Colony Capital’s Thomas Barrack warns that commercial mortgage markets are in danger
Colony Capital CEO Thomas J. Barrack Jr. writing a column warning that the financial infrastructure that underpins the commercial real estate sector was in serious danger of imploding unless immediate policy action was taken. The CMBS market virtually closed, he noted, as large margin calls on repurchase agreements led to a severe liquidity crunch across the entire real estate finance market.
“If these actions continue in the CMBS market and spread to the broader commercial real estate lending market, the economic impact, amplified by widespread total industry shutdowns across the entire U.S. economy, could be exponentially worse. that the economic effects of the crash of 1987, September 11th attacks and recession of 2008, combined,” he wrote. “The long-term impact on the economy could be catastrophic.”
Barrack made several suggestions that could ease the tensions in the market.
- The SEC could introduce temporary holiday marketing rules that would free up billions of dollars in cash overnight. Mark-to-market rules wreaked havoc on repo transactions last week, he said.
- Suspend requirements under US GAAP for COVID-19 related loan modifications that would otherwise be classified as a TDR. Also, suspend any determination of a loan modification due to the effects of COVID-19 as a TDR. (On Sunday, regulators gave banks more leeway modifying loans for borrowers affected by coronavirus without having to label the loan as TDR.)
- Suspend the CECL accounting rule for banks. Barrack said its impact is “incredibly pro-cyclical, which is not helpful at a time when we need loans to sink, not shrink.” A suspension of CECL until at least 2024 will allow banks and non-bank SEC filers to make billions of dollars available to borrowers by releasing regulatory capital from their balance sheets.
- Do more to allow banks to refrain from returning collateral without triggering liquidity coverage ratios. Cautious banking regulators in recent days have encouraged banks to use their cash and capital buffers and the Fed’s discount window to provide assistance to their customers, but more can be done, he said. . “The fractured banking regulatory environment – Fed, OCC, and FDIC – should be streamlined for faster future decision-making.”
Without action, the consequences will be disastrous, Barrack warned.
“If these institutions are not allowed to maintain the flexibility and patience necessary to undertake the loan restructuring efforts that will be essential to weather the COVID-19 crisis, loan repayment demands are likely to increase to a systemic, triggering a domino effect of borrower defaults that will have a rapid and severe impact on the wide range of stakeholders across the real estate market, including building and home owners, landlords, developers , hotel operators and their respective tenants and employees.
“At a time when liquidity is essential to avert public panic and to facilitate investments that respond to rapidly changing and unprecedented economic conditions, the real estate finance market risks prompting a liquidity freeze.”
Barrack isn’t the only player seeing weakness in trading markets. Earlier this month, investor Carl Icahn Told CNBC that it is shorting the commercial mortgage bond market in anticipation of a meltdown in the commercial real estate market. Specifically, it shorts credit default swaps – assets that back office and shopping center mortgages.