through the the value chain there. And if it doesn't make sense for certain loans to be more costly for a bank, then you're certainly gonna see unintended negative consequences in the market. And so once you frame it that way, I think it becomes pretty easy for members and their staff to kind of understand the importance of the issues we're bringing up to them. And then just in terms of process, once we've sort of built that basic framework, we'll always just focus on one or two key priorities. we don't want to bog them down with details and then offer to send them sort of a comment letter or full analysis if they're interested.
Rich Carlson: Thanks. Yeah, that that was interesting how you could see various staffers had different levels of interest in certain topics. Raj, how important is it to have the market data behind the conversations?
Raj Aidasani (CREFC): so you know, it's it's the difference between an opinion and a fact pattern. a staffer hears from a dozen groups a day. what earns a second meeting is a number the office can check and reuse. and we and we try to make it local. For for Chairman Flood's office, the figure that matters isn't a national number. It's the six point three billion of securitized debt in Nebraska, eighty-six percent of it is housing. Every figure comes from TREP, Bloomberg, and the agency's own data. and we count each mortgage once. So an apartment loan that shows up in three different deals isn't counted three times. And lastly, we keep it to one page because these staffers are busy and we know a staffer will actually read one page.
Rich Carlson: so okay, before we move on, is there anything else as far as engagement with policymakers that we haven't covered?
David McCarthy: Yeah, I'd say that, you know, making that data and making the issues real for them is important. And it's also kind of coming to their level. even financial services staffers cover a huge portfolio of issues. And so when we come in there and talk about these things, giving them that context, but also talking about a way that kind of elevates the importance. So our members care about liquidity, right? a lot of staffers will know what liquidity is, but also a lot won't. So you have to bring that kind of lexicon to something that's real. We wanna make sure that it's easy to buy and sell real estate. We wanna make sure it's easy to make loans on real estate. you know, getting towards like what liquidity is actually, what that means. And You know, making sure that they understand those building blocks. Everybody has commercial real estate in their district. Everybody has housing. Everybody has multifamily housing. Those things matter. And showing them how it impacts them is important. People also care about the national conversation. And often that's intermediated by the press, which can do a good job or maybe a not so good job. So think about
Sairah: Good job too.
David McCarthy: any headline that comes to the Wall Street Journal. With the New York Times about commercial real estate, that is going to trickle into Congress. And they might not have all the context there. So we want to fill that in. And these meetings are a great opportunity
Rich Carlson: Yeah, I definitely agree. all right, so let's get started with an issue that might not immediately sound like a commer commercial real estate finance issue. Terrorism risk insurance. David, what is TRIA and why does it matter to CRE finance?
David McCarthy: TRIA is the Terrorism Risk Insurance Act. So this is basically a government backstop for terrorism risk insurance, and it was created after the 9-11 attacks, which were hugely devastating, both in human costs and the destruction waged by those horrific attacks. So, what happened after that is there used to be commercially available terrorism risk insurance. It was usually part of a policy. But we saw underwriters kind of pull that out after those attacks because just the magnitude of what happened and there it wasn't available. So Congress came together in 2002, stood up this program, which basically serves as a government backstop. I won't get into the specifics here, but essentially if there's a terrorist attack that causes losses of a certain level, the government step back in and act as kind of the insurer to those policies that have paid out. And it's split and kind of shifted over the years. but it essentially they cover 80% of the losses after the deductibles and things like that. So it's really a government backstop. It needs to be reauthorized occasionally. This will expire at the end of 2027. So what does that mean? After 2027, there won't necessarily be terrorism risk insurance coverage without this program. So what we're trying to do is get that program reauthorized ahead of time. So we can have certainty of a functioning market for terrorism risk insurance. And this is important for commercial real estate because if you've ever made a commercial real estate loan, and certainly in the securitization space, this coverage is actively required. Because loans make up a huge portion of the portion of the investment for the capital stack, and lenders want to make sure that they're covered in an event if a terrorist attack happens.
Rich Carlson: All right. Sarah, anything you'd want to add regarding the connection between insurance and lending and and the ability to finance C A E?
Sairah: Yeah, I mean I think David hit on it, you know, via the the tria example, but just to take it up a level, you know, generally insurance is a lender's protection, not its collateral. So if your building is damaged, it's what helps make the lender And in CMBS, it's Kate the bondholder as whole, and that's why, as David mentioned, every commercial mortgage requires the borrower to carry insurance. And if I can just do a very quick plug, our property risk and resilience committee has been increasingly focused on insurance issues over the past several years. while the market has softened a bit, and I'm talking here more about sort of like climate events and the like, you know, you did see, I think everyone remembers, you know, astronomical. rates and the a reduced ability to get coverage. So we've really been focused on that. there was you know, we heard from our members that in Some instances deals at the end of the day wouldn't close because insurance requirements couldn't be met. And then, you know, from a policymaker's perspective, insurance costs, don't just stay in the insurance market. They affect rents. like I just mentioned, deals that don't pencil and loans that are harder or are impossible to refinance. So while the market is easier right now, we're always just a few big st you know, storms away from a tougher environment. So it's something that Krepsy and the property risk and resilience committee is is very focused on.
Rich Carlson: Great. Yeah, that those are all great points, especially the trickle down effect and how insurance costs can affect rents. Raj, do we have any market data or a real world example that helps illustrate the importance of insurance availability to CRE finance?
Raj Aidasani (CREFC): Yeah, so in the fourteen months between September eleventh, two thousand one and when TRIA became law in
Sairah: Yeah.
Raj Aidasani (CREFC): November two thousand two, insurance companies stopped covering terrorism, but loan documents still required it. the real estate round table found that found more than fifteen point five billion of projects in seventeen states stalled or canceled. And in September 2002, Moody's downgraded 4.5 billion of CMBS because the properties didn't have full coverage. Basically, a lender needs coverage on the property that backs its loan. And a federal review found the found the private market can't fully replace the backstop. so and what's different today is scale. there's six point five trillion of CRE debt outstanding. And MBA counts eight hundred seventy five billion scheduled to mature this year. So nearly every one of those loans needs property insurance to re refinance. And for most lenders that includes terrorism coverage.
Rich Carlson: So David, what exactly is Krefsey asking Congress to do regarding TRIA? And what is our position on long term reauthorization?
David McCarthy: So David, what exactly is Kref C asking Congress to do regarding TRIA? And what is our position on long term reauthorization? So this this was an easy one for the day. There's two bills that have advanced. In the Senate it's S four three nine five and in the House it's HR seven one two eight. The House passed that back in June. The Senate has advanced that and frankly could pass it this week because there's such strong support for this. But each bill would reauthorize this program for seven years from its expiration. So this would extend it through 2034. Ultimately, the ask is get this to the president's desk in 2026. So when these policies are starting to be written in 2027, people can have that long-term certainty that that coverage is going to be there. If heaven forbid they need it.
Rich Carlson: let's move forward and move to something a little bit more technical. bank capital. Syra, what are the current bank capital proposals and why should someone working in commercial real estate care about?
Sairah: Yeah, so just for some context, earlier this year the banking agencies released basically a do-over of the two thousand twenty three Basel III and beam proposal. Comments were due in June. Krepsi filed its own letter along with leading a joint effort with ten other real estate groups. So the big headline was the change in direction. The 2023 version would have raised capital requirements significantly. This version, however, is roughly neutral, in some cases leads to lower capital requirements. And it did fix a few important issues that we flagged the last time around. So, to your question, you know, why should someone in commercial real estate care? They should care because banks are the single largest source of commercial real estate debt. these rules basically decide how much capital a bank has to hold against a variety of its CRE-related activities, for example, a construction loan, a warehouse line to a CMBS lender, or even investing in CMBS bonds. All of that flows directly into how much credit is available and what it costs.
Rich Carlson: Great. hey David, this sounds like a banking regulation issue. Why is Krefsi involved?
David McCarthy: So as I'm sure Raj will tell us, banks are 50% of the outstanding commercial real estate and multifamily debt market, but they're also instrumental in other forms of finance. And I think as Syra unpacks this and Raj unpacks this, it's an ecosystem. And that's what I tell folks on Capitol Hill. It's not just banks lending or it's not just non-banks lending, private debt or securitization. You need different sources of capital. And that's good for this system because if You know, one can pull back, another can kind of step in with different risk profiles. And that regulation can really drive a lot of this behavior. And so it's important for Congress to understand that what the regulators are doing, what is working, what is maybe not working, and what they might have to do about it in the future.
Raj Aidasani (CREFC): So to David's point, banks are the largest single source of capital in this market. Of the 6.5 trillion of Sierra debt outstanding, banks hold 3.1 trillion or 48%. Outside multifamily, their share is about 59%. In multifamily, they hold about 31%, second only to the agencies at 47%. Now, 69% of bank CRE loans sit at institutions under $100 billion in assets, in assets. So this is community and regional banks, basically the lenders in every district we visited. And banks hold the largest component of the maturity wall: $396 billion of the $875 billion scheduled to mature this year. And the market also shows what happens when bank appetite shifts. banks made 39% of CRE loans in 2023, 28% in 2024, and 35% in 2025. when they pulled back, the CMBS share doubled. and lastly, banks also hold about four hundred twenty-six billion of CMBS and fund the the warehouse lines behind it.
Rich Carlson: Great, thanks. so David, what do you think regulators got right in the latest proposal and what if anything would we like to see changed?
David McCarthy: So the regulators, what they got right this time was they were responding to conditions on the ground. During the last proposal, under the previous administration, there was a very strong bipartisan pushback that these capital rules were too punitive on a number of fronts, and that it would drive lending out of the banks. It would make the banks kind of unable to support different aspects here. So I know Syra's gonna get into and she's the expert on kind of the technical recommendations here, but this was kind of part of our argument when this was going on the first time. the proposals were not calibrated right to be supportive of commercial and multifamily real estate. So our comments were keyed towards that. And I think they listened on a lot of fronts. you know, overall the capital piece. is a capital relief on some accounts. And what I always described it as, kind of in the first iteration here, there were some actual proposals in the first capital rule, Basel Endgame, where commercial real estate actually got some better treatment from a lending perspective. But what I would describe it as maybe commercial real estate, if you're thinking of a bank as like a pie and it's it's kind of capital allocations, The commercial real estate lending could be a bigger piece of that pie, but if the pie is getting smaller, it's probably going to be less money for making commercial real estate loans. And remember, this is kind of coming out of the regional bank crisis. Banks had started pulling back generally. We're looking for other sources of capital. And I think our comments for the first time around demonstrated that this could also choke off other areas of capital from warehouse lending to securitization. So I think there was some good progress made on that, but I'll turn it over to Syra to get into the the actual details of what was changed and what we want.
Sairah: Yeah, no, absolutely. So, I mean, first we thank the regulators. They did take some of our comments on the last proposal, including very importantly a technical fix on how capital is calculated for securitizations, and that obviously matters for us. our comments on the latest proposal were narrow and technical, but again, very important, and two themes ran through them. One, capital should reflect actual risk, and banks need to be able to keep playing their role as We've talked through for the past several minutes in keeping the CRE markets liquid. And you know, it's a detailed comment letter, so I will just focus on a few of our most important issues. One, the first is how the regulators have decided to treat CRE loans depending on the size of the bank. So, in the current iteration, the largest banks get to use a much more tailored approach where the capital they have to hold depends on how risky loan is. Actually, it is. So how much equity the borrower has in the property and how strong the rated related cash flow is. But regional and smaller banks get one flat number for almost every CRE loan, just slightly trimmed from 100% in the previous iteration to 95%. So you could have a conservative loan with a lot of equity treated about the same as a much riskier one. And that penalizes even the safest lending at the smallest banks, which are some of the most active CRE. Yeah. And then finally, the data shows that CRE loans track equity and cash flow just as closely as residential mortgages do, which are getting the tailored approach at banks of every size. So one is just that inconsistency across banks. Two, as David mentioned, warehouse lending. Now, the couple of angles here. One is that the proposal says a structure only counts as a securitization. If its performance depends solely on the underlying loans. So the key word is solely. Many warehouse lines include a limited guarantee from the sponsor to cover short-term risks. So this one word could basically knock them all out of securitization treatment. And the bank would have to hold capital as if the loans had never been securitized at all. What we tried walking the regulators through is that these facilities relied mostly on the loans themselves, the cash flow, eligibility rules, extra collateral. Etc. The guarantee is just just a backstop. And then continuing on the warehouse lines theme, today a bank doesn't hold capital against a credit line that it can that it can cancel at any time, unconditionally cancelable lines. The proposal would change that and what require capital to be held against you know a specific percentage of the line, whether or not it's used. We explain that these lines aren't sort of, you know, like. credit cards. Every request to draw has to go through very detailed review and diligence by the bank and some loans just don't even, you know, get approved. So the risk is much lower than the proposal assumes. And finally, a really quick note on agency CMBS. The proposal lowers the minimum capital charge on senior private label CMBS from 20 to 50%, which we think is, you know, it makes sense. But it leaves agency CMBS at 20%, which is hard to explain, especially when the GSCs are in government conservatorship. So that was another thing we pointed out. If folks are interested in more, there's our comment letter and folks can read that if they want help going to sleep.
Rich Carlson: No, no, they're very interesting. I think you know, a lot of it seems to be education
Sairah: Well I'm logically.
Rich Carlson: regarding unintended consequences, and so I think the recommendations did a great job of addressing that. David, is there anything else you want to add here about Congress and and how they are involved in regulatory affairs?
David McCarthy: Yeah, so our kind of ask on this one was a little trickier. We have laid the groundwork there for engaging further. So Congress ultimately has the ability to change regulation through law. and they have done that. Actually, when I started at Creftsy, there was an effort that changed the high volatility commercial real estate regulations were which were at their core a capital rule dealing with construction lending. So I'm not saying it'll come to that. and they can always kind of tweak these after the fact too. It's a little bit harder, but but Congress needs to know what's going on. And we've been keeping them informed. So when it comes out, hopefully it's good. But if it's not, we have a plan of action.
Rich Carlson: So now we're gonna turn to housing. The Road to Housing Act has already become law, so David, what's the issue now?
David McCarthy: The issue is it's law, and now people have to figure out how to comply with it. So I won't go into the whole sorted history of how this thing came to be law, but it came very quickly and happened with a very, very large bipartisan majority. I mean, well over 90% in some cases. So essentially, and for those of us who don't know what we're talking about, we're talking about the provision that bans large institutional investors. From purchasing single family homes. And that's what it is. This is attempting to get at the so-called scatter site single family rental market. So, where, you know, the perception is that big institutions are buying these homes out from under first time home buyers and then renting them out to other folks. And so this has been kind of a trickling political issue at the state, and then the federal government has gotten involved. And the basic way it works is that. A large institutional investor is defined as any entity owning more than 350 single family homes. And a single family home, and I'm gonna read from the statute here, means a structure that contains two or fewer dwelling units. That are each intended for residential occupancy by a single household. And it does not include a manufactured home. So that that's it. That's that's kind of what the law bans. Now, of course, with any law, there are about 11 exceptions and all of these things that you can and cannot do. And so that's kind of where the rubber meets the road here. So what we talked about on Capitol Hill was saying, like, look, we get the policy. The wisdom of that notwithstanding, we need to make sure that this works from the market. And the biggest part of this is the build-to-rent space, which was not a target of this. There's an exemption for build-to-rent. There was a build-to-rent exception in the president's executive order that kind of predated this legislation. And for those of you who don't know, build-to-rent is kind of exactly what it says. People call it horizontal multifamily. It's basically building single-family homes. To rent them out rather than building a multifamily high-rise apartment building, you're building a bunch of homes. and this has kind of become the dominant part of this industry. And people might think of it as single-family rental, but it's not quite the same. You're not buying stock off the existing housing market there. So our comments to make this operational, trying to make the law work. There's all these exceptions. Not all of them are clear. There's some confusing parts in this regulation. And we just need to make sure that the back-end financing, servicing, all of that works both for build-to-rent and for the single family rental because it still allows certain type of activity. And I can get into those in a bit, but we're just trying to make this work within the parameters that Congress set.
Rich Carlson: Okay, thanks. So Syra, can you help explain some of Krebs's guidance, particularly around some of the exceptions like the bill to rent and the foreclosure and disposition exceptions?
Sairah: Yeah, and just really building onto what you know David laid out nicely, I think as he covered build-to-rent. So this law exempts purchases under our build-to-rent program. But there are several open questions we're, you know, trying to work through both us and with other trade associations, other market participants. for example, whether that covers existing and stabilized then built-to-rent communities when they change hands or only brand new construction. And that matters for lending. Because lenders underwrite the exit ultimately. And if a lender cannot be confident that the next buyer is allowed to buy the property, that loan will be harder to make. And ultimately, fewer communities will get built. And that sort of you know runs counter to the the premise behind the build-to-rent exemption. And then the second, Rich, as you noticed, foreclosure, that's another big focus. The law exempts the homes that a lender or servicer acquires through foreclosure. But again, lenders need clarity on how that actually will work in the real world. For example, once a lender owns that home, who can it sell to? Is there a sort of a time restriction? If the options are too narrow, you're faced with potential for sales at distress prices, which ultimately hurts recoveries and the neighborhood and again runs counter to the the point. of the legislation. so we've met with Treasury, walked through sort of some of our concerns here. We're not asking you know Treasury to rewrite the law, they absolut certainly can't do that and statute limits what they can change. But what we're asking for is clear guidance so that the you know exemptions Congress wrote actually do work as they're supposed to.
Rich Carlson: Great, thank you.
Sairah: Yeah, you know.
Rich Carlson: So Raj, why does this matter from a market perspective? Is there anything in the SFR or build to rent market that makes the timing important?
Raj Aidasani (CREFC): Yeah, so let's start with scale. Institutional investors own well under 1% of US single family homes and about 3% of single family rentals. Nearly 90% of rental homes belong to owners with one to five properties. The government accountability office studied six metro areas and found that the largest investors, those with at least 5,000 homes, On no more than 3% of the single-family homes in any of them. Institutional buying of existing homes has fallen more than 90% since 2022. Growth now comes from bill-to-rent, which adds supply. The Home Builders Association counted about 15,000 bill-to-rent starts in the second quarter. That was down from 18,000 a year earlier. They blamed part of that drop on uncertainty while this bill was pending. and now that the final law carves out bill to rent, they expect starts to level off. Lastly, lenders commit money before the homes are built. So clear guidance on the bill to rent foreclosure and transfer exceptions really matters before the law takes effect on January 7th.
Rich Carlson: Yeah, thanks for highlighting. I think clarity is to your point is for sure one of the most important factors here. So, David, you mentioned it a little bit earlier, but it's obvious that it's not just large institutional owners that need to worry about this. Can you provide a little bit of detail on why lenders or servicers or investors how they could be affected by how the law is implemented?
David McCarthy: Yeah, absolutely. And it's a great question because the penalties for this can be pretty draconian. So the law sets up that if there's a violation, so if you're a large institutional investor, you have 350 or more single family homes and you buy one more, the law says that Treasury and the Department of Justice can seek penalties up to a million dollars per violation or triple the price of the home, whichever is greater. So that is a pretty big stick in terms of trying to stop behavior here. And it's one thing if this just applied to the large institutional investors and just purchasing single family homes off the MLS. But because these definitions are so broad and because there's so many exceptions, figuring out how you fit into those definitions and exceptions is going to take a lot of time. And certainly forward looking guidance will be helpful there. But this is a The housing market is big. And even though that the single family rental market, as kind of Raj ran through the data, is relatively small comparatively, some of these transactions might look like these because of just the nature of things. So for example, if you're a servicer, there's an exception for a servicer taking back loans and taking back properties, and then you know, that it that is an exempted purchase. So that is allowed under this law. However, What happens after that? Can that servicer then sell? Let's say you take back a portfolio of a thousand single-family rental homes. Can that servicer then sell those homes to another large institutional investor? Well, if that servicer is a large institutional investor, the answer is pretty clearly yes. But if it's not because it doesn't have enough homes or or whatnot, it's not included in this, then the answer becomes more complicated. And so it's things like that because if you trip up, you could either one, be fined a lot of money, or two, be left with an asset that has really no legal buyers. And that's a bad, that's bad uncertainty. people have very detailed questions because these are highly negotiated and sophisticated transactions. And there's pretty easy ways to stay away from the truly quote unquote bad purchases buying off the MLS, but that's still allowed under some of these exemptions. So what we want to make sure is that there's clear rules of the road so that folks who are not intended to be captured by this are not, and that the market can function in the way Congress intended and not disrupt things that are already existing or things that are allowed, such as build to rent so people can kind of buy and sell those as Allow.
Rich Carlson: All right. Well, you know, January twenty twenty seven is right around the corner. Is there anything we could expect to happen between now and then?
David McCarthy: Congress did not require Treasury to make rules on this. So they have the option to make regulations to kind of clarify this, but they don't have to. This law goes into effect January seventh, with or without additional clarity. But from what we understand, they're moving quickly to to propose rules and get public comment on them. So the next kind of inflection point here is hopefully a proposed rule and then the opportunity to comment on that. So that's that's I think what we're looking for next.
Rich Carlson: All right, so we're gonna move on to our fourth and final issue, which is SEC CMBS regulation. we're sort of running out of time. So David, do you want to quickly tee up this one?
David McCarthy: I'm gonna pretend that we're talking to somebody who doesn't really know what securitization is. So, first of all, CMBS, commercial mortgage-backed securities, securitizations as loans packaged and sold as bonds to investors. Now, there's a couple of flavors of these. But some are publicly registered, which we call conduit. And these are generally made up of different property types of commercial real estate, loans backing those kind of across the country. And then there's the other kind of the non-registered market, which we call the 144As, which is a regulation that allows this. They're still, you know, regulated securities, but they're only available to qualified institutional buyers. And that means in an institution with $100 million or more. In investments. Only those buyers can purchase those. We call them single asset, single borrower deals, SASBY. Raj can kind of talk about those differences more. But you know, for a number of reasons, market-driven and regulation, the conduit market has shrunk drastically. So that publicly registered market, where we get a lot of this great data from. And one reason is that it's expensive to issue these from a paperwork and bureaucratic perspective. I know Syra has a lot to say about that.
Rich Carlson: Right, Syra, let us know what's what's the issue here with the duplicative reporting requirements.
Sairah: Yeah, absolutely. And I think one point we try to make with policymakers, both on the regulatory side and on the hill, is that CMBS is already one of the most transparent markets in fixed income. So we start with that. Every month investors get loan level data through the Krepsy Investor Reporting Package, the IRP, which Rich, of course, is one of your areas of expertise. The industry built it, has maintained it for decades, and it keeps Being updated as investor needs and the market changes. So it's the data that CMBS investors actually do rely on. However, complicating issues. After Dodd-Frank, the SEC added its own loan-level template called Schedule AL. Public deals now have to report two sets of data on the same loans in different formats, under different standards. All along the investors really do rely on the on the IRP. again, you know, in in many sort of comment letters we've written, we go into various reasons and descriptions as to how the IRP is is frankly superior to schedule AL. But this translates into a significant burden on an ongoing basis. you know, they they draw the distinction between corporate issuers and securitization issuers. A corporate issuer can generally stop filing. Reports at the SEC, so automatic suspension of filing reporting once it has fewer than 300 holders. Dodd Frank eliminated the statutory automatic suspension for securitizations and delegated that decision to the SEC. And under the SEC's current regulations, a public CMBS DO has to keep filing for its entire life, five or ten years, what have you, until there are no outside investors left. And as you can imagine, that means years and years of fees for lawyers and servicers and accountants, etc., for reports that investors ultimately don't use. And in another case of a severe penalty, you have it here, miss a single filing and an issuer can lose its ability to issue public deals for at least a year. That's a huge Huge deterrent to staying in the public market. So we've asked the SEC to restore the automatic suspension as well as rationalize some other reporting requirements so that essentially public CMBS can compete again. Investors, you know, would still get the IRP every month for the life of the deal, and the offering documents are always available. We have lobbed in you know a few common letters to the SEC on this point. We are, you know, according to the unified regulatory agenda that comes out of the agencies, the SEC has signaled that ABS disclosure reform is on the agenda. so we might see a proposal in the coming months.
Rich Carlson: hey Raj, what can you provide a little bit of perspective as to what has happened to the public CMBS market and how you think that it might be related to these regulations?
Raj Aidasani (CREFC): sure. So I mean basically it's gotten a lot smaller. In twenty fourteen, when Reg A B two was adopted, registered deals were about sixty-two percent of US private label CMBS. By twenty twenty four it was thirty percent, and in the first half of this year about twenty. some of that is the growth of single asset deals that David mentioned, which are mostly sold privately, but But conduit issuance itself is well below its 2014 level. And issuers point to the cost and penalties of registering with the SEC. And it matters because conduit is the main way smaller commercial loans reach the bond market, say a ten to forty million dollar mortgage in a secondary market. A smaller conduit market means fewer of those loans get financed that way. And in our view, the outcome is upside down. rules written to protect investors have pushed deals into the private market where there's less public reporting.
Rich Carlson: Those are good points. I think we've covered a lot of this, but is there anything else as far as what we would like to see happen or what next steps might be?
David McCarthy: This is one of those things where we told Congress, keep your eye on this space. We expect a rulemaking that might touch on this from the SEC, but it's important. And it's actually a really good story. we can come to Capitol Hill and the regulators and say, hey, look. We can reduce your costs without compromising the information that investors get. This is a win win win for everyone. we hope the SEC can give some relief, but if not, we can try to engage Congress to either give that relief through legislation or through kind of the bully pulpit with some letters or calls on there too. So that was our objective on this one.
Rich Carlson: Excellent. all right. Well, we've talked about four very different issues, terrorism insurance, bank capital, housing policy, and CMBS regulation. What connects all of these issues from a CRE finance perspective?
Sairah: I can Quickly share share my thoughts and then I know David can chime in, of course. for me, as we're whenever I'm examining proposed regulations or regulations that are outstanding and just not working, the common thread is really whether a market is appropriately liquid and if you know, if capital shows up, at what cost is it showing up and with what certainty. So, as we've walked through at length, for example, bank capital rules play a huge role in what banks invest in and lend against, and SEC. regulations determine whether CRE debt can be issued in the public market at a r at a reasonable cost. And at the end of the day, as you know, as David noted, win-win-win, we're not asking for weaker protections. What we're asking for are rules that match the actual risk inherent in different types of financing, underlying assets, and rules that are clear enough to underwrite against. When the rules aren't clear or are unnecessarily punitive and don't match underlying risks, capital you know, withdraws or becomes more expensive. And so we're all kind of hoping for a and working towards a more efficient, effective market.
David McCarthy: Yeah, at the end of the day, we just want to make sure that people can borrow against their commercial real estate and people can lend on commercial real estate. That's the end of it. You want to make sure that it's easy to do that within the appropriate risk parameters.
Rich Carlson: And Raj, any additional thoughts from your perspective?
Raj Aidasani (CREFC): I would say capital, you know, doesn't disappear when policy changes. It it either costs more or moves somewhere else. and the and the borrowers with the fewest options feel at first. and the result is higher cost. And to a borrower, a cost from a new rule is no different from a rate move. So, for example, on a $50 million loan, one extra percentage point is $500,000 a year in interest. And if the loan gets smaller, the owner has to put in more cash, which makes refinancing and new projects harder to get done. So now you apply that to a market with $875 billion scheduled to mature this year, a 10-year treasury above 5%, and office delinquency at 12%. a and because seventy one percent of the securitized debt in the in the states we covered is housing, the cost ends up landing on rental supply.
Rich Carlson: All right. so moving forward, we started this episode talking about the fall fly-in. After having these conversations with congressional offices, what did Krefsey hear?
David McCarthy: Yeah, I think there was a lot of interest. in addition to the issues we covered, there was certainly discussion about that, but data centers kind of came up organically. which is not surprising. We were prepared for that too, because data centers are heavily in the news. They're certainly kind of financed through various channels in our ecosystem. And Congress kind of needs to figure out what to do or not do about them. we had questions about data centers from detailing in terms of, what type of financing are they getting? Is it more like a commercial mortgage, or is it more like an operating, or is it more like an infrastructure? we had deep discussions with members and members of Congress about that and then some of it was about, you know, Rich, to kind of your efforts. It's like when we were looking at the the data from the IRP, it's like, why aren't data centers showing up in here, it's like, Well, we're working on that, or at Rich is.
Rich Carlson: Me and the data center working group are are working to address that. Syrah, did you hear any questions or concerns during the fly-in that surprised you?
Sairah: Honestly, I was I was pleasantly surprised at how many offices really implicitly understood, and maybe this is built off of David's work in explaining things to them for so long, that they they understood that unnecessary regulations are regulations that aren't effectively drafted, can really impede liquidity and increase the cost of capital in the CRE space. So they were I mean, our stuff is not the most scintillating, right? When you're when you're walking through the details, but they were They remain engaged and and very eager to help.
Rich Carlson: Yeah, I agree. I was impressed with how many of the congressional staff asked for some follow up info about certain things and I think that's a good sign. Raj, did these conversations reinforce anything that you've been seeing in the market?
Raj Aidasani (CREFC): honestly, the data we provided was the leave behind, not not so much the debate, but but preparing 28 of those pages reinforced something the the national conversation misses, which is how much the local mix matters. so if you if you only talk about office, you're really missing most of those markets. You know, and nationally, 69% of bank loans sit with community and regional banks, the same banks lending in those districts. So that that turns, you know, policy and bank capital into district issues. and lastly, on single family rental, the data answers a simple question, how big are the large investors really? well under one percent of homes nationally and concentrated in a handful of Sunbelt metros. And insurance costs is moving up the agenda. Chairman Flood said publicly on September 14th that it should be the focus of the next housing push. So those are the points I'd want an office to take away
Rich Carlson: Yeah, no, definitely very important. All right, so we're we're wrapping up here. So let's end with each of you and a quick look ahead. so Cyra, what's one regulatory issue that you're watching closely?
Sairah: I'm gonna cheat and and give you two.
Rich Carlson: huh.
Sairah: the final bank rule, as we discussed at length here, after years and years of back and forth, this has gone back to 2017 when when the Basel framework was approved internationally. We're close to knowing what the framework for the US will actually look like. And the details, especially as you know, Raj just mentioned for regional community banks, will really shape CRA lending moving forward. And then of course on the SCC side, really looking forward to a proposal. that will hopefully rationalize some of the reporting and regulatory requirements for public conduit.
Rich Carlson: Great. so David, what's one or two legislative issues that
David McCarthy: Ha ha.
Rich Carlson: you're watching?
David McCarthy: Well, I have to say all of them. I'm watching all of them. However, not fighting the the question, data centers. And as we talked about, you know, this is a political concern, but it also, I think there's some lessons here from the single family rental aspect. So as Raj kind of detailed in the data, like single family rental has kind of captured the imagination and kind of the political hot button. And that federal legislation moved with an impressive velocity. It really kind of emerged. the State of the Union from the president and then became law by July eleventh. that's light speed in congressional metrics. And so we need to be careful on the data center pieces too, because you know there are real issues that people have to deal with here. Energy costs, land use and things like that. But based on their media coverage here, you think that every square inch of this country is basically shovel ready project for data center. That is not the case here. And so we need to make sure that we're kind of cognizant of the political risks here, especially on the finance end. So a lot of the legislation right now is focused more on the energy usage and that piece, but we need to be watching for things that could have an impact on the actual financing because there's a lot of levers to pull from a regulation perspective or even congressional.
Rich Carlson: Great, thanks. Raj, are there any market developments that you're watching that could intersect with federal policy?
Raj Aidasani (CREFC): Yeah, so so it has to be interest rates and and how loans in this environment are getting resolved. the 10-year treasury is about five twenty-five as we record this. That's that's up more than a full point from four fourteen a year ago. So so I'm watching three things: payoffs, how much new cash borrowers have to put in, and and repeat extensions. And the trouble spot really is those loans that have gone past their final maturity. So each issue we talked about today affects the outcome. Banks hold about 400 billion of this year's maturities. The agencies hold about 50% of multifamily debt. nearly every refinancing needs insurance to close. And conduit is how smaller loans reach the bond market. So Policy is really a critical component of how that maturity wall gets refinanced.
Rich Carlson: those are all good points. It sounds like potentially servicers and special servicers are gonna be challenged with some volumes with some loans that are having some problems. And to your other points, you know, interest rates affect everything. I guess one final question. How do Kref C members get involved with any of these issues?
Sairah: You know, I think regardless of if we're looking at regulators or folks on the Hill, the most valuable thing members can provide for us is real examples. And when we talk to policymakers about how a rule might change, how a loan gets made, or specific details related to transaction dynamics, that's always more persuasive than a general argument. So we really love for Krepsy members to get involved in. Our policy committee, other working groups, providing input on comment letters and of course joining us for the for the fly-ins. You absolutely don't need to be a policy expert. I think David alluded to this earlier, but what's really helpful is when you explain to policymakers how the market actually works and how a specific proposal might potentially derail it.
David McCarthy: Yeah, showing up on the fly-in days is important, but showing up when we need context, data, and what isn't working for you is essential to make sure that we are saying the right things, that we are equipped with the knowledge. So reaching out to Syra, me, anybody on Cref C staff, getting involved, that really makes us effective. So I would just say get involved and stay involved.
Rich Carlson: I love that. Thanks. All right, well, thanks for joining us for this episode of Crefcy Signal. As we've heard, federal policy can sometimes seem removed from the day-to-day business of commercial real estate finance. But decisions around insurance, bank capital, housing policy, capital markets regulation, and other issues can have a direct impact on how capital moves through the market. And that's why Krefsi is bringing the industry's perspective directly to policymakers. Thanks for listening, and we'll see you next time on KrefC Signal.
Sairah: With two big.
Rich Carlson: What's the issue? Why does it matter? And what does it mean for CRE finance? Syra, why is it important to KrefC and its members to be having these conversations directly with policymakers?
Sairah: Sure, thanks Rich. Happy to be here. Most of my day-to-day work is with the regulators, mostly the the Fed, the FDIC, the OCC, and the SEC, both you know, directly in meetings with staff, leadership, and of course through the all-important comment letter. It's obviously critically important they understand the implications of proposed regulations on our markets. Also share with them when certain regulations aren't working the way they do or never have. But increasingly, decisions that affect our industry are being made in Congress. And that's one of the reasons David and I work closely together. The Road to Housing Act is a good example. It came out of Congress, not a regulatory agency. So we need members and their staff to understand how commercial real estate finance actually works. And then there's a second reason. When we're pushing on a regulatory issue, it really helps to have members of Congress who understand. this issue and who can weigh in with the agencies. Congress oversees these regulators and a letter or a question at the hearing from a member carries real weight. So our Hill meetings aren't all that separate from a regulatory work. They make it stronger. Let me hand it over to David.
David McCarthy: Thanks, Syra. you know, I echo what Cyrus says. Lawmakers like hearing from people directly, especially ones who know what they're talking about. So Syra and I bring these messages from our members day in and day out, what we with what we do here in DC. But hearing it directly from those people in the business can really drive that message home. there's also just this natural in-person aspect when you're there meeting with people. In their offices in DC, it creates a different dynamic for everybody involved. You know, you can ask those follow-up questions, you can see their demeanor, you can respond to things, and you can kind of go to things that aren't on the agenda where a virtual meeting or even over email just doesn't hit the same. So ultimately, this makes my job a lot easier because it shows that the Cref C members who show up for the fly-in back. What we say every day in DC. It gives us and the organization credibility and authority because those lawmakers, those regulators, those staffers know that we're connected to these leaders, these business folks, and we're talking with them day in and day out.
Rich Carlson: Excellent. Yeah, that's the those are great points. Thank you both. Raj, from the research perspective, what does the market data help us explain to policymakers that they might not otherwise see?
Raj Aidasani (CREFC): thanks, Rich. Happy to be here. I would say there there are three things. first, it makes the financing visible. a member can see the buildings in a district, but what they can't see is the capital behind them. For this fly-in, we built a one-page snapshot for each of the 28 offices on our meeting list. So across the 22 states, those pages cover, there's about 1.35 trillion. of securitized commercial and multifamily debt. So that's C B S, C R E C L O's, and the agencies. Second, it's mostly housing. Seventy one percent of that total is
Sairah: I
Raj Aidasani (CREFC): apartments, seniors housing, and manufactured housing communities. Even in New York, where office is 29% of the state, housing is still half the market. third, the pages name the actual properties Garden State Plaza in Paramus, Willis Tower in Chicago, Park Meadows Mall outside Denver, and apartments near the University of Nebraska in Lincoln. so that I think that's when it clicks for the policymakers. This affects a building that they drive past.
Rich Carlson: Yeah, that's a great point. And interesting fact about New York, I wasn't aware of how much of commercial real estate in New York is housing. So very interesting. All right, so now we're gonna talk a little bit about how Krefsi approaches a hill meeting. So when we walk into a congressional office, we have relatively short amount of time to explain a pretty complicated industry. So David, if you're sitting across the table from a congressional staffer, what's your approach? What do you want them to understand by the end of the meeting?
David McCarthy: Yeah. So in any of this, knowing your audience is always priority number one. And that's kind of a combination of the politics, the policy focus, their background in terms of the office, the member of Congress. Sometimes you have people who were commercial real estate
Sairah: Yeah.
David McCarthy: professionals or commercial real estate borrowers. And then also just their approach to legislating and legislation. So some people are always looking to do something. Some people will want to sign a letter. Some people want to introduce legislation. So knowing all that and going in helps you kind of prepare for what that meeting is going to be like. And usually I will say that members of Congress and their staffs are kind of preconditioned to expect an ask. They're always being asked for something, right? Like vote for this, sign on to this, sponsor this. you know, sometimes we always we don't have like a clear ask. Sometimes it's like pay attention to this. at the end of the meeting, what do we want them, what state do we want them to be in? I need them to understand that they know what I'm talking about, why they should care about it, and what they can or should do about it.
Rich Carlson: That's great. hey Sarah, how do you take something as complicated as, let's say, bank capital regulation and make it understandable to someone who isn't as immersed in commercial real estate finance every day?
Sairah: Sure. Yeah. I mean the people we meet with when we're at the fly in or if I happen to accompany David to s you know, one of his outside fly in meetings, the folks we meet with care very much about the cost and availability of financing. They Want their constituents from consumers to businesses large and small to be able to access financing at a at a fair and reasonable price. So if you look at the bank capital examp example, we give them kind of a overarching framework using Raj's data. We show them that banks hold nearly half of the debt that's financing commercial real estate. So If it costs more for a bank to hold certain types of loans, it will naturally cost more for the borrower if you kind of work it all the way through the the value chain there. And if it doesn't make sense for certain loans to be more costly for a bank, then you're certainly gonna see unintended negative consequences in the market. And so once you frame it that way, I think it becomes pretty easy for members and their staff to kind of understand the importance of the issues we're bringing up to them. And then just in terms of process, once we've sort of built that basic framework, we'll always just focus on one or two key priorities. we don't want to bog them down with details and then offer to send them sort of a comment letter or full analysis if they're interested.
Rich Carlson: Thanks. Yeah, that that was interesting how you could see various staffers had different levels of interest in certain topics. Raj, how important is it to have the market data behind the conversations?
Raj Aidasani (CREFC): so you know, it's it's the difference between an opinion and a fact pattern. a staffer hears from a dozen groups a day. what earns a second meeting is a number the office can check and reuse. and we and we try to make it local. For for Chairman Flood's office, the figure that matters isn't a national number. It's the six point three billion of securitized debt in Nebraska, eighty-six percent of it is housing. Every figure comes from TREP, Bloomberg, and the agency's own data. and we count each mortgage once. So an apartment loan that shows up in three different deals isn't counted three times. And lastly, we keep it to one page because these staffers are busy and we know a staffer will actually read one page.
Rich Carlson: so okay, before we move on, is there anything else as far as engagement with policymakers that we haven't covered?
David McCarthy: Yeah, I'd say that, you know, making that data and making the issues real for them is important. And it's also kind of coming to their level. even financial services staffers cover a huge portfolio of issues. And so when we come in there and talk about these things, giving them that context, but also talking about a way that kind of elevates the importance. So our members care about liquidity, right? a lot of staffers will know what liquidity is, but also a lot won't. So you have to bring that kind of lexicon to something that's real. We wanna make sure that it's easy to buy and sell real estate. We wanna make sure it's easy to make loans on real estate. you know, getting towards like what liquidity is actually, what that means. And You know, making sure that they understand those building blocks. Everybody has commercial real estate in their district. Everybody has housing. Everybody has multifamily housing. Those things matter. And showing them how it impacts them is important. People also care about the national conversation. And often that's intermediated by the press, which can do a good job or maybe a not so good job. So think about
Sairah: Good job too.
David McCarthy: any headline that comes to the Wall Street Journal. With the New York Times about commercial real estate, that is going to trickle into Congress. And they might not have all the context there. So we want to fill that in. And these meetings are a great opportunity
Rich Carlson: Yeah, I definitely agree. all right, so let's get started with an issue that might not immediately sound like a commer commercial real estate finance issue. Terrorism risk insurance. David, what is TRIA and why does it matter to CRE finance?
David McCarthy: TRIA is the Terrorism Risk Insurance Act. So this is basically a government backstop for terrorism risk insurance, and it was created after the 9-11 attacks, which were hugely devastating, both in human costs and the destruction waged by those horrific attacks. So, what happened after that is there used to be commercially available terrorism risk insurance. It was usually part of a policy. But we saw underwriters kind of pull that out after those attacks because just the magnitude of what happened and there it wasn't available. So Congress came together in 2002, stood up this program, which basically serves as a government backstop. I won't get into the specifics here, but essentially if there's a terrorist attack that causes losses of a certain level, the government step back in and act as kind of the insurer to those policies that have paid out. And it's split and kind of shifted over the years. but it essentially they cover 80% of the losses after the deductibles and things like that. So it's really a government backstop. It needs to be reauthorized occasionally. This will expire at the end of 2027. So what does that mean? After 2027, there won't necessarily be terrorism risk insurance coverage without this program. So what we're trying to do is get that program reauthorized ahead of time. So we can have certainty of a functioning market for terrorism risk insurance. And this is important for commercial real estate because if you've ever made a commercial real estate loan, and certainly in the securitization space, this coverage is actively required. Because loans make up a huge portion of the portion of the investment for the capital stack, and lenders want to make sure that they're covered in an event if a terrorist attack happens.
Rich Carlson: All right. Sarah, anything you'd want to add regarding the connection between insurance and lending and and the ability to finance C A E?
Sairah: Yeah, I mean I think David hit on it, you know, via the the tria example, but just to take it up a level, you know, generally insurance is a lender's protection, not its collateral. So if your building is damaged, it's what helps make the lender And in CMBS, it's Kate the bondholder as whole, and that's why, as David mentioned, every commercial mortgage requires the borrower to carry insurance. And if I can just do a very quick plug, our property risk and resilience committee has been increasingly focused on insurance issues over the past several years. while the market has softened a bit, and I'm talking here more about sort of like climate events and the like, you know, you did see, I think everyone remembers, you know, astronomical. rates and the a reduced ability to get coverage. So we've really been focused on that. there was you know, we heard from our members that in Some instances deals at the end of the day wouldn't close because insurance requirements couldn't be met. And then, you know, from a policymaker's perspective, insurance costs, don't just stay in the insurance market. They affect rents. like I just mentioned, deals that don't pencil and loans that are harder or are impossible to refinance. So while the market is easier right now, we're always just a few big st you know, storms away from a tougher environment. So it's something that Krepsy and the property risk and resilience committee is is very focused on.
Rich Carlson: Great. Yeah, that those are all great points, especially the trickle down effect and how insurance costs can affect rents. Raj, do we have any market data or a real world example that helps illustrate the importance of insurance availability to CRE finance?
Raj Aidasani (CREFC): Yeah, so in the fourteen months between September eleventh, two thousand one and when TRIA became law in
Sairah: Yeah.
Raj Aidasani (CREFC): November two thousand two, insurance companies stopped covering terrorism, but loan documents still required it. the real estate round table found that found more than fifteen point five billion of projects in seventeen states stalled or canceled. And in September 2002, Moody's downgraded 4.5 billion of CMBS because the properties didn't have full coverage. Basically, a lender needs coverage on the property that backs its loan. And a federal review found the found the private market can't fully replace the backstop. so and what's different today is scale. there's six point five trillion of CRE debt outstanding. And MBA counts eight hundred seventy five billion scheduled to mature this year. So nearly every one of those loans needs property insurance to re refinance. And for most lenders that includes terrorism coverage.
Rich Carlson: So David, what exactly is Krefsey asking Congress to do regarding TRIA? And what is our position on long term reauthorization?
David McCarthy: So David, what exactly is Kref C asking Congress to do regarding TRIA? And what is our position on long term reauthorization? So this this was an easy one for the day. There's two bills that have advanced. In the Senate it's S four three nine five and in the House it's HR seven one two eight. The House passed that back in June. The Senate has advanced that and frankly could pass it this week because there's such strong support for this. But each bill would reauthorize this program for seven years from its expiration. So this would extend it through 2034. Ultimately, the ask is get this to the president's desk in 2026. So when these policies are starting to be written in 2027, people can have that long-term certainty that that coverage is going to be there. If heaven forbid they need it.
Rich Carlson: let's move forward and move to something a little bit more technical. bank capital. Syra, what are the current bank capital proposals and why should someone working in commercial real estate care about?
Sairah: Yeah, so just for some context, earlier this year the banking agencies released basically a do-over of the two thousand twenty three Basel III and beam proposal. Comments were due in June. Krepsi filed its own letter along with leading a joint effort with ten other real estate groups. So the big headline was the change in direction. The 2023 version would have raised capital requirements significantly. This version, however, is roughly neutral, in some cases leads to lower capital requirements. And it did fix a few important issues that we flagged the last time around. So, to your question, you know, why should someone in commercial real estate care? They should care because banks are the single largest source of commercial real estate debt. these rules basically decide how much capital a bank has to hold against a variety of its CRE-related activities, for example, a construction loan, a warehouse line to a CMBS lender, or even investing in CMBS bonds. All of that flows directly into how much credit is available and what it costs.
Rich Carlson: Great. hey David, this sounds like a banking regulation issue. Why is Krefsi involved?
David McCarthy: So as I'm sure Raj will tell us, banks are 50% of the outstanding commercial real estate and multifamily debt market, but they're also instrumental in other forms of finance. And I think as Syra unpacks this and Raj unpacks this, it's an ecosystem. And that's what I tell folks on Capitol Hill. It's not just banks lending or it's not just non-banks lending, private debt or securitization. You need different sources of capital. And that's good for this system because if You know, one can pull back, another can kind of step in with different risk profiles. And that regulation can really drive a lot of this behavior. And so it's important for Congress to understand that what the regulators are doing, what is working, what is maybe not working, and what they might have to do about it in the future.
Raj Aidasani (CREFC): So to David's point, banks are the largest single source of capital in this market. Of the 6.5 trillion of Sierra debt outstanding, banks hold 3.1 trillion or 48%. Outside multifamily, their share is about 59%. In multifamily, they hold about 31%, second only to the agencies at 47%. Now, 69% of bank CRE loans sit at institutions under $100 billion in assets, in assets. So this is community and regional banks, basically the lenders in every district we visited. And banks hold the largest component of the maturity wall: $396 billion of the $875 billion scheduled to mature this year. And the market also shows what happens when bank appetite shifts. banks made 39% of CRE loans in 2023, 28% in 2024, and 35% in 2025. when they pulled back, the CMBS share doubled. and lastly, banks also hold about four hundred twenty-six billion of CMBS and fund the the warehouse lines behind it.
Rich Carlson: Great, thanks. so David, what do you think regulators got right in the latest proposal and what if anything would we like to see changed?
David McCarthy: So the regulators, what they got right this time was they were responding to conditions on the ground. During the last proposal, under the previous administration, there was a very strong bipartisan pushback that these capital rules were too punitive on a number of fronts, and that it would drive lending out of the banks. It would make the banks kind of unable to support different aspects here. So I know Syra's gonna get into and she's the expert on kind of the technical recommendations here, but this was kind of part of our argument when this was going on the first time. the proposals were not calibrated right to be supportive of commercial and multifamily real estate. So our comments were keyed towards that. And I think they listened on a lot of fronts. you know, overall the capital piece. is a capital relief on some accounts. And what I always described it as, kind of in the first iteration here, there were some actual proposals in the first capital rule, Basel Endgame, where commercial real estate actually got some better treatment from a lending perspective. But what I would describe it as maybe commercial real estate, if you're thinking of a bank as like a pie and it's it's kind of capital allocations, The commercial real estate lending could be a bigger piece of that pie, but if the pie is getting smaller, it's probably going to be less money for making commercial real estate loans. And remember, this is kind of coming out of the regional bank crisis. Banks had started pulling back generally. We're looking for other sources of capital. And I think our comments for the first time around demonstrated that this could also choke off other areas of capital from warehouse lending to securitization. So I think there was some good progress made on that, but I'll turn it over to Syra to get into the the actual details of what was changed and what we want.
Sairah: Yeah, no, absolutely. So, I mean, first we thank the regulators. They did take some of our comments on the last proposal, including very importantly a technical fix on how capital is calculated for securitizations, and that obviously matters for us. our comments on the latest proposal were narrow and technical, but again, very important, and two themes ran through them. One, capital should reflect actual risk, and banks need to be able to keep playing their role as We've talked through for the past several minutes in keeping the CRE markets liquid. And you know, it's a detailed comment letter, so I will just focus on a few of our most important issues. One, the first is how the regulators have decided to treat CRE loans depending on the size of the bank. So, in the current iteration, the largest banks get to use a much more tailored approach where the capital they have to hold depends on how risky loan is. Actually, it is. So how much equity the borrower has in the property and how strong the rated related cash flow is. But regional and smaller banks get one flat number for almost every CRE loan, just slightly trimmed from 100% in the previous iteration to 95%. So you could have a conservative loan with a lot of equity treated about the same as a much riskier one. And that penalizes even the safest lending at the smallest banks, which are some of the most active CRE. Yeah. And then finally, the data shows that CRE loans track equity and cash flow just as closely as residential mortgages do, which are getting the tailored approach at banks of every size. So one is just that inconsistency across banks. Two, as David mentioned, warehouse lending. Now, the couple of angles here. One is that the proposal says a structure only counts as a securitization. If its performance depends solely on the underlying loans. So the key word is solely. Many warehouse lines include a limited guarantee from the sponsor to cover short-term risks. So this one word could basically knock them all out of securitization treatment. And the bank would have to hold capital as if the loans had never been securitized at all. What we tried walking the regulators through is that these facilities relied mostly on the loans themselves, the cash flow, eligibility rules, extra collateral. Etc. The guarantee is just just a backstop. And then continuing on the warehouse lines theme, today a bank doesn't hold capital against a credit line that it can that it can cancel at any time, unconditionally cancelable lines. The proposal would change that and what require capital to be held against you know a specific percentage of the line, whether or not it's used. We explain that these lines aren't sort of, you know, like. credit cards. Every request to draw has to go through very detailed review and diligence by the bank and some loans just don't even, you know, get approved. So the risk is much lower than the proposal assumes. And finally, a really quick note on agency CMBS. The proposal lowers the minimum capital charge on senior private label CMBS from 20 to 50%, which we think is, you know, it makes sense. But it leaves agency CMBS at 20%, which is hard to explain, especially when the GSCs are in government conservatorship. So that was another thing we pointed out. If folks are interested in more, there's our comment letter and folks can read that if they want help going to sleep.
Rich Carlson: No, no, they're very interesting. I think you know, a lot of it seems to be education
Sairah: Well I'm logically.
Rich Carlson: regarding unintended consequences, and so I think the recommendations did a great job of addressing that. David, is there anything else you want to add here about Congress and and how they are involved in regulatory affairs?
David McCarthy: Yeah, so our kind of ask on this one was a little trickier. We have laid the groundwork there for engaging further. So Congress ultimately has the ability to change regulation through law. and they have done that. Actually, when I started at Creftsy, there was an effort that changed the high volatility commercial real estate regulations were which were at their core a capital rule dealing with construction lending. So I'm not saying it'll come to that. and they can always kind of tweak these after the fact too. It's a little bit harder, but but Congress needs to know what's going on. And we've been keeping them informed. So when it comes out, hopefully it's good. But if it's not, we have a plan of action.
Rich Carlson: So now we're gonna turn to housing. The Road to Housing Act has already become law, so David, what's the issue now?
David McCarthy: The issue is it's law, and now people have to figure out how to comply with it. So I won't go into the whole sorted history of how this thing came to be law, but it came very quickly and happened with a very, very large bipartisan majority. I mean, well over 90% in some cases. So essentially, and for those of us who don't know what we're talking about, we're talking about the provision that bans large institutional investors. From purchasing single family homes. And that's what it is. This is attempting to get at the so-called scatter site single family rental market. So, where, you know, the perception is that big institutions are buying these homes out from under first time home buyers and then renting them out to other folks. And so this has been kind of a trickling political issue at the state, and then the federal government has gotten involved. And the basic way it works is that. A large institutional investor is defined as any entity owning more than 350 single family homes. And a single family home, and I'm gonna read from the statute here, means a structure that contains two or fewer dwelling units. That are each intended for residential occupancy by a single household. And it does not include a manufactured home. So that that's it. That's that's kind of what the law bans. Now, of course, with any law, there are about 11 exceptions and all of these things that you can and cannot do. And so that's kind of where the rubber meets the road here. So what we talked about on Capitol Hill was saying, like, look, we get the policy. The wisdom of that notwithstanding, we need to make sure that this works from the market. And the biggest part of this is the build-to-rent space, which was not a target of this. There's an exemption for build-to-rent. There was a build-to-rent exception in the president's executive order that kind of predated this legislation. And for those of you who don't know, build-to-rent is kind of exactly what it says. People call it horizontal multifamily. It's basically building single-family homes. To rent them out rather than building a multifamily high-rise apartment building, you're building a bunch of homes. and this has kind of become the dominant part of this industry. And people might think of it as single-family rental, but it's not quite the same. You're not buying stock off the existing housing market there. So our comments to make this operational, trying to make the law work. There's all these exceptions. Not all of them are clear. There's some confusing parts in this regulation. And we just need to make sure that the back-end financing, servicing, all of that works both for build-to-rent and for the single family rental because it still allows certain type of activity. And I can get into those in a bit, but we're just trying to make this work within the parameters that Congress set.
Rich Carlson: Okay, thanks. So Syra, can you help explain some of Krebs's guidance, particularly around some of the exceptions like the bill to rent and the foreclosure and disposition exceptions?
Sairah: Yeah, and just really building onto what you know David laid out nicely, I think as he covered build-to-rent. So this law exempts purchases under our build-to-rent program. But there are several open questions we're, you know, trying to work through both us and with other trade associations, other market participants. for example, whether that covers existing and stabilized then built-to-rent communities when they change hands or only brand new construction. And that matters for lending. Because lenders underwrite the exit ultimately. And if a lender cannot be confident that the next buyer is allowed to buy the property, that loan will be harder to make. And ultimately, fewer communities will get built. And that sort of you know runs counter to the the premise behind the build-to-rent exemption. And then the second, Rich, as you noticed, foreclosure, that's another big focus. The law exempts the homes that a lender or servicer acquires through foreclosure. But again, lenders need clarity on how that actually will work in the real world. For example, once a lender owns that home, who can it sell to? Is there a sort of a time restriction? If the options are too narrow, you're faced with potential for sales at distress prices, which ultimately hurts recoveries and the neighborhood and again runs counter to the the point. of the legislation. so we've met with Treasury, walked through sort of some of our concerns here. We're not asking you know Treasury to rewrite the law, they absolut certainly can't do that and statute limits what they can change. But what we're asking for is clear guidance so that the you know exemptions Congress wrote actually do work as they're supposed to.
Rich Carlson: Great, thank you.
Sairah: Yeah, you know.
Rich Carlson: So Raj, why does this matter from a market perspective? Is there anything in the SFR or build to rent market that makes the timing important?
Raj Aidasani (CREFC): Yeah, so let's start with scale. Institutional investors own well under 1% of US single family homes and about 3% of single family rentals. Nearly 90% of rental homes belong to owners with one to five properties. The government accountability office studied six metro areas and found that the largest investors, those with at least 5,000 homes, On no more than 3% of the single-family homes in any of them. Institutional buying of existing homes has fallen more than 90% since 2022. Growth now comes from bill-to-rent, which adds supply. The Home Builders Association counted about 15,000 bill-to-rent starts in the second quarter. That was down from 18,000 a year earlier. They blamed part of that drop on uncertainty while this bill was pending. and now that the final law carves out bill to rent, they expect starts to level off. Lastly, lenders commit money before the homes are built. So clear guidance on the bill to rent foreclosure and transfer exceptions really matters before the law takes effect on January 7th.
Rich Carlson: Yeah, thanks for highlighting. I think clarity is to your point is for sure one of the most important factors here. So, David, you mentioned it a little bit earlier, but it's obvious that it's not just large institutional owners that need to worry about this. Can you provide a little bit of detail on why lenders or servicers or investors how they could be affected by how the law is implemented?
David McCarthy: Yeah, absolutely. And it's a great question because the penalties for this can be pretty draconian. So the law sets up that if there's a violation, so if you're a large institutional investor, you have 350 or more single family homes and you buy one more, the law says that Treasury and the Department of Justice can seek penalties up to a million dollars per violation or triple the price of the home, whichever is greater. So that is a pretty big stick in terms of trying to stop behavior here. And it's one thing if this just applied to the large institutional investors and just purchasing single family homes off the MLS. But because these definitions are so broad and because there's so many exceptions, figuring out how you fit into those definitions and exceptions is going to take a lot of time. And certainly forward looking guidance will be helpful there. But this is a The housing market is big. And even though that the single family rental market, as kind of Raj ran through the data, is relatively small comparatively, some of these transactions might look like these because of just the nature of things. So for example, if you're a servicer, there's an exception for a servicer taking back loans and taking back properties, and then you know, that it that is an exempted purchase. So that is allowed under this law. However, What happens after that? Can that servicer then sell? Let's say you take back a portfolio of a thousand single-family rental homes. Can that servicer then sell those homes to another large institutional investor? Well, if that servicer is a large institutional investor, the answer is pretty clearly yes. But if it's not because it doesn't have enough homes or or whatnot, it's not included in this, then the answer becomes more complicated. And so it's things like that because if you trip up, you could either one, be fined a lot of money, or two, be left with an asset that has really no legal buyers. And that's a bad, that's bad uncertainty. people have very detailed questions because these are highly negotiated and sophisticated transactions. And there's pretty easy ways to stay away from the truly quote unquote bad purchases buying off the MLS, but that's still allowed under some of these exemptions. So what we want to make sure is that there's clear rules of the road so that folks who are not intended to be captured by this are not, and that the market can function in the way Congress intended and not disrupt things that are already existing or things that are allowed, such as build to rent so people can kind of buy and sell those as Allow.
Rich Carlson: All right. Well, you know, January twenty twenty seven is right around the corner. Is there anything we could expect to happen between now and then?
David McCarthy: Congress did not require Treasury to make rules on this. So they have the option to make regulations to kind of clarify this, but they don't have to. This law goes into effect January seventh, with or without additional clarity. But from what we understand, they're moving quickly to to propose rules and get public comment on them. So the next kind of inflection point here is hopefully a proposed rule and then the opportunity to comment on that. So that's that's I think what we're looking for next.
Rich Carlson: All right, so we're gonna move on to our fourth and final issue, which is SEC CMBS regulation. we're sort of running out of time. So David, do you want to quickly tee up this one?
David McCarthy: I'm gonna pretend that we're talking to somebody who doesn't really know what securitization is. So, first of all, CMBS, commercial mortgage-backed securities, securitizations as loans packaged and sold as bonds to investors. Now, there's a couple of flavors of these. But some are publicly registered, which we call conduit. And these are generally made up of different property types of commercial real estate, loans backing those kind of across the country. And then there's the other kind of the non-registered market, which we call the 144As, which is a regulation that allows this. They're still, you know, regulated securities, but they're only available to qualified institutional buyers. And that means in an institution with $100 million or more. In investments. Only those buyers can purchase those. We call them single asset, single borrower deals, SASBY. Raj can kind of talk about those differences more. But you know, for a number of reasons, market-driven and regulation, the conduit market has shrunk drastically. So that publicly registered market, where we get a lot of this great data from. And one reason is that it's expensive to issue these from a paperwork and bureaucratic perspective. I know Syra has a lot to say about that.
Rich Carlson: Right, Syra, let us know what's what's the issue here with the duplicative reporting requirements.
Sairah: Yeah, absolutely. And I think one point we try to make with policymakers, both on the regulatory side and on the hill, is that CMBS is already one of the most transparent markets in fixed income. So we start with that. Every month investors get loan level data through the Krepsy Investor Reporting Package, the IRP, which Rich, of course, is one of your areas of expertise. The industry built it, has maintained it for decades, and it keeps Being updated as investor needs and the market changes. So it's the data that CMBS investors actually do rely on. However, complicating issues. After Dodd-Frank, the SEC added its own loan-level template called Schedule AL. Public deals now have to report two sets of data on the same loans in different formats, under different standards. All along the investors really do rely on the on the IRP. again, you know, in in many sort of comment letters we've written, we go into various reasons and descriptions as to how the IRP is is frankly superior to schedule AL. But this translates into a significant burden on an ongoing basis. you know, they they draw the distinction between corporate issuers and securitization issuers. A corporate issuer can generally stop filing. Reports at the SEC, so automatic suspension of filing reporting once it has fewer than 300 holders. Dodd Frank eliminated the statutory automatic suspension for securitizations and delegated that decision to the SEC. And under the SEC's current regulations, a public CMBS DO has to keep filing for its entire life, five or ten years, what have you, until there are no outside investors left. And as you can imagine, that means years and years of fees for lawyers and servicers and accountants, etc., for reports that investors ultimately don't use. And in another case of a severe penalty, you have it here, miss a single filing and an issuer can lose its ability to issue public deals for at least a year. That's a huge Huge deterrent to staying in the public market. So we've asked the SEC to restore the automatic suspension as well as rationalize some other reporting requirements so that essentially public CMBS can compete again. Investors, you know, would still get the IRP every month for the life of the deal, and the offering documents are always available. We have lobbed in you know a few common letters to the SEC on this point. We are, you know, according to the unified regulatory agenda that comes out of the agencies, the SEC has signaled that ABS disclosure reform is on the agenda. so we might see a proposal in the coming months.
Rich Carlson: hey Raj, what can you provide a little bit of perspective as to what has happened to the public CMBS market and how you think that it might be related to these regulations?
Raj Aidasani (CREFC): sure. So I mean basically it's gotten a lot smaller. In twenty fourteen, when Reg A B two was adopted, registered deals were about sixty-two percent of US private label CMBS. By twenty twenty four it was thirty percent, and in the first half of this year about twenty. some of that is the growth of single asset deals that David mentioned, which are mostly sold privately, but But conduit issuance itself is well below its 2014 level. And issuers point to the cost and penalties of registering with the SEC. And it matters because conduit is the main way smaller commercial loans reach the bond market, say a ten to forty million dollar mortgage in a secondary market. A smaller conduit market means fewer of those loans get financed that way. And in our view, the outcome is upside down. rules written to protect investors have pushed deals into the private market where there's less public reporting.
Rich Carlson: Those are good points. I think we've covered a lot of this, but is there anything else as far as what we would like to see happen or what next steps might be?
David McCarthy: This is one of those things where we told Congress, keep your eye on this space. We expect a rulemaking that might touch on this from the SEC, but it's important. And it's actually a really good story. we can come to Capitol Hill and the regulators and say, hey, look. We can reduce your costs without compromising the information that investors get. This is a win win win for everyone. we hope the SEC can give some relief, but if not, we can try to engage Congress to either give that relief through legislation or through kind of the bully pulpit with some letters or calls on there too. So that was our objective on this one.
Rich Carlson: Excellent. all right. Well, we've talked about four very different issues, terrorism insurance, bank capital, housing policy, and CMBS regulation. What connects all of these issues from a CRE finance perspective?
Sairah: I can Quickly share share my thoughts and then I know David can chime in, of course. for me, as we're whenever I'm examining proposed regulations or regulations that are outstanding and just not working, the common thread is really whether a market is appropriately liquid and if you know, if capital shows up, at what cost is it showing up and with what certainty. So, as we've walked through at length, for example, bank capital rules play a huge role in what banks invest in and lend against, and SEC. regulations determine whether CRE debt can be issued in the public market at a r at a reasonable cost. And at the end of the day, as you know, as David noted, win-win-win, we're not asking for weaker protections. What we're asking for are rules that match the actual risk inherent in different types of financing, underlying assets, and rules that are clear enough to underwrite against. When the rules aren't clear or are unnecessarily punitive and don't match underlying risks, capital you know, withdraws or becomes more expensive. And so we're all kind of hoping for a and working towards a more efficient, effective market.
David McCarthy: Yeah, at the end of the day, we just want to make sure that people can borrow against their commercial real estate and people can lend on commercial real estate. That's the end of it. You want to make sure that it's easy to do that within the appropriate risk parameters.
Rich Carlson: And Raj, any additional thoughts from your perspective?
Raj Aidasani (CREFC): I would say capital, you know, doesn't disappear when policy changes. It it either costs more or moves somewhere else. and the and the borrowers with the fewest options feel at first. and the result is higher cost. And to a borrower, a cost from a new rule is no different from a rate move. So, for example, on a $50 million loan, one extra percentage point is $500,000 a year in interest. And if the loan gets smaller, the owner has to put in more cash, which makes refinancing and new projects harder to get done. So now you apply that to a market with $875 billion scheduled to mature this year, a 10-year treasury above 5%, and office delinquency at 12%. a and because seventy one percent of the securitized debt in the in the states we covered is housing, the cost ends up landing on rental supply.
Rich Carlson: All right. so moving forward, we started this episode talking about the fall fly-in. After having these conversations with congressional offices, what did Krefsey hear?
David McCarthy: Yeah, I think there was a lot of interest. in addition to the issues we covered, there was certainly discussion about that, but data centers kind of came up organically. which is not surprising. We were prepared for that too, because data centers are heavily in the news. They're certainly kind of financed through various channels in our ecosystem. And Congress kind of needs to figure out what to do or not do about them. we had questions about data centers from detailing in terms of, what type of financing are they getting? Is it more like a commercial mortgage, or is it more like an operating, or is it more like an infrastructure? we had deep discussions with members and members of Congress about that and then some of it was about, you know, Rich, to kind of your efforts. It's like when we were looking at the the data from the IRP, it's like, why aren't data centers showing up in here, it's like, Well, we're working on that, or at Rich is.
Rich Carlson: Me and the data center working group are are working to address that. Syrah, did you hear any questions or concerns during the fly-in that surprised you?
Sairah: Honestly, I was I was pleasantly surprised at how many offices really implicitly understood, and maybe this is built off of David's work in explaining things to them for so long, that they they understood that unnecessary regulations are regulations that aren't effectively drafted, can really impede liquidity and increase the cost of capital in the CRE space. So they were I mean, our stuff is not the most scintillating, right? When you're when you're walking through the details, but they were They remain engaged and and very eager to help.
Rich Carlson: Yeah, I agree. I was impressed with how many of the congressional staff asked for some follow up info about certain things and I think that's a good sign. Raj, did these conversations reinforce anything that you've been seeing in the market?
Raj Aidasani (CREFC): honestly, the data we provided was the leave behind, not not so much the debate, but but preparing 28 of those pages reinforced something the the national conversation misses, which is how much the local mix matters. so if you if you only talk about office, you're really missing most of those markets. You know, and nationally, 69% of bank loans sit with community and regional banks, the same banks lending in those districts. So that that turns, you know, policy and bank capital into district issues. and lastly, on single family rental, the data answers a simple question, how big are the large investors really? well under one percent of homes nationally and concentrated in a handful of Sunbelt metros. And insurance costs is moving up the agenda. Chairman Flood said publicly on September 14th that it should be the focus of the next housing push. So those are the points I'd want an office to take away
Rich Carlson: Yeah, no, definitely very important. All right, so we're we're wrapping up here. So let's end with each of you and a quick look ahead. so Cyra, what's one regulatory issue that you're watching closely?
Sairah: I'm gonna cheat and and give you two.
Rich Carlson: huh.
Sairah: the final bank rule, as we discussed at length here, after years and years of back and forth, this has gone back to 2017 when when the Basel framework was approved internationally. We're close to knowing what the framework for the US will actually look like. And the details, especially as you know, Raj just mentioned for regional community banks, will really shape CRA lending moving forward. And then of course on the SCC side, really looking forward to a proposal. that will hopefully rationalize some of the reporting and regulatory requirements for public conduit.
Rich Carlson: Great. so David, what's one or two legislative issues that
David McCarthy: Ha ha.
Rich Carlson: you're watching?
David McCarthy: Well, I have to say all of them. I'm watching all of them. However, not fighting the the question, data centers. And as we talked about, you know, this is a political concern, but it also, I think there's some lessons here from the single family rental aspect. So as Raj kind of detailed in the data, like single family rental has kind of captured the imagination and kind of the political hot button. And that federal legislation moved with an impressive velocity. It really kind of emerged. the State of the Union from the president and then became law by July eleventh. that's light speed in congressional metrics. And so we need to be careful on the data center pieces too, because you know there are real issues that people have to deal with here. Energy costs, land use and things like that. But based on their media coverage here, you think that every square inch of this country is basically shovel ready project for data center. That is not the case here. And so we need to make sure that we're kind of cognizant of the political risks here, especially on the finance end. So a lot of the legislation right now is focused more on the energy usage and that piece, but we need to be watching for things that could have an impact on the actual financing because there's a lot of levers to pull from a regulation perspective or even congressional.
Rich Carlson: Great, thanks. Raj, are there any market developments that you're watching that could intersect with federal policy?
Raj Aidasani (CREFC): Yeah, so so it has to be interest rates and and how loans in this environment are getting resolved. the 10-year treasury is about five twenty-five as we record this. That's that's up more than a full point from four fourteen a year ago. So so I'm watching three things: payoffs, how much new cash borrowers have to put in, and and repeat extensions. And the trouble spot really is those loans that have gone past their final maturity. So each issue we talked about today affects the outcome. Banks hold about 400 billion of this year's maturities. The agencies hold about 50% of multifamily debt. nearly every refinancing needs insurance to close. And conduit is how smaller loans reach the bond market. So Policy is really a critical component of how that maturity wall gets refinanced.
Rich Carlson: those are all good points. It sounds like potentially servicers and special servicers are gonna be challenged with some volumes with some loans that are having some problems. And to your other points, you know, interest rates affect everything. I guess one final question. How do Kref C members get involved with any of these issues?
Sairah: You know, I think regardless of if we're looking at regulators or folks on the Hill, the most valuable thing members can provide for us is real examples. And when we talk to policymakers about how a rule might change, how a loan gets made, or specific details related to transaction dynamics, that's always more persuasive than a general argument. So we really love for Krepsy members to get involved in. Our policy committee, other working groups, providing input on comment letters and of course joining us for the for the fly-ins. You absolutely don't need to be a policy expert. I think David alluded to this earlier, but what's really helpful is when you explain to policymakers how the market actually works and how a specific proposal might potentially derail it.
David McCarthy: Yeah, showing up on the fly-in days is important, but showing up when we need context, data, and what isn't working for you is essential to make sure that we are saying the right things, that we are equipped with the knowledge. So reaching out to Syra, me, anybody on Cref C staff, getting involved, that really makes us effective. So I would just say get involved and stay involved.
Rich Carlson: I love that. Thanks. All right, well, thanks for joining us for this episode of Crefcy Signal. As we've heard, federal policy can sometimes seem removed from the day-to-day business of commercial real estate finance. But decisions around insurance, bank capital, housing policy, capital markets regulation, and other issues can have a direct impact on how capital moves through the market. And that's why Krefsi is bringing the industry's perspective directly to policymakers. Thanks for listening, and we'll see you next time on KrefC Signal.
