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S. HRG. 111–320 COMMERCIAL REAL ESTATE FIELD HEARING CONGRESSIONAL OVERSIGHT PANEL ONE HUNDRED ELEVENTH CONGRESS SECOND SESSION HEARING HELD IN ATLANTA, GEORGIA, JANUARY 27, 2010 Printed for the use of the Congressional Oversight Panel ( jbell on DSKDVH8Z91PROD with HEARING Available on the Internet: http://www.gpoaccess.gov/congress/house/administration/index.html VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00001 Fmt 6011 Sfmt 6011 E:\HR\OC\A522.XXX A522 jbell on DSKDVH8Z91PROD with HEARING VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00002 Fmt 6019 Sfmt 6019 E:\HR\OC\A522.XXX A522 COMMERCIAL REAL ESTATE S. HRG. 111–320 COMMERCIAL REAL ESTATE FIELD HEARING CONGRESSIONAL OVERSIGHT PANEL ONE HUNDRED ELEVENTH CONGRESS SECOND SESSION HEARING HELD IN ATLANTA, GEORGIA, JANUARY 27, 2010 Printed for the use of the Congressional Oversight Panel ( Available on the Internet: http://www.gpoaccess.gov/congress/house/administration/index.html U.S. GOVERNMENT PRINTING OFFICE WASHINGTON 55–522 : 2010 jbell on DSKDVH8Z91PROD with HEARING For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800 Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00003 Fmt 5011 Sfmt 5011 E:\HR\OC\A522.XXX A522 CONGRESSIONAL OVERSIGHT PANEL PANEL MEMBERS ELIZABETH WARREN, Chair RICHARD H. NEIMAN PAUL ATKINS DAMON SILVERS jbell on DSKDVH8Z91PROD with HEARING J. MARK MCWATTERS (II) VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00004 Fmt 5904 Sfmt 5904 E:\HR\OC\A522.XXX A522 CONTENTS Page jbell on DSKDVH8Z91PROD with HEARING Statement of: Opening Statement of Elizabeth Warren, Chair, Congressional Oversight Panel .............................................................................................................. Statement of Kasim Reed, Mayor of Atlanta ................................................. Statement of Paul Atkins, Member, Congressional Oversight Panel .......... Statement of Damon Silvers, Deputy Chair, Congressional Oversight Panel .............................................................................................................. Statement of J. Mark McWatters, Member, Congressional Oversight Panel .............................................................................................................. Statement of Richard Neiman, Member, Congressional Oversight Panel ... Statement of Jon Greenlee, Associate Director, Division of Banking Supervision and Regulation, Board of Governors of the Federal Reserve .... Statement of Doreen Eberly, Acting Atlanta Regional Director, Federal Deposit Insurance Corporation .................................................................... Statement of Brian Olasov, Managing Director—Atlanta, McKenna, Long, and Aldridge .................................................................................................. Statement of David Stockert, Chief Executive Officer, Post Properties ...... Statement of Chris Burnett, Chief Executive Officer, Cornerstone Bank ... Statement of Mark Elliot, Partner and Head of the Office and Industrial Real Estate Group, Troutman Sanders ....................................................... Statement of Hal Barry, Chairman, Barry Real Estate Companies ............ (III) VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00005 Fmt 5904 Sfmt 0483 E:\HR\OC\A522.XXX A522 1 1 7 7 12 16 20 36 64 70 98 111 130 jbell on DSKDVH8Z91PROD with HEARING VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00006 Fmt 5904 Sfmt 0483 E:\HR\OC\A522.XXX A522 ATLANTA FIELD HEARING ON COMMERCIAL REAL ESTATE WEDNESDAY, JANUARY 27, 2010 U.S. CONGRESS, CONGRESSIONAL OVERSIGHT PANEL, Atlanta, GA The Panel met, pursuant to notice, at 10:04 a.m. in room 132, Georgia Institute of Technology, 85 Fifth Street, NW, Atlanta, Georgia 30308, Elizabeth Warren, Chair of the Panel, presiding. Present: Elizabeth Warren [presiding], Damon Silvers, Richard Neiman, Paul Atkins, and Mark McWatters. Index: Elizabeth Warren, Damon Silvers, Richard Neiman, Paul Atkins, and Mark McWatters. OPENING STATEMENT OF ELIZABETH WARREN, CHAIR, CONGRESSIONAL OVERSIGHT PANEL Chair WARREN. This hearing of the Congressional Oversight Panel will now come to order. My name is Elizabeth Warren. I’m the Chair of the Congressional Oversight Panel. I’d like to start this morning by thanking Georgia Tech for the use of the facilities, and I also want to thank the staff of Congressman John Lewis for working with us and with our staff in helping to plan this hearing. I am joined this morning by the rest of our panel. The Deputy Chair, Damon Silvers of the AFL–CIO, and then further down on my left is Superintendent of Banking for the State of New York, Richard Neiman. On my right is Paul Atkins, who a former Commissioner of the Securities and Exchange Commission, and on my far right is Mark McWatters an attorney and certified public accountant. This is the full Congressional Oversight Panel. We are glad that we can all be with you today to learn about commercial real estate. And I would like to start by recognizing the Mayor of Atlanta. We are honored to have you here, Mr. Mayor, and hope that you can give us some remarks to help us get started on this hearing. Mr. Mayor. STATEMENT OF KASIM REED, MAYOR OF ATLANTA jbell on DSKDVH8Z91PROD with HEARING Mr. REED. Madam Chair, distinguished members of the Panel, welcome to Atlanta. Good morning. It’s a pleasure to welcome you to our city and to one of the nation’s premier institutions of higher learning, Georgia Tech. I believe that Georgia Tech is an ideal environment for this important panel to conduct its work. Problem solving is indeed etched into its culture. Known for educational excellence and aca(1) VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 E:\HR\OC\A522.XXX A522 jbell on DSKDVH8Z91PROD with HEARING 2 demic rigor, the solution to many, many tough problems have been conceived on this historic campus. It is my sincere hope that this tradition will continue as some of our country’s greatest tests face us right now. As a newly elected mayor, I am especially grateful that the Congressional Oversight Panel has chosen our city as the site for these crucial discussions on the condition of the commercial real estate market. Atlanta is a city whose fiscal ebb and flow is closely tied to the fortunes of this sector of the local and national economy. It is not news to anyone certainly in this room that our city has been one of the hardest hit commercial real estate markets in the United States. Commercial property values have seen sharp declines. Applications for new construction permits have fallen off to the most alarming levels that I have seen in 50 years, and we have had more than 30 banks fail in Georgia in the last two years. The current rate of decline is untenable. I use the word untenable after much consideration because a declining commercial real estate market has a compounding impact on our city’s tax base, our employment levels, and the availability of affordable housing for our families, and this threat to the vitality of our city, our nation, and our state must be met with action. That said, I do want members of this panel to know that the scope of the challenges that Atlanta faces are substantial, but we are willing to work as partners. Our citizens are uniquely aware of the existing realities and the burdens to be born in order to turn around our local, regional, and national economy, but we are also very optimistic in our hope that there is an impending recovery. And we know that your work is an important part of the recovery. We hope that the solutions developed from today’s discussion will play a role in the reversal of fortune within the commercial real estate market and, by extension, the larger economy. Please know that in our city you have a partner who is willing to work with experts from the public and private sector to stabilize the various markets within our economy. Thank you for the opportunity to speak with you today, and may your hearings be just as productive as they are necessary. Thank you, and welcome to Atlanta. Chair WARREN. Thank you very much, Mr. Mayor. We appreciate it. We are going to start with some opening statements from the panelists and then we’ll call our first panel of witnesses. So thank you, Mr. Mayor, for being with us. Mr. REED. Thank you. Chair WARREN. The Congressional Oversight Panel was established in October of 2008 to oversee the expenditure of the $700 billion dollar Troubled Asset Relief Program, or TARP, as it is commonly known. We issue reports every month on different topics, mostly trying to evaluate the Treasury Department’s administration of this program and their efforts to stabilize our economy. As part of our work, we travel from area to area to try to go to the places that have been hard hit by various aspects of the financial crisis. This morning we have come to Atlanta to learn more about the wave of foreclosures and vacancies sweeping through your commercial real estate markets. VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00008 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 jbell on DSKDVH8Z91PROD with HEARING 3 To prepare for this hearing we did some research and what we discovered was deeply disturbing. We learned that vacancy rates for Atlanta retail and office space grew throughout 2009, eventually topping 20 percent. Commercial property values have declined across the board and the price per square foot of office space has fallen by 50 percent. These declines have severely threatened bank balance sheets, contributing to the failure of 30 Georgia banks since August of 2008, more than any other state in the nation. Many experts believe that Atlanta’s experience could foreshadow a problem that could echo across the country. Such a crisis could cause damage far beyond the borrowers and lenders who participate in any one transaction. More empty storefronts means more lost jobs, more lost productivity, and prolonged pain for middleclass families. Commercial loan defaults could lead to deep losses for banks and potentially raise the specter of more taxpayer-funded bailouts. Foreclosures in apartment complexes and multifamily housing developments could push families out of their residences even if they have never missed a rent payment. And because the modern financial industry is so deeply interconnected, a downturn in the commercial credit markets could spread to the rest of our financial system. Against this backdrop, the Panel is holding today’s hearing to explore the troubles in commercial real estate. We hope that by learning from Atlanta’s experiences, we may better advance our oversight responsibilities and public understanding of this important problem. No one can predict the course that commercial real estate will take. The problems appear at a time when banks are already weakened by massive losses. So we need to closely examine the stability of our banks. For example, the stress test conducted last year examined financial institutions only through 2010. We ask the question how these institutions will cope with a commercial real estate crisis that may produce losses in 2011, 2012, and 2013. Whether or not Treasury and Federal Reserve have fully examined this question and made appropriate provisions will be a part of our oversight question. And given that TARP itself is due to expire in October of this year, we raise a question about how much TARP can do to address these challenges. We also note that commercial real estate poses particular threats to small and midsize banks, which are often the key sources of loans for commercial projects in their communities. Given these smaller banks have never faced stress tests, how likely are smaller financial institutions to survive a significant shock in commercial real estate? How can the Treasury’s programs, which until now have focused on supporting the very largest financial institutions, provide adequate support to smaller banks? What are the implications for the FDIC if the rate of bank failures, already high, starts to rise at a steeper rate? These are hard questions, and we are grateful to be joined by experts who can begin to find the answers, including government experts representing the Federal Reserve, the FDIC, as well as local bankers and investors. We thank you all for your willingness to share your perspectives and we look forward to your testimony. VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00009 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 4 jbell on DSKDVH8Z91PROD with HEARING The Chair calls on Mr. Atkins, if you’d like to make some opening remarks. [The prepared statement of Chair Warren follows:] VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00010 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00011 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert graphic folio 16 55522A.001 jbell on DSKDVH8Z91PROD with HEARING 5 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00012 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert graphic folio 17 55522A.002 jbell on DSKDVH8Z91PROD with HEARING 6 7 STATEMENT OF PAUL ATKINS, MEMBER, CONGRESSIONAL OVERSIGHT PANEL Mr. ATKINS. Thank you, Madam Chair, and thank you all for coming today. And thank you, Mr. Mayor for your kind remarks and welcome to the city. And thank you very much to the witnesses who have come to appear before us today and share their insights. I very much look forward to hearing from you today. There is no question that commercial real estate in the U.S. experienced a boom in the last ten years just like in the residential housing market. Business confidence was high. Risk capital was available aplenty. The cost of money was low, even by historical standards. So even what might have been marginal deals seemed to have gotten done anyway. So too much money was chasing too few deals. I want to leave as much time as possible for the witnesses to talk, so I don’t want to talk myself today. But the things that I really am interested in hearing about from the witnesses, of course, is the current state of the commercial real estate market here in Atlanta and also in the United States as a whole. And the two aspects of that that are really crucial to me are, obviously, we have a clear oversupply of commercial real estate space. But is our problem just a supply side one? What about the demand side? Obviously, we have been and are still going through economic issues on the national level and even on the global level. And so some of those economic problems, obviously, are affecting the demand for commercial real estate space. People are reluctant to invest or take on obligations of new loans or take on risk because of uncertainty in the future. That has to do with microeconomic and macroeconomic regulatory and legislative issues, taxation, fiscal issues, all those sorts of things, and I’d love to hear your perspective on how those compare here in Atlanta and also the United States as a whole. So thank you very much, and I yield the balance of my time. Chair WARREN. Thank you. Mr. Silvers. jbell on DSKDVH8Z91PROD with HEARING STATEMENT OF DAMON SILVERS, DEPUTY CHAIR, CONGRESSIONAL OVERSIGHT PANEL Mr. SILVERS. Thank you, Madam Chair. Good morning. Like my fellow panelists, I’m very pleased to be here in Atlanta and grateful for the help and the presence here today of Atlanta’s mayor, Kasim Reed. I also want to extend my appreciation again for the assistance of the office of Congressman John Lewis, one of the people in public life whom I admire most. The Emergency Economic Stabilization Act of 2008, which gave rise to TARP, sought to address both the immediate and acute crisis that ripped world markets in October of 2008 and the deeper causes of that crisis in the epidemic of residential foreclosures. The purpose of the Act was not to stabilize the financial system for its own sake, but to do so in order that the financial system could play its proper role of providing credit to Main Street. Since this panel began its work a little more than a year ago, we have continued to ask three questions. First, is TARP working effectively to stabilize the financial system? Secondly, is that same financial system, as a result of TARP, doing its job of providing credit to Main VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00013 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 jbell on DSKDVH8Z91PROD with HEARING 8 Street, and, three, is TARP functioning in a way that is fair to the American people? Today’s hearing on the impact of difficulties in the commercial real estate market is really about all three of these questions. There is three-and-a-half trillion dollars in U.S. commercial real estate debt. Five hundred billion of that debt will mature in the next few years. There was clearly a bubble in the commercial real estate values prior to 2008. We’ve heard already a fair amount about that. But it is not clear the extent of the bubble. Meaning it’s not clear how much of those—of those values were unsustainable and how much was real. As a result, the return of commercial real estate prices to levels that are supported by real estate fundamentals is a potential source of systemic risk. For example, recently Bank of America was allowed to repay TARP funds in a manner that weakened its Tier 1 Capital ratios. Meanwhile, here in Atlanta, Bank of America is dealing with large commercial real estate problem loans in properties like Streets of Buckhead, and it’s quite unclear what the outcome in those circumstances is going to be. In addition, it is unclear whether the financial system as a whole is healthy enough to provide financing for properties even when they are properly priced, let alone financing for new development. Finally, there is the question of the impact of the decline on commercial real estate values on smaller banks. This goes to the fairness point part of our mission. In Georgia there have been 30 bank failures since August of 2008. These banks have gone through the FDIC resolution process resulting, insofar as I know, their disappearance as independent entities. The contrast between the impact of the financial crisis on small banks and on very large failing financial institutions, that received both extraordinary TARP assistance and assistance from the Federal Reserve System, appears to raise fundamental issues of fairness. I hope in this hearing we will address these questions, and, in the process, help the Panel to advise the Treasury Department and Congress as to what steps, if any, need to be taken in the area of commercial real estate. I do not believe it is either desirable or possible to prevent commercial real estate prices from returning to sustainable levels. The goals here should be to ensure that the collapse of the bubble in commercial real estate has little, if any, systemic impact, that financing remains available for both existing property and new construction that is rationally priced, and that the federal government conducts itself in this area in a manner that is fair to both small and big financial institutions and to communities where commercial real estate financing is vital to maintaining community vitality and jobs. In reviewing the materials our staff helpfully provided for this hearing and the testimony of our witnesses, I cannot help but be struck by the contrast between the bonuses being announced this week by the institutions the public rescued on Wall Street and the unabated tide here in Atlanta and across this country of unemployment, residential and commercial foreclosures, and jobs that, not only are lost, but not being created. VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00014 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 9 jbell on DSKDVH8Z91PROD with HEARING President Obama has rightly asked the big banks to help pay for TARP, but more needs to be done to restore fairness to our economy and financial system. I hope that this hearing can provide concrete ideas we can bring back to the Treasury and Congress for how TARP can be managed to be part of the solution the Mayor referred to earlier for communities like Atlanta. Solutions that lead the financial system to play in its proper role as a creator and not a destroyer of jobs and communities. Thank you. [The prepared statement of Mr. Silvers follows:] VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00015 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00016 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 25 here 55522A.003 jbell on DSKDVH8Z91PROD with HEARING 10 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00017 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 26 here 55522A.004 jbell on DSKDVH8Z91PROD with HEARING 11 12 Chair WARREN. Thank you, Mr. Silvers. Mr. McWatters. jbell on DSKDVH8Z91PROD with HEARING STATEMENT OF J. MARK McWATTERS, MEMBER, CONGRESSIONAL OVERSIGHT PANEL Mr. MCWATTERS. Thank you, Professor Warren. I very much appreciate the attendance of the distinguished witnesses that we have today, and I look forward to hearing your views. In order to suggest a solution to the challenges currently facing the commercial real estate or CRE market, it is critical that we thoughtfully identify the sources of the underlying difficulties. Without a proper diagnosis, it is likely that we may craft an inappropriately targeted remedy with adverse, unintended consequences. Broadly speaking, it appears that today’s CRE market is faced with both an oversupply of CRE facilities and an undersupply in prospective tenants and purchasers. In my view, there has been an unprecedented collapse of demand for CRE property, and many potential tenants and purchasers have withdrawn from the CRE market, not simply because rental rates and purchase prices are too high, but because the business operations do not presently require additional CRE facilities. Over the past few years, while CRE developers have constructed new facilities, the end users of such facilities have suffered the worst economic downturn in several generations. Any posited solution to the CRE problem that focuses only on the oversupply of CRE facilities to the exclusion of the economic difficulties facing the end users of such facilities appears unlikely to succeed. The challenges confronting the CRE market are not unique to that industry, but, instead, are indicative of the systemic uncertainties manifest throughout the larger economy. In order to address the oversupply of CRE facilities, developers and their creditors are currently struggling to restructure and refinance their portfolio loans. In some instances, creditors are acknowledging economic reality and writing their loans down to the market with, perhaps, the retention of an equity participation right. In other cases, lenders are merely kicking the can down the road by refinancing problematic credits on favorable terms at or near par, so as to avoid the recognition of losses and the attendant reductions in regulatory capital. While each approach may offer assistance in specifically tailored instances, neither addresses the underlying economic reality of too few tenants and purchasers for CRE properties. Until small and large businesses regain the confidence to hire new employees and expand their business operations, it is doubtful the CRE market will sustain a meaningful recovery. As long as business persons are faced with the multiple challenges of rising taxes, increasing regulatory burdens, enhanced political risks associated with unpredictable governmental interventions in the private sector, as well as uncertain healthcare and energy costs, it is unlikely that they will enthusiastically assume the entrepreneurial risk necessary for protracted economic expansion and a recovery of the CRE market. It is fundamental to acknowledge that the American economy grows one job and one consumer purchase at a time, and that the CRE market will recover one lease, one sale, and one financing at a time. With the ever expanding array of less than friendly rules, VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00018 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 13 jbell on DSKDVH8Z91PROD with HEARING regulations, and taxes facing business persons and consumers, we should not be surprised that businesses remain reluctant to hire new employees, consumers remain cautious about spending, and the CRE market continues to struggle. The problems presented by today’s CRE market would be far easier to address if they were solely based upon the mere oversupply of CRE facilities in certain well-delineated markets. In such event, a combination of restructurings, refinancings, and foreclosures would most likely address the underlying difficulties. Unfortunately, the CRE market must also assimilate a remarkable drop in demand from prospective tenants and purchasers with CRE properties who are suffering a reversal in their business operations and prospects. In my view, the Administration could promptly jumpstart the CRE market as well as the overall economy by sending an unambiguous message to the private sector that it will not directly or indirectly raise taxes or increase the regulatory burden of CRE participants and other business enterprises. Without such express action, the recovery in the CRE market will most likely proceed at a sluggish and costly pace that may foreshadow the Secretary’s allocation of additional TARP funds to financial institutions that hold CRE loans and commercial mortgage-backed securities. Thank you for joining us today, and I look forward to our discussion. [The prepared statement of Mr. McWatters follows:] VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00019 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00020 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 32 here 55522A.005 jbell on DSKDVH8Z91PROD with HEARING 14 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00021 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 33 here 55522A.006 jbell on DSKDVH8Z91PROD with HEARING 15 16 Chair WARREN. Thank you, Mr. McWatters. Superintendent Neiman. jbell on DSKDVH8Z91PROD with HEARING STATEMENT OF RICHARD NEIMAN, MEMBER, CONGRESSIONAL OVERSIGHT PANEL Mr. NEIMAN. Thank you. I am very pleased to be here in Atlanta. Atlanta has a special meaning to me. I went to law school here at Emory. I even started my career in bank regulation here in Atlanta as an intern for the regional office of the control of the currency. This hearing continues the Panel’s commitment to issues around it, credit availability, community banking, and commercial real estate. It’s been six months since our first hearing on these issues, which was held in New York City, and it is the right time to revisit them. New York has a unique concentration of commercial real estate properties. But, as the recession has lingered, regional business hubs, such as Atlanta, are under increasing pressure as well. Atlanta, in particular, experienced a surge in commercial real estate development during the boom years. And from my days here in Atlanta, I vividly recall—in fact, I even worked at the Hyatt Regency in the sky bar that went around the restaurant, around and around. You could see the entire city, and now you’re looking probably at the thirtieth floor of the building next to you. Now high vacancy rates for office space here are compounding as a fallout from the financial crisis. Reevaluating the growing risks in this sector is a top priority, and that is why commercial real estate is the subject of the Panel’s first hearing in the New Year. Commercial real estate is not a boutique lending niche of importance only to a subset of lenders and borrowers. Commercial real estate impacts every community on multiple levels, so understanding this sector is an important aspect of stabilizing our national economy. When people think of commercial real estate they often just think of properties, such as office buildings, shopping malls, and hotels, but commercial real estate also includes multifamily and affordable housing units, from rental apartment complexes to condos. This is the financing that provides accommodation for jobs, for conducting business, and for living. I know that we will hear a lot today about the risk that troubled commercial real estate loans present for bank balance sheets, and that is certainly a critical consideration, particularly for me, as a bank regulator. But financial stability begins and ends with the well-being of our neighborhoods, and our families, and our national economy. It is the health of our communities that is our ultimate concern. For multiple family buildings in particular, there is a concern that the property’s condition will deteriorate as the owner’s cash flow is diverted to making debt payments. Further, tenants who pay their rent on time can find themselves homeless because their landlord defaulted on the underlying commercial mortgage. In New York we are developing progressive solutions that can serve as models for stabilizing multifamily housing units nationwide. Foremost is Governor Patterson’s 2009 mortgage reform legislation, which provides new protections for renters when their VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00022 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 17 jbell on DSKDVH8Z91PROD with HEARING landlord is in foreclosure. Our state housing finance agency is also developing a pilot program to convert unused luxury units to affordable housing. There is still another way in which commercial real estate intersects with people’s daily lives, and that is the impact of community banks. Community banks not only provide a proportionately large share of commercial real estate financing, they also are key sources of credit to small businesses, an engine of growth for job creation. We have seen growing numbers of smaller banks fail recently and anticipate that this trend will continue. These small bank failures, which could be increasingly driven by commercial real estate defaults, creates holes in our communities. Where there was once a flourishing center for responsible hometown lending, there can be a vacuum. This means less credit may be available for small businesses as well as for consumer lending. The meltdown in residential subprime mortgages caught many by surprise. But with commercial real estate we have more advance warning of the scope and the magnitude of the developing problem. It is my hope and intent that today’s hearing will not only assess the magnitude of the problem, but will also explore potential market-based and public policy solutions. I look forward to your testimony and to your innovative ideas. Thank you. [The prepared statement of Mr. Neiman follows:] VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00023 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00024 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 39 here 55522A.007 jbell on DSKDVH8Z91PROD with HEARING 18 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00025 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 40 here 55522A.008 jbell on DSKDVH8Z91PROD with HEARING 19 20 Chair WARREN. Thank you Superintendent Neiman. We call our first panel now. Our first panel, while they are taking their places, I will go ahead and introduce them. Our first panel of witnesses today will consist of government banking regulators from the Federal Reserve and the Atlanta office of the FDIC. And I’m pleased to welcome Jon Greenlee, who is the Associate Director of the Division of Banking and Supervision for the Board of Governors of the Federal Reserve System. Thank you, Mr. Greenlee. And Doreen Eberley, the Acting Director of the Atlanta Regional Office of the FDIC. I am going to ask each of you if you would limit your oral remarks to five minutes, but we have read your testimony and it will become part of the written record of this hearing. So with that, I would like to present you Mr. Greenlee for five minutes. jbell on DSKDVH8Z91PROD with HEARING STATEMENT OF JON GREENLEE, ASSOCIATE DIRECTOR, DIVISION OF BANKING SUPERVISION AND REGULATION, BOARD OF GOVERNORS OF THE FEDERAL RESERVE Mr. GREENLEE. Thank you, Chair Warren, and members Neiman, Silvers, Atkins and McWatters. I appreciate the opportunity to appear before you today to discuss trends in the commercial real estate sector and other issues related to the condition of the banking system. Although conditions in the financial markets continue to show improvement, significant stress remains and borrowing by business and households sectors remain weak. The condition of the banking system remains far from robust, loan quality continues to deteriorate across many asset classes because of the economic downturn, increases in unemployment, and weaknesses in real estate markets. As a result, many banking organizations have experienced significant losses and are challenged by poor earnings and concerns about capital adequacy. In Georgia, the performance of banking organizations has also deteriorated. Like their counterparts nationally, banks in Georgia have seen a steady rise in non-current loans and provisions for loan losses, which have weighed on bank earnings and capital, and 30 banks have failed in the state since the turmoil in financial markets first emerged. Substantial financial challenges remain, and, in particular, for those banking organizations that have built up unprecedented concentrations in commercial real estate loans, given the current strains in the real estate markets. From a supervisory perspective, the Federal Reserve has been focused on CRE exposures for some time. In 2006 we led the development of interagency guidance on CRE concentrations to highlight the importance of strong risk management over these types of exposures. On October 30th of last year the federal and state banking agencies, including my colleagues at the FDIC, issued guidance on CRE loan restructuring and workouts. This guidance is designed to address concerns that examiners may not always take a balanced approach to the assessment of CRE loans. One of the key messages in the guidance was that for renewed or restructured loans in which borrowers who have the ability to repay their debt according VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00026 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 21 jbell on DSKDVH8Z91PROD with HEARING to reasonably modified terms, will not be subject to examiner criticism. Consistent with our longstanding policies, this guidance supports balanced and prudent decision-making with respect to loan restructuring and timely recognition of losses. At the same time, our examiners have observed incidents where banks have been slow to acknowledge declines in commercial real estate cash flows and collateral values in their assessment of potential loan repayment. As noted in the guidance, the expectation is that the bank should restructure CRE loans in a prudent manner and not simply renew a loan to avoid a loss recognition. Immediately after the release of this guidance, the Federal Reserve developed an enhanced examiner training program and we have engaged in outreach with the industry to underscore the importance of the principles laid out in that guidance. Finally, in late November, the Federal Reserve’s TALF program financed the first issuance of CMBS since mid-2008. Investor demand was high. And in the end, non-TALF investors purchased almost 80 percent of the TALF eligible securities. Shortly thereafter, two additional CMBS deals without TALF support came to market and were positively received by investors. Irrespective of these positive developments, market participants anticipate that CMBS delinquency rates will continue to increase in the near term. In summary, it will take some time for the banking industry to work through this current set of challenges and for the financial markets to fully recover. The Federal Reserve is committed to working with Congress and the other banking agencies to promote the concurrent goals of fostering credit availability and a safe and sound banking system. Accordingly, we thank you for holding this important hearing, and I look forward to your questions. Thank you. [The prepared statement of Mr. Greenlee follows:] VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00027 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00028 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 46 here 55522A.009 jbell on DSKDVH8Z91PROD with HEARING 22 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00029 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 47 here 55522A.010 jbell on DSKDVH8Z91PROD with HEARING 23 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00030 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 48 here 55522A.011 jbell on DSKDVH8Z91PROD with HEARING 24 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00031 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 49 here 55522A.012 jbell on DSKDVH8Z91PROD with HEARING 25 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00032 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 50 here 55522A.013 jbell on DSKDVH8Z91PROD with HEARING 26 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00033 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 51 here 55522A.014 jbell on DSKDVH8Z91PROD with HEARING 27 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00034 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 52 here 55522A.015 jbell on DSKDVH8Z91PROD with HEARING 28 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00035 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 53 here 55522A.016 jbell on DSKDVH8Z91PROD with HEARING 29 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00036 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 54 here 55522A.017 jbell on DSKDVH8Z91PROD with HEARING 30 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00037 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 55 here 55522A.018 jbell on DSKDVH8Z91PROD with HEARING 31 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00038 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 56 here 55522A.019 jbell on DSKDVH8Z91PROD with HEARING 32 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00039 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 57 here 55522A.020 jbell on DSKDVH8Z91PROD with HEARING 33 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00040 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 58 here 55522A.021 jbell on DSKDVH8Z91PROD with HEARING 34 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00041 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 59 here 55522A.022 jbell on DSKDVH8Z91PROD with HEARING 35 36 Chair WARREN. Thank you, Mr. Greenlee. Ms. Eberley. jbell on DSKDVH8Z91PROD with HEARING STATEMENT OF DOREEN EBERLEY, ACTING ATLANTA REGIONAL DIRECTOR, FEDERAL DEPOSIT INSURANCE CORPORATION Ms. EBERLEY. Good morning Chair Warren and members of the panel. I appreciate the opportunity to testify on behalf of the Federal Deposit Insurance Corporation concerning the condition of the commercial real estate market in Atlanta and its impact on insured institutions’ lending. As you noted in your invitation letter, the real estate market in the Atlanta metropolitan area has been hard hit. My testimony will describe the factors that led to the difficulties in the Atlanta housing market and the manner in which those difficulties have translated to high levels of loan losses and bank failures. I will discuss weaknesses we have started to see in the Atlanta area market for other types of real estate, such as office, retail, hotel, and industrial properties. And, finally, I’ll describe the supervisory actions regulators are taking to address these risks. The Atlanta area was ranked first in the nation in single-family home construction each year from 1998 to 2005. In response to an increased demand for housing stock, residential development activity increased and many FDIC-insured institutions headquartered in the Atlanta area exhibited rapid growth in their acquisition, development, and construction or ADC portfolios. This growth resulted in significant concentrations in ADC loans. The FDIC monitored the growth of ADC loans in the Atlanta area as it occurred and attributed the growth to local institutions meeting the housing needs of an increasing population. What was not really apparent, however, was the increasing volume of subprime and nontraditional mortgage originations in the market. The increased availability of these types of mortgages turned out to be a significant factor driving housing demand. Demand for vacant developed lots in the Atlanta market collapsed shortly after subprime and nontraditional mortgage originations were sharply curtailed in 2007. The resulting imbalance between supply and demand has led to deterioration in the performance of residential development loans, which comprised the bulk of the ADC portfolios of Atlanta area financial institutions. The impact of this deterioration has been magnified by the disproportionately high concentration of ADC loan lending. At year end 2007, Atlanta-based institutions reported a weighted average ADC concentration that was nearly three times higher than that reported by similar institutions in other metropolitan areas. Losses experienced by Atlanta banks on ADC portfolios have also been higher than the national average, and poorly performing portfolios of ADC loans have been a significant factor in recent bank failures. The 25 institutions from the Atlanta area that have failed since the beginning of 2008 reported a weighted average ADC concentration a year before failure of 384 percent of total capital. While Atlanta’s residential development market remains strained with reports of a ten-year supply of vacant developed lots, weaknesses are now emerging in the Atlanta area market for other categories of real estate, such as office, retail, hotel and industrial VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00042 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 37 jbell on DSKDVH8Z91PROD with HEARING properties. Atlanta ranks among the top ten markets, in terms of vacancy rates across these categories. As a result, performance of these loans has started to deteriorate. Contrary, to what we’ve seen in ADC portfolios, loss rates and non-performing rates experienced by Atlanta institutions for the largest category of commercial real estate loans—those that have non-farm, non-residential property as collateral—are comparable to national averages. It’s not greater. Also, Atlanta area financial institutions are proportionately less exposed to this segment of the market than it appears in other metropolitan areas. In response to the risks in the Atlanta and other commercial real estate markets, the FDIC has maintained a balanced supervisory approach. We identify problems and seek corrections when there are weaknesses, while remaining sensitive to the economic and real estate market conditions and the efforts of bank management. Through industry guidance we have encouraged banks to continue making loans available to credit-worthy borrowers and to work with mortgage borrowers that have trouble making payments; we have required banks to have policies and practices in place to ensure prudent commercial real estate lending; and we have encouraged prudent and pragmatic commercial real estate workouts within the framework of financial accuracy, transparency, and timely loss recognition. Finally, we believe that financial reform proposals currently under consideration can play a role in mitigating the types of risks that have led to significant losses in the Atlanta market. For example, the FDIC believes that consideration of a borrower’s ability to repay is a fundamental consumer protection that should be enforced across the lending industry. Establishment of such a standard at the federal level should eliminate regulatory gaps between insured depository institutions and non-bank providers of financial products and services by establishing strong, consistent consumer protection standards across the board. In addition, we support the creation of a process to oversee systemic risk issues, develop new prudential policies, and mitigate developing systemic risks. With the benefit of hindsight, it’s fair to say that during the years leading up to the crisis, systemic risks were not identified and addressed before they were realized as widespread industry losses. The experience in Atlanta is illustrative. During the years of rapid ADC loan growth local financial institutions and their supervisors did not fully appreciate the growing risks posed by the availability of subprime and nontraditional mortgage products. Examples such as this underscore the benefit of monitoring systemic risks to assess emerging risks using a system-wide prospective. [The prepared statement of Ms. Eberley follows:] VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00043 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00044 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 66 here 55522A.023 jbell on DSKDVH8Z91PROD with HEARING 38 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00045 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 67 here 55522A.024 jbell on DSKDVH8Z91PROD with HEARING 39 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00046 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 68 here 55522A.025 jbell on DSKDVH8Z91PROD with HEARING 40 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00047 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 69 here 55522A.026 jbell on DSKDVH8Z91PROD with HEARING 41 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00048 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 70 here 55522A.027 jbell on DSKDVH8Z91PROD with HEARING 42 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00049 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 71 here 55522A.028 jbell on DSKDVH8Z91PROD with HEARING 43 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00050 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 72 here 55522A.029 jbell on DSKDVH8Z91PROD with HEARING 44 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00051 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 73 here 55522A.030 jbell on DSKDVH8Z91PROD with HEARING 45 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00052 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 74 here 55522A.031 jbell on DSKDVH8Z91PROD with HEARING 46 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00053 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 75 here 55522A.032 jbell on DSKDVH8Z91PROD with HEARING 47 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00054 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 76 here 55522A.033 jbell on DSKDVH8Z91PROD with HEARING 48 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00055 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 77 here 55522A.034 jbell on DSKDVH8Z91PROD with HEARING 49 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00056 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 78 here 55522A.035 jbell on DSKDVH8Z91PROD with HEARING 50 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00057 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 79 here 55522A.036 jbell on DSKDVH8Z91PROD with HEARING 51 jbell on DSKDVH8Z91PROD with HEARING 52 Chair WARREN. Ms. Eberley, that’s all for now. Ms. EBERLEY. Thank you. Chair WARREN. Okay. Thank you very much. So we’re going to see if we can go through a round of questions here. What I’d like to start with, since we have two people who supervise the regulators in front of us, is I’d like to talk a little and ask them a bit about the role of the regulators in the run up to this crisis. The rules governing lending, obviously, are going to be critical in understanding the problem and trying to shape some kind of solution. Now, as I understand it, 2005, 2006 there was a significant deterioration in bank underwriting standards. In 2006, there was an interagency guidance concerning risks to banks having large concentrations of commercial real estate, and the banks complained about this guidance because it would have restricted the amount of concentration that they could have had in lending, and, as a result, the guidance was changed. The regulations were, in fact, weakened so that there was less regulatory oversight. So what I’d like to start with is a question about the role that the regulators played in the run-up to this crisis and maybe a grade for how the regulators did. Mr. Greenlee. Mr. GREENLEE. Thank you for that question. From our perspective, commercial real estate in particular, is an area that we’ve been focused on for quite some time. We did identify building concentrations in the earlier part of the decade, and we got together with the other agencies to try to find a way to make sure that as banks were continuing to expand in that area and that they were managing the risk associated with commercial real estate appropriately. And we issued the guidance in 2006 that you are referencing. Chair WARREN. But the guidance, that was weakened when the banks complained. Mr. GREENLEE. We were trying to balance our guidance, in terms of not, you know, overlaying too stringent of requirements on banks, but allowing them to pursue their business plans. Chair WARREN. So in 20/20 hindsight—— Mr. GREENLEE. At the same time make sure—— Chair WARREN [continuing]. How has that worked out for us? Mr. GREENLEE. I think in 20/20 hindsight, you look back, and, as we have mentioned in both our testimonies, the commercial real estate concentrations have become a significant problem. Chair WARREN. What I’m asking about though is the role of the regulators in those concentrations. The regulators had the power to make sure that this didn’t happen. What went wrong? Mr. GREENLEE. Our guidance was really aimed at trying to get the banks to manage those concentrations in a more effective way. Particularly through the use of stress testing to gain a broader understanding of what potential difficulties in the marketplace could mean to overall bank solvency, and to have the banks take the responsibility for managing that risk in a prudent and effective way. Chair WARREN. Let me switch then. Let me go to the current context, since we’re going to be pressed on time. To what extent did the banks, the current banks, recognize their commercial losses? Are the losses now acknowledged on the books of the banks? Are VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00058 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 jbell on DSKDVH8Z91PROD with HEARING 53 the books of the banks reliable on the question of commercial real estate losses, Mr. Greenlee? Mr. GREENLEE. One of the purposes of the guidance that we issued last October, as I mentioned in my statement, was that we had come across incidents where banks were slow to recognize losses. In some instances, banks had renewed and restructured loans in ways that may not have increased the ability of that borrower to repay the loan in full. So, in part, we were trying to send a message to the industry too that they need to recognize their losses in a timely manner. Our—— Chair WARREN. My question is how much confidence do you have that they’ve done that? Mr. GREENLEE. For our examiners that is a main focus of their onsite examination process. There are a few outliers, our supervisors are addressing them and making sure that the banks are taking losses as appropriate. Chair WARREN. I don’t think I’m hearing an answer though. Are you confident that that has now been accomplished, that the books accurately reflect the commercial real estate losses? Mr. GREENLEE. As commercial real estate markets continue to be under pressure, I think there could be more losses. Our examination process is designed to—— Chair WARREN. But you feel confident that they’re at least current today? Mr. GREENLEE. I think in terms of individual, specific banks there may be some question. As such, we continue our supervisory efforts to make sure they are recognizing their losses. It’s a very hard question to kind of answer in a broad way, because it is very institution-specific as to whether or not the banks have good risk management and loss recognition practices. Chair WARREN. Ms. Eberley, I’m sorry, I didn’t mean to ignore you during this. Ms. EBERLEY. That’s okay. Chair WARREN. We have such short periods of time. Would you like to add to either one of those questions about the role of the regulators or where we stand? Ms. EBERLEY. Yes, I will. To the second question, I think that the point that Mr. Greenlee is making is an appropriate one, that this is an ongoing process for financial institutions. They’re required to take a look at their loans on a regular basis as they do their call reports to the federal regulators. Their financial statements every quarter have to be an accurate reflection of their financial condition. Chair WARREN. So you’re confident in the books now? Ms. EBERLEY. I wouldn’t say that the losses are over, if that’s your question. Chair WARREN. That’s not my question. My question is whether or not the books currently reflect appropriately the risks that these banks face? Ms. EBERLEY. I think, yes, generally they do. There are outliers, but generally they do. Chair WARREN. Thank you. Mr. Atkins. Mr. ATKINS. Okay. Thank you very much. Let’s circle back around to that. I think that was a good question with respect to VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00059 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 jbell on DSKDVH8Z91PROD with HEARING 54 the guidance back in the middle part of this decade. When it came out, and I guess I am on more of a security side than a banking side, but I assume that basically the purpose of the guidance was to call attention to and to impact management to make sure that they were looking for and taking into account various types of disaster scenarios and things like that. So, just to follow up on the question, when that guidance was revised, in what way was it revised? And did it have any impact with respect to how banks were treating their loans or undertaking new transactions? Mr. GREENLEE. When we issued the guidance, we did put it out for public comment, and, as you noted, we got a lot of comments back from the industry and other participants. And, as we do with everything we put out for public comment, we tried to take those responses into account as we worked toward the final issuance of the guidance. One chief concern that many people expressed at that time was, again, concern that their business plans and the lending that they were primarily engaged in, commercial real estate. There were also concerns about effects on local economies and profitability of the institution as a whole. As regulators, we try to strike a balance to make sure that the banks understand what the downside scenarios are, that they have thought about that, in terms of their capital planning, and conducted proper stress testing so that the banks understand the capital impact. We also tried to ensure that they understand the need to have effective processes in place to manage the risks that they’re taking on in their institutions. Mr. ATKINS. Ultimately, it was their decision and not the regulators’ decision, and we have had sort of a hundred or a thousandyear type of storm. But looking forward at current types of activity in the marketplace, obviously, it’s very far down. And one of the issues that gets raised over and over is how bank examiners might be dampening the ability or willingness of bankers to undertake new loans. And so I salute the the guidance, the training, and the other things that you have been doing, because, as I know from personal experience from the early 1990s when we went through a similar thing, the regulators are not always as responsive. But it sounds like you are trying. So I was wondering do you have any assessment of how effective that’s being, because, obviously, we don’t want to have the dreaded ‘‘F’’ word of forbearance. Do you perceive that examiner scrutiny is depressing the willingness of bankers to be active in this marketplace? Ms. EBERLEY. I don’t believe so. I think the greater constraints are capital constraints that financial institutions are operating under because of the volume of troubled assets that they have on their books, and, additionally, liquidity concerns. I think those are the two greatest constraints to institutions being able to lend. Mr. ATKINS. With respect to demand then—well the liquidity constraints and that sort of thing—but also the demand from business folks who are looking to take out loans. What we’re seeing, of course is a depression of the demand. I guess we’ll hear more about that later. But are you seeing that nationwide as a whole or is it regionally focused? VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00060 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 jbell on DSKDVH8Z91PROD with HEARING 55 Mr. GREENLEE. From what we’re hearing and observing, the demand for credit is down considerably. Loans to businesses and consumers alike have been dropping in the banking system. We have done a lot of work and we continue to try to better understand, the supply and demand effects of credit. We hear stories just like you do that the examiners perhaps are impeding credit being made available to borrowers. We follow up on those things. And we have issued supervisory statements, such as the November 2008 statement encouraging banks to make prudent loans. And in the CRE guidance, it is especially important in terms of the effect it has on small businesses, because a lot of small business loans are secured by the real estate that the business owner owns or the business owns. So we were trying to think about that as well. Mr. ATKINS. Well, my time is up, so thank you. Chair WARREN. Thank you. Mr. Silvers. Mr. SILVERS. Thank you. I’ll try to continue the thread here. We are looking at this ultimately from the perspective of our responsibilities and the relationship to TARP. What actions, if any, should or might be taken with TARP funds or with the powers that the bill passed by Congress in the crisis gives the Treasury to address commercial real estate? And, in order to begin to do that, we need to begin by asking, ‘‘What’s the problem here?’’ You mentioned—I think each of you mentioned—liquidity as a potential issue and you mentioned capital, the capital constraints in financial institutions. Those seem to be two possible diagnoses of, I think, what your testimony and the testimony of our witnesses that will follow you suggest is an absence of commercial real estate finance in this market and, to a significant degree, nationwide. So can you comment on the relevant importance of those two issues to start off? Mr. GREENLEE. In terms of looking at the banks that we supervise and particularly the local community banks that specialize and have concentrations in commercial real estate, I agree with my colleague that the capital constraints, the liquidity concerns that they have, are a significant factor in their willingness and ability to continue to make commercial real estate loans or loans in general. We also try to think about the broader marketplace, and the CMBS market is an important provider of commercial real estate financing. And, as you know, we expanded the TALF program for CMBS to provide some stability to that market and try to bring some investors back in. That has actually worked. We had one recent CMBS issuance of TALF, and then following that, two more were issued without TALF financing. So the broader CRE liquidity in the marketplace is an important consideration. And it also gets to investors’ willingness to take on this risk, and how they’re pricing it, and how they see the future for real estate prices. Mr. SILVERS. Ms. Eberley. Ms. EBERLEY. I would say that capital is the most significant concern facing financial institutions here in the Atlanta area, with liquidity as the second. Mr. SILVERS. Let’s focus on capital for a moment. I must say, I am inherently suspicious of complaints about liquidity, the reason being that my liquidity crisis is your belief that I am deluding my- VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00061 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 jbell on DSKDVH8Z91PROD with HEARING 56 self, as to the value of the asset I’m trying to sell. So I want to focus on capital. If that’s the major problem, that our financial institutions are undercapitalized, that would suggest that perhaps—Ms. Eberley, you raised the issue of trying to get assets off the books. Is that a plausible solution, meaning if assets are moved off of bank books at fair—at rational prices today, would that solve a liquidity crisis, or, I mean, solve the capital crisis or would it exacerbate it? Ms. EBERLEY. I would say it would exacerbate it. The institutions need the capital to be able to sell loans at prices that the market will pay. What they are doing now is they are recognizing market value declines as they occur, typically on a quarterly basis, since they file their financial statements with the regulators, and—and it erodes capital over time. Mr. SILVERS. And so now—— Ms. EBERLEY. And economic recovery would also help. Mr. SILVERS. Yes. And I share the comments, the views of my colleagues, that all these things are driven by larger economic forces. But can you all comment on the relative capital strength as you perceive in this marketplace as between community banks, larger regional institutions, and national players? Is there a capital problem across the board or is this limited to one or more segments of the banking industry? Ms. EBERLEY. I’ll speak to the community banks. They came into this crisis with very strong capital levels compared to historic norms, very strong capital, which has been fortunate. Mr. SILVERS. So you would say that, in fact, community banks are not where the capital problem resides. Ms. EBERLEY. No. I said they came into the crisis with very strong capital. It’s—— Mr. SILVERS. Finish the thought then. Ms. EBERLEY. Yes. They definitely are facing capital pressures now. It would have been far worse had they not come in with the strong capital levels that they did at the beginning of the crisis. Mr. SILVERS. And then can you comment—I know that you don’t regulate the larger institutions directly, but—but you certainly pay attention to them, given the fact that you insure them. Can you comment on the other segments? Ms. EBERLEY. I’d like to defer to Mr. Greenlee to talk about capital—— Mr. SILVERS. That’s fine. Ms. EBERLEY [continuing]. With the larger institutions. Chair WARREN. We’re going to have to be short. We’re over time. Mr. GREENLEE. I would just quickly say that part of the supervisory stress test we conducted last Spring, the Supervisory Capital Assessment Program (SCAP), was designed to ensure that the largest institutions had an adequate capital base to weather an adverse economic scenario. And they have been able to raise significant amounts of capital since that time. Mr. SILVERS. So they are lending freely right now in this market? Mr. GREENLEE. They are making loans, but the loan balances overall are declining. Chair WARREN. Mr. McWatters. VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00062 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 jbell on DSKDVH8Z91PROD with HEARING 57 Mr. MCWATTERS. Thank you. You know, I’ve heard a lot of problems. We have a lot of problems. But if you had to summarize in a one-page memo to your immediate supervisor, who asked you, how do I orchestrate a soft landing of the CRE market, what would you say and why would you say it? Mr. GREENLEE. I think that’s an interesting question. I would say the one thing that we do know is that the broader economic environment, the recession and increases in unemployment have been a significant factor in commercial real estate prices falling, and vacancies rising. In terms of trying to get prices to stabilize or potentially recover, the economic environment is going to be a key factor. Ms. EBERLEY. I think what the regulators have already done is the most important step that we can make, which is to encourage institutions to engage in reasonable workouts of loans with borrowers that have the ability to pay. Perhaps not make the same payment they were making before, but the ability to continue making payments to the institution at a reduced basis. Loans can be reworked, restructured, partially charged down, and the inter-agency guidance addresses all of the options and specifically says that regulators will not criticize bank management for engaging in that sort of activity. Mr. MCWATTERS. So it’s a bit of a kick the can down the road with the expectation or, with the hope, that prices will recover, and that prices will recover when more tenants are competing for the properties, more purchasers are competing for the properties. And that will only happen when their underlying businesses become stronger. Ms. EBERLEY. I wouldn’t call it a kick the can down the road. I would call it a recognizing the economic reality of today. Loans are going to have to be written down. There will have to be some partial write downs, and reworking, and restructuring, but it doesn’t have to be a complete loss. There are ways to move forward. Mr. MCWATTERS. Okay. Do you see a lot of simple refinancing at existing prices with the expectation that prices will recover for the property? Ms. EBERLEY. Do you mean just rolling over a loan and—— Mr. MCWATTERS. Rolling it without writing down and impairing regulatory capital. Taking losses in the light which effects share value and so forth. Ms. EBERLEY. We do occasionally. And there’s two ways that that happens. One way is with a borrower that has the ability to continue servicing debt, and making payments, and amortizing a credit. Another way is—is where an institution would just refinance the loan, set a payment date in the future, and say you’ll pay us then, and that’s not acceptable. Mr. MCWATTERS. Okay. Okay. How about an update on TALF and PPIP? Where is that going and what’s the future? Mr. GREENLEE. I can speak to TALF. My understanding is that the last Federal Open Markets Committee (FOMC) indicated that the TALF programs will be winding down on their scheduled dates. But the FOMC also reserved the right to modify that schedule if conditions warrant it is deemed appropriate. VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00063 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 jbell on DSKDVH8Z91PROD with HEARING 58 Ms. EBERLEY. In terms of PPIP, there haven’t been any Treasury or taxpayer funds used to support a PFIF-type partnership. There have been for the partnerships form basis supported by FDIC funds or guarantees. And we continue to work on ways to refine the program. Mr. MCWATTERS. I guess one more question. Every time I speak with someone who wants to refinance or wants to borrow money, they say they can’t refinance or they can’t borrow. But what I hear from a lot of regulators and a lot of other people is, ‘‘Yeah, it’s happening.’’ A lot of banks are refinancing. Where is the disconnect? And what’s happening in the marketplace? If I have an underwater property that I want to refinance, how difficult is it? I mean is it actually being done? Mr. GREENLEE. In my discussions with bankers, I hear that it is being done when they can do it in a prudent and effective way, when a borrower has the willingness and ability to make payments on a restructured basis. Ms. EBERLEY. My discussions with examiners would indicate the same, that it is being done. Mr. MCWATTERS. Okay. That’s all. Chair WARREN. Commissioner Neiman. Mr. NEIMAN. I’d like to follow up on the CRE guidance and regulatory accounting, because I think there is a lack of full understanding by the public and the media, as to the purpose and the objectives of the CRE guidance. You know, sometimes people refer that it provides the ability for institutions to extend and pretend, because it does not automatically consider an underwater loan to be impaired, requiring that it be written down, if there is an expectation of repayment. Could you elaborate on why regulators put first priority on loan performance and the expectation of being repaid according to contract terms compared to with collateral? I think it would be helpful just to go into that in a little more detail. Ms. EBERLEY. Certainly. I think that first and foremost, when examiners are looking at loans and financial institutions, the very first focus is on a borrower’s ability to repay the debt. We look to the borrower. We expect financial institutions to look to the borrower, not to look to the sale of collateral. Ability to repay is the fundamental tenet of lending that we expect in community institutions. Mr. NEIMAN. And would you agree that loans that were paying, the fact that the loan is being held to maturity, if they were required to mark these loans based on collateral, you would have a great deal of volatility in those balance sheets without really referencing the true credit risk of that loan? Ms. EBERLEY. So you’re saying, if a fair market value were adopted on a wholesale basis for loan portfolios? Mr. NEIMAN. That’s right. Ms. EBERLEY. Yes. It would. It would inject a lot of volatility. Mr. NEIMAN. Would you like to comment on issues around calls to impose a full fair market accounting on loan portfolios held by banks? Mr. GREENLEE. I think that you have highlighted one of the key considerations since a lot of the issues we were dealing with con- VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00064 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 jbell on DSKDVH8Z91PROD with HEARING 59 cern how to value the assets. We have gone through a period where valuations have been challenged, particularly with some of the mortgage-backed securities. I think the question you raise is really a question of at what value do you have a buyer. While a buyer would buy at distressed level, which would be a valuation of a different kind than just looking at the collateral values. Mr. NEIMAN. I want to come back to these differences, and we’re going to hear a lot, I assume, from the second panel, on the difference between credit risk and term risk. There are really two categories of commercial borrowers who are going to be facing default. One group that faces a credit risk due to fundamentals like increasing vacancies and decreasing rent rolls or an inability to make those payments. And another group who are paying on time and have sufficient cash flow on projects that are performing, but the value of the collateral has declined so much that in any refinancing they would have to come up with sufficient equity to refinance that project and have an inability to do that and thus face default or foreclosure. Can you elaborate on what are the key drivers? Where do you see those falling out and impacting banks, which are the key drivers to foreclosures in commercial real estate? Mr. GREENLEE. I’ll comment first. I think we have seen a lot of construction projects, for example, come to completion or be running into difficulties in the last few years in particular. That is why the whole focus on the borrower’s ability to repay, to sell the property, or to find a permanent investor, is such an important issue and that is where we have tried to focus. Some of our thinking behind this guidance that we issued last October was to try to address the other point you were making about the huge amount of refinancing risk that we see on the horizon and we know the property values have declined. Even if the borrower does have the ability and willingness to pay, the terms and conditions, and what the values are going to be, potentially are very different than when the original loan was made. And so our thought was that we need to find a way to restructure these loans. We need to find a way to enable these people that have an ability and willingness to repay, to stay in that property. We believe that is better for the bank and for everyone involved. Mr. NEIMAN. Do you want to comment? Ms. EBERLEY. I have nothing to add. I agree completely. Chair WARREN. Thank you. I’m actually just going to pick up on the same theme in a short question. We are talking about the importance of capital, and that you need more capital, private capital injected in these banks, not more government money in them. But capital investments depend on confidence, and that confidence is based on an accurate assessment of what this bank is worth, and that depends on how these assets are valued. And, frankly, the regulators don’t give us a lot of confidence, based on their most recent history. I’m concerned about the shifts in accounting standards. I understand the point that Superintendent Neiman has raised and that Mr. Atkins raised. But I want to go back to this October 2009 change. As I understand it—we all understand—that any loan that has a loan-to-value ratio that’s low, that has a lot of equity in the deal, is a loan that’s most likely to be repaid. And so as I under- VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00065 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 jbell on DSKDVH8Z91PROD with HEARING 60 stand this change in accounting, it says that, hey, if you’re in negative territory, if there’s not only no equity, but that you’re actually below water on this loan, you don’t have to reflect that in your books. You soften how to reflect that in your books. And what concerns me is how this helps improve the confidence in the banks that—that the books accurately reflect where the banks stand financially so that investors say it’s good to invest in banks? Every time I see this softening, I’m really troubled by it, and I just want to understand it better. Ms. Eberley. Ms. EBERLEY. I wouldn’t call it a softening, but the guidance I think is much more structured to say you need to recognize the reality of the economic situation for the borrower and find a way to move forward. That may require a partial charge down in the loan balance. So the bank would—would reflect a loss and restructure a loan at a lower balance that the borrower can then move forward with. That can be a better deal, as Mr. Greenlee said, in the long run for the financial institution—— Chair WARREN. That one I totally understand. Ms. EBERLEY. Okay. Chair WARREN. That’s not my concern. You’ve written it down and it now accurately reflects what the properties were and the likelihood that it’s going to be repaid. But where I am concerned is the part that I’m reading that says, in effect, if you’ve gone from a loan that had a positive equity on it to a loan that has a negative equity on it, you don’t have to change your books so long as you can continue to collect monthly payments. You don’t have to change in your books the value of that loan. Now, if I’m not understanding this correctly, that’s fine, but I want to understand it. Ms. EBERLEY. No, that’s correct. And if the borrower has the financial wherewithal to repay the loan and you’re looking at the borrower’s obligations on a global basis, and they have the capability and demonstrated willingness to repay the loan, there’s no reason to write down that loan. Chair WARREN. You are saying there’s no reason to write down a loan. We should treat loans exactly the same whether they have positive equity or negative equity? I don’t know any banker on earth who has done that prior to this time, and, yet, this is what the regulators are saying we should do? We should treat those as if they were the same value? Ms. EBERLEY. Bankers are making loans based on the borrower’s ability to repay. The collateral is the secondary source of repayment, not the primary. Chair WARREN. I’ll stop. Mr. Atkins. Mr. ATKINS. Thank you. I just wanted to pick up on your discussion earlier about guidance with respect to market accounting and FASB 157. Of course this comes up and when I was at the SEC in the summer of 2008, we were hearing a lot of stories about how accountants were forcing complete write-offs of some of these securities based on there being no trades or looking at the indexes and things that were indicating that the values were very low. The SEC, finally, in September of 2008, when FASB came out with guidance with respect to 157 to clarify the orderly market aspect of that, which I think was overdue and finally helpful, relieved some chaos in the market. So I was wondering, do you view that VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00066 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 jbell on DSKDVH8Z91PROD with HEARING 61 guidance now as being sufficient? Does there need to be additional guidance, with respect to mark-to-market accounting, or how do you perceive that in your activities? Mr. GREENLEE. I think that it was helpful to get clarification. What I believe raises the most questions are the Level 3 assets and how those ultimately get valued. As we’ve gone through the valuation process, the banks, our examiners, and the broader marketplace improved their ability to evaluate those assets. Confidence increased that the right factors were the focus. It is also important not to be based solely on an index or something that tended to maybe overshoot on the way down. Certainly, when you encounter illiquid markets, valuation does get to be a challenge, and there is also a lot of modeled risk that has to be managed. Fortunately, we have seen improvement since we went into this financial crisis. Mr. ATKINS. The pressure from the outside accountants has abated because of that, so I assume that management now can point to this guidance and that’s proven helpful? Mr. GREENLEE. I believe it’s helpful. But I also believe that a lot of those assets that were in question at the time were written down quite a lot. So I am not sure there are going to be further significant write-downs on those particular assets. Valuation practices, at least in some of the larger firms, have improved. Mr. ATKINS. Okay. All right. Thanks. Chair WARREN. Mr. Silvers. Mr. SILVERS. Yes, thank you. This may not seem like it follows the thread of the conversation, but I’m going to come back around to it. Some of the testimony we have for today suggests strongly that in this area, in the Atlanta metropolitan area, real estate development, residential real estate development, and all of the ancillary activities associated with it, is a very large portion of the economy in this area. Do you all have a sense of roughly what that appears to have been? Meaning how much economic activity have we lost as a result of the deflating of the bubble in this area? Ms. EBERLEY. I can’t give you a quantification of that. We can go back to our research staff and give you an answer in writing. Mr. SILVERS. Do you have a sense that it’s big? Ms. EBERLEY. It is big. It is big. The Atlanta economy has been driven by construction for many, many years. This goes back to the early 1980s that it’s been a trend. It certainly has become more pronounced in the last decade. Mr. SILVERS. Mr. Greenlee, any thoughts about this? Mr. GREENLEE. Well, I don’t live here, but my impression and my understanding is exactly what Ms. Eberley described. Construction and real estate development was a big driver of the economy here. In terms of answering your question, I can speak to the Federal Reserve Bank of Atlanta staff and see if we can get you additional information. Mr. SILVERS. It would be interesting to have some data on that. Not just the direct development activity, but, as one of our other witnesses put it, everything that flowed from it, architecture, furniture sales—secondary, tertiary. I would go for that. The reason I want to put that on the record is because it seems to me that the conversation we’ve just been having about mark-to-market, about capital requirements and the like, appears to—tell me if you dis- VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00067 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 jbell on DSKDVH8Z91PROD with HEARING 62 agree—but it appears to suggest a strategy of attempting to kind of hold on as much as possible to a set of values and arrangements based on that economy that is no longer with us, in the hopes that we will somehow return to it. I think this conversation about trying to focus on rent, on cash flow, as opposed to property values, to collateral value, it has that feel to it. And that would appear to run the risk that, if we’re not going to be able to return to that type of economy, we are essentially locking in the financial system in a way that will make it unable to shift to finance activity that could actually lead to renewed growth. Can you comment on your views of whether or not I’m identifying a reasonable matter of concern? Ms. EBERLEY. Well, let me make a distinction that might help address some of the concern that Chair Warren expressed, as well. When a loan at an institution is considered collateral-dependent and when the borrower’s ability to repay is clearly nonexistent or not sufficient, the institution is required to look to the collateral value and write the loan down to the collateral values. But that’s where the borrower’s ability to repay is no longer apparent or evidenced and more certainly if payment is not happening. Mr. SILVERS. Well, if your primary measure of value deteriorates then—— Ms. EBERLEY. Right. Mr. SILVERS [continuing]. You look to your secondary collateral. Is it good enough? Ms. EBERLEY. Right. And the accounting rules require that the balances be written down. Mr. SILVERS. Thank you. Ms. WARREN. Thank you. Mr. McWatters. Mr. MCWATTERS. Just a quick question. Would you support the investment of additional TARP funds in Atlanta regional financial institutions because of the CRE problem? Is it that bad or will it recover in due course? Ms. EBERLEY. Additional capital in Atlanta financial institutions would be most helpful, and economic recovery would certainly make a difference in Atlanta, as well. Mr. GREENLEE. I would echo that. Improved capital would be helpful to the banks. Mr. MCWATTERS. So additional TARP funds? Mr. GREENLEE. You would have to look at the details of the program and go through the process that we have been going through with the banks that applied for TARP. Generally, improved capital positions would be helpful. Mr. MCWATTERS. Okay. Thank you. Chair WARREN. Superintendent Neiman. Mr. NEIMAN. Thank you. Three questions that I hope to get in. Chair WARREN. Talk fast. Mr. NEIMAN. They are critical to our February report. Do you see CRE as posing a systemic risk to recovery and financial stability or does it not rise to the level of residential and subprime and can be contained? Mr. GREENLEE. From our perspective, it is an important exposure that the banks we supervise have. We have a lot of banks with significant concentrations and they are under stress because of the VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00068 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 jbell on DSKDVH8Z91PROD with HEARING 63 weakness in the CRE markets. And so it is something we do focus a lot on and spend a lot of time working on. Ms. EBERLEY. I would say that commercial real estate values have declined more than they did in the last commercial real estate crisis in the late ’eighties, but there are important protections, from a regulatory standpoint, that have been put in place since that time, including enhanced appraisal regulations, regulatory guidelines about loan-to-value limitations, and enhanced underwriting practices and institutions. So I think there’s some mitigation there. Mr. NEIMAN. Stress tests. Do you think that stress tests should be rerun for an expanded class of institutions beyond the SCAP approach or with the new assumptions? Mr. GREENLEE. What we are focused on right now at the Federal Reserve is really trying to get improved stress testing practices in the banks that we supervise improved. We think that is an improvement that the banks we need to better manage their business. Mr. NEIMAN. Stress tests done by the bank? Mr. GREENLEE. Yes. That is what we would like to see. Mr. NEIMAN. Or the FDIC on an isolated basis. I know we used a stress test in particular institutions where we think it may present a problem. Ms. EBERLEY. We absolutely do. And I think that stress testing by financial institutions on their own balance sheets, on their own economic circumstances, and their locality are very important. Mr. NEIMAN. And then the third question. Are there any changes in public policy that you would find helpful, particularly in dealing with commercial real estate? It’s kind of a follow-up to Mark’s question. Either in the TARP program itself or outside of TARP that would help address this from either a Treasury or a regulatory perspective? Are there tools that would be helpful to you in dealing with CRE? Mr. GREENLEE. I can only comment that we did what we thought we could with the TALF, in terms of trying to help support the CMBS market and provide financing there. Mr. NEIMAN. From the FDIC’s perspective, are there any changes needed to the public policy or tools? Ms. EBERLEY. I think the best tool that we have is to work with the institutions and get them to work with borrowers. Mr. NEIMAN. Great. Do you think that CRE guidance is fully understood by institutions, or is there still work to be done in getting institutions to really understand their responsibilities with respect to modification? Ms. EBERLEY. Yes. I think it’s an ongoing process. Mr. GREENLEE. Yeah. We’ve done some initial outreach, but we recognize we need to do more. Chair WARREN. Thank you very much. This panel is excused. I would like to call the second panel. I am pleased to welcome Brian Olasov, who is the managing director of the Atlanta office of the law firm McKenna, Long, and Aldridge. David Stockert is the CEO of Post Properties, an Atlanta-based firm that develops and operates apartment buildings. Chris Burnett, the CEO of Cornerstone Bank, a community bank in the Atlanta region. Hal Barry, chairman of Barry Real Estate Companies, an Atlanta-based developer of commercial property. And Mark Elliott who is a partner at the VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00069 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 64 Atlanta office of the law firm of Troutman Sanders and the head of the Office and Industrial Properties practice. I appreciate you all being with us today. I’m going to ask you, as I did with our first witnesses, if you would hold your oral remarks to five minutes or even less so that we’ll have more time for questions, but your written testimony will be part of the public record. Thank you very much. If I could start with you, Mr. Olasov. jbell on DSKDVH8Z91PROD with HEARING STATEMENT OF BRIAN OLASOV, MANAGING DIRECTOR, ATLANTA, McKENNA, LONG, AND ALDRIDGE Mr. OLASOV. Madam Chair and distinguished members of the Panel, I’m very enthusiastic to be testifying before you today. In fact, I’m chomping at the bit after that first panel to discuss some of these issues. Chair WARREN. We thought you might be. Mr. OLASOV. As the Panel described in selecting the site for today’s discussion, it’s entirely appropriate that the hearing be held in Georgia, whose banking system has suffered disproportionately. Over the past couple of weeks I’ve had the opportunity to discuss my views with staff members of the Oversight Panel, and I’d like to reiterate some of these opinions today. By way of background, I have worked in commercial banking, investment banking, a bank regulatory research environment, academia, and I’m currently at a national law firm where I’ve had the opportunity to assist in large, complex real estate workouts, both in commercial and residential transactions shared between portfolio lenders, banks that we’re going to discuss in greater detail today, and in the area of structured finance, MBS and CMBS. I have worked extensively as an expert witness in litigation involving residential and CMBS. During the previous downturn, I collaborated on building a historical market to market model for the thrift industry and testing, and frequently refuting various theories of conventional wisdom concerning what happened to the thrift industry, what were the factors that actually collapsed the thrift industry. My written statement can be brief, as I have also submitted two recent editorials, along with a draft white paper that reflects my views on a policy prescription to deal with the continuing unresolved problem of toxic assets in banking. That reflects very much the thoughts of COP’s August report. And I applaud the August report and some of their conclusions reached. Let me summarize my opinions and observations. In my view, there is a logical and inevitable sequence that follows from an inability or unwillingness to move problem assets from banks. The inability or unwillingness of banks to remove these assets stems from the overwhelming and justified desire to preserve regulatory capital. As long as banks sit on material levels of problem loans, given the volatile nature of the value and cash flow attributes of these loans, available cash will migrate to excess reserves of the Fed or low-risk securities include Treasuries and agency mortgage banks. When regulatory enforcement is perceived by bank management as either unfairly severe or capricious, and I think that’s applicable to the earlier discussion on policy guidance that came out in Octo- VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00070 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 65 jbell on DSKDVH8Z91PROD with HEARING ber, this accelerates the movement towards more restrictive lending policies, and this is dramatic and demonstrable. This results in a constriction of available credit. Since the architectural intent of financial stability in all its guises, obviously including TARP, is to bridge the economy until private sector demand reengages, the absence of a healthy, functioning credit allocation system, primarily a banking system, prolongs the need for this bridge to exist. This comes at a terrible price to the real economy and to the American taxpayer that must support this skein in subsidies. Conventional wisdom holds that distress in residential markets has bottomed out. I happen to disagree with that. And that the commercial real estate mortgage market is the next shoe to drop. My own informal research indicates a lag of approximately six quarters between residential and commercial mortgage markets. If this relationship persists, and in the presence of delinquency and default numbers that are still rising in residential mortgage markets, commercial markets are at least 18 months, and I would argue considerably longer, from touching bottom. The deteriorating performance of the CMBS market gives us a predictor of increasing problems in bank portfolios, as can be seen in the graph. And for those of you who have a copy of this, CMBS, I think, is instructive because it doesn’t suffer the same accounting confusions that the earlier panel touched on. Until we design a mechanism that promotes the movement of problem assets off banks’ balance sheets, banks will be less inclined to meet reasonable, prudent borrower requests. This problem will become increasingly acute as 1.4 trillion dollars of commercial real estate loans balloon over the next three years. At a national level where banks hold 1.8 trillion of CRE loans, or 13.5 percent of all bank assets, a deterioration of CRE portfolios will jeopardize some already weakened banks. And I would add that those are likely to be in those same areas that are currently suffering residential problems, making it much more difficult for those regional banks in that regional system to recover. In Georgia, where 23—— Chair WARREN. Mr. Olasov, I’m sorry, sir. We’re at five minutes. I’m going to ask you to finish up, please. Mr. OLASOV. All right. Thank you. I’ll end on a positive note, which is to say that in supporting CMBS and indirectly commercial mortgage lending, TALF has contributed to a dramatic reduction of spreads on senior bonds. TALF funding has been extraordinarily limited, but it’s still been extremely helpful including promoting new CMBS issuance in the fourth quarter. [The prepared statement of Mr. Olasov follows:] VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00071 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00072 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 115 here 55522A.037 jbell on DSKDVH8Z91PROD with HEARING 66 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00073 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 116 here 55522A.038 jbell on DSKDVH8Z91PROD with HEARING 67 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00074 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 117 here 55522A.039 jbell on DSKDVH8Z91PROD with HEARING 68 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00075 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 118 here 55522A.040 jbell on DSKDVH8Z91PROD with HEARING 69 70 Chair WARREN. Thank you very much. Mr. Stockert. jbell on DSKDVH8Z91PROD with HEARING STATEMENT OF DAVID STOCKERT, CHIEF EXECUTIVE OFFICER, POST PROPERTIES Mr. STOCKERT. Thank you, Madam Chair, distinguished members of the Congressional Oversight Panel. I am David Stockert, the president and CEO of Post Properties. We are a REIT that owns and operates nearly 20 thousand apartments in 55 communities. Our total market capitalization is roughly two billion dollars. I am testifying for the National Multi Housing Council and the National Apartment Association and have been asked to discuss the state of the apartment market. 2009 was one of the most challenging years in memory for our industry. The vacancy rate for investment grade apartments hit eight percent in fourth quarter, an almost 30-year high. 2009’s 2.3 percent drop in rents nationally was the largest in 30 years. With more than four-and-a-half million vacant rental units, absorption rates for newly completed apartments had dropped to the lowest levels since 1989. Property values have declined by more than 30 percent, and transaction volume has plummeted from $100 billion to around $14 billion in just two years. Because of the capital shortage, new apartment development has come to a virtual standstill. New apartment starts set a post World War II record low of 84 thousand units down 67 percent from a year ago. This comes as the foreclosure crisis and the echo boomers entering the housing market have modestly increased demand for rental housing. Analysts project the growing demand will create a shortage of apartments beginning as early as late 2011. In addition to these challenging conditions, our industry faces an estimated 50 to 60 billion dollars in loans maturing in 2010 and 2011 that will need to be refinanced. Now, many believe that 2010 will likely mark the bottom fundamentally of the market, but the headwinds are still very strong. GDP may recover in 2010, but significant job growth is not expected until 2011 or later, and employment is the primary driver of demand in our business. The loss of over eight million jobs is a severe blow to the industry. In addition, we think the recovery will likely be one based on a flight to quality. Public companies like ours will have greater access and do have greater access to low-cost debt and other forms of capital. Other nonpublic companies in our industry are not nearly as fortunate. Older properties with weaker sponsorship and properties in secondary markets will continue to find it difficult to access capital. Looking at the capital markets, the multifamily sector has benefited from the presence of the GSEs, Fannie Mae and Freddie Mac, and the FHA multifamily mortgage insurance program, which has served as a partial replacement for the construction financing. These two capital sources accounted for 90 to 95 percent of all the multifamily debt issued in 2009. While the multifamily sector has enjoyed more liquidity through the GSEs than the rest of commercial real estate, industry has not been all good news. All debt sources have tightened their requirements, meaning firms must provide additional equity, refinance debt, purchase property, or start a new development. With most eq- VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00076 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 71 jbell on DSKDVH8Z91PROD with HEARING uity sources on the sidelines, this has exacerbated the capital shortage in the apartment sector. The GSEs are very necessary, but they’re not wholly sufficient. Reestablishing a viable CMBS market is also critical. This will require reforming the regulatory oversight in Wall Street and improving transparency and rating agency performance. In addition, we are urging the Treasury Department to extend the TALF program through 2010. I also want to address the widespread media coverage of multifamily CMBS defaults. These reports have left the impression that all multifamily mortgages are experiencing high default rates. This is untrue. CMBS represents just 12 percent of the more than 900 billion of outstanding multifamily loans. The vast majority of multifamily mortgages are held by commercial banks, insurance companies, and the GSEs. When those loans are examined, multifamily default rates are quite low. Delinquencies for loans issued by insurance companies and GSEs remain well below one percent, and the GSEs are underwriting new multifamily loans with good coverage ratios and relatively moderate loan to value levels. Given the importance of the GSEs to the apartment sector, we are closely watching reform efforts, which are just getting underway. In the short term, we are reassured by the Treasury’s December 24th announcement confirming its unlimited support for the GSEs through 2012. In the long term, however, it is critical that policy makers understand the unique needs of the multifamily housing sector and not restrict the supply of multifamily capital as they reform the single family financing process. Among other things, the reformed GSEs must continue their vital role as a source of permanent debt to refinance construction loans. They should also continue to provide capital for affordable housing projects with greater risk profiles. Chair Warren. Mr. Stockert—— Mr. STOCKERT. I’m going to stop there, and thank you very much for listening. [The prepared statement of Mr. Stockert follows:] VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00077 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00078 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 124 here 55522A.041 jbell on DSKDVH8Z91PROD with HEARING 72 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00079 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 125 here 55522A.042 jbell on DSKDVH8Z91PROD with HEARING 73 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00080 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 126 here 55522A.043 jbell on DSKDVH8Z91PROD with HEARING 74 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00081 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 127 here 55522A.044 jbell on DSKDVH8Z91PROD with HEARING 75 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00082 Fmt 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Frm 00103 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 149 here 55522A.066 jbell on DSKDVH8Z91PROD with HEARING 97 98 Chair WARREN. Thank you very much. I appreciate it. Mr. Burnett. jbell on DSKDVH8Z91PROD with HEARING STATEMENT OF CHRIS BURNETT, CHIEF EXECUTIVE OFFICER, CORNERSTONE BANK Mr. BURNETT. Thank you. Good morning. I am Chris Burnett. I am the chief executive officer of Cornerstone Bank headquartered here in Atlanta. Cornerstone is one of Georgia’s 25 largest community banks with assets of 550 million dollars with one-third of our loans in housing, one-third of our loans in small business financing, and a third in commercial real estate loans. We do have a balanced portfolio and a balanced perspective on the problems facing our economy today. Commercial real estate is certainly a challenging area, but you cannot talk about this category without stressing the impact that has been had from the housing industry. As we all know, new home construction and residential lot development was the first issue to hit the economic downturn. When the mortgage market seized up, builders could not find buyers for their homes, and the need for developed lots virtually went to zero, causing many developers to fail and leaving hundreds of projects in suspension. The effectors, the effect on our lenders was devastating. In Georgia, we’ve already seen 30 community banks fail, all of which had heavy concentrations in residential development and construction loans. We’ve also seen the problems in the job market. We’re acutely familiar with the devastation in our residential housing and its impact on the economy, as thousands of jobs have been lost in Georgia in that industry and many more workers leaving our state. Regarding commercial real estate, for most community banks like ours the typical client is a business owner with financial substance, substance that has been—or has had the wherewithal to move from rental space into owner-occupied buildings. Unless those owner-occupants were involved in the real estate industry or retailing, most borrowers continue to make their payments on time, and the performance of most owner-occupied commercial loan portfolios remain satisfactory through 2009. But the difficult economy has taken its toll, draining earnings and liquidity from once strong borrowers. The aftershocks of the recession continue to abate a recovery and consumer confidence, thus restricting spending. As a result, we are now seeing a rise in borrower and tenant distress. Tenants are asking for rental concessions, which are often granted, but this reduces the cash flow available to meet debt service. This issue is systemic at all levels. Even the larger banks, the insurance companies, and the pension funds that lend on the much larger commercial projects are also reporting similar stresses. As we have talked about, vacancy rates for these projects in the metro Atlanta area are now over 20 percent, and that sort of rate is not sustainable with the level of debt that most owners incur to bring those projects to market. On the retail front in particular, where the greatest deterioration is occurring, as long as unemployment remains high and the economic news is negative, consumer spending will be tight. As a result, more retailers, especially nonfranchised, small businesses are VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00104 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 jbell on DSKDVH8Z91PROD with HEARING 99 closing. The same is true for service businesses that occupy office space. As these companies contract or close all together, vacancy rates climb and cash flows available for debt service decline. The banks are then often confronted with a dilemma. They must either foreclose on the properties or restructure the mortgages, allowing them to convert to interest-only payment terms and often times lowering their interest rates. These loans then become known as troubled debt restructures, meaning that they must be classified as substandard assets. New appraisals are mandated by regulatory rules, and if the new values do not support those loan balances, specific reserves must be established further eroding bank capital. There is no question that it’s more unlikely today for borrowers to obtain credit. Borrower’s financial conditions have deteriorated making loan decisions more difficult to make. Strong pressure by regulators to reserve for projected loan losses and to reduce real estate lending concentrations further impairs a borrower’s ability to obtain credit. In many cases throughout Georgia, regulatory orders directed at troubled institutions mandate no growth and asset shrinkage policies, therefore making it impossible for those banks to extend credit. And all of this goes on while private capital sits on the sidelines still apprehensive to invest in Georgia’s banks. Let me be clear. We want to make good loans to help businesses in our communities grow. That is what we do and that is what our industry is all about. That is what Main Street banking is all about. But it can be frustrating to borrowers and bankers when we are told lend more and be as flexible as possible with workouts, but also apply the hard lessons learned related to sound underwriting. With these conflicting messages, lending more money right now is a very delicate balance. And finally asking—I’m going to speak briefly on the TARP issue. Twenty-six banks in Georgia have received TARP investments. My bank is not one of those. The TARP application process was perhaps the most frustrating regulatory experience in my 30 years in this industry. Our bank applied in 2008 as soon as the program was announced. We were finally told to withdraw our application in October of 2009, almost a year after the program began. Early in the process we had new capital lined up alongside with TARP, because the receipt of TARP was viewed as a confirmation of viability, but after ten months of waiting for an answer, those capital sources had dried up. In my opinion, the measure of TARP’s effectiveness can be assessed in two ways. If the intent is to help banks clean up their balance sheets and rid them of troubled assets, then it has been effective to a degree in Georgia. Those banks that did receive TARP investments have been able to rid their books of some distressed assets, although at extremely low values. However, if the intent was to stimulate more lending, the jury is still out on TARP’s effectiveness. Banks have burned through enormous amounts of capital for both actual and projected losses with only about 40 percent of Georgia’s banks currently profitable. Banks cannot increase retained earnings. They cannot shore up their capital positions until they return to profitability. VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00105 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 100 jbell on DSKDVH8Z91PROD with HEARING Chair WARREN. Mr. Burnett, I’m going to have to stop you on time there. But thank you very much. We wanted to hear this about TARP. Thank you. [The prepared statement of Mr. Burnett follows:] VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00106 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00107 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 156 here 55522A.067 jbell on DSKDVH8Z91PROD with HEARING 101 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00108 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 157 here 55522A.068 jbell on DSKDVH8Z91PROD with HEARING 102 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00109 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 158 here 55522A.069 jbell on DSKDVH8Z91PROD with HEARING 103 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00110 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 159 here 55522A.070 jbell on DSKDVH8Z91PROD with HEARING 104 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00111 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 160 here 55522A.071 jbell on DSKDVH8Z91PROD with HEARING 105 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00112 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 161 here 55522A.072 jbell on DSKDVH8Z91PROD with HEARING 106 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00113 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 162 here 55522A.073 jbell on DSKDVH8Z91PROD with HEARING 107 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00114 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 163 here 55522A.074 jbell on DSKDVH8Z91PROD with HEARING 108 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00115 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 164 here 55522A.075 jbell on DSKDVH8Z91PROD with HEARING 109 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00116 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 165 here 55522A.076 jbell on DSKDVH8Z91PROD with HEARING 110 111 Chair WARREN. Mr. Elliott. jbell on DSKDVH8Z91PROD with HEARING STATEMENT OF MARK ELLIOTT, PARTNER AND HEAD OF THE OFFICE AND INDUSTRIAL REAL ESTATE GROUP, TROUTMAN SANDERS Mr. ELLIOTT. Thank you, Professor Warren and members of the Panel. My name is Mark Elliott, and I’m the head of the office and industrial real estate group at Troutman Sanders. As Mayor Reed said, Atlanta is a real estate town. I have seen more distress in the market here in the last year than in my 30 years of practice. And before I get into specifics, let me just share something with you anecdotally on the numbers. Just to kind of illustrate the point: deal volume for transactions, that’s purchases and sales in 2007 compared to 2009 in our business has gone down to roughly onesixteenth. It’s roughly in 2009 six percent of what it was in 2007. And we, as a country and the press, decried and panic when retail sales nationwide drop by seven percent. We dropped by 95 percent, and that distress is remarkable, and it’s having catastrophic effects on the service providers in the industry. And I think there are two reasons for this. It relates from problems on the supply side and problems on the demand side. And, Mr. Atkins, you had asked for some comments on the demand side. And I’m very happy to address that now. Basically, for a real estate developer or an owner to borrow money, they basically need to make sure that they are going to have a return on that money and a profit that covers the cost of the capital plus the cost of borrowing, plus some profit to the owner. And I think for three specific reasons, you’re not going to see borrowing of any kind of rigor for quite some time. The first of which is, and people have addressed it here today, it’s the tremendous loss of jobs in our economy, and I know you used an eight million figure. I think it’s 6.1 million jobs lost in calendar year 2009. And, Mr. McWatters, as you said, we’ll build this back one job at a time, but the crash in the real estate industry has occurred one job loss at a time. And every loss of those jobs represents an empty office somewhere and—or at least there’s some very strong correlation. So eight million jobs lost is a lot of empty offices. The second point is a tremendous loss of confidence in the business sector coupled by a loss in market cap on the tenants of this space. Just like builders build buildings on the come, so do tenants lease on the come, and when you’re a business unit owner, and you’re leasing space in the future, you’re making business expectations and you’re making business judgments on the basis of your business growing or at least that’s been the hope. There is complete loss of confidence on the business growth aspect. And I would say the tenant base is much more worried about what they can do to shrink or get out of their lease five years from now than they are on what they can do to grow that lease. And the third one is the whole mandate on the corporate America to cut costs and to cut costs aggressively. Typically, you’ll see that the second greatest cost that business unit owners faced after employment is real estate costs, and people are cutting their space and they’re cutting the cost of their space, and they are very, very aggressively renegotiating lease rates. And, Mr. Neiman, you made VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00117 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 112 jbell on DSKDVH8Z91PROD with HEARING the point about looking out at the Hyatt Regency 25 years ago and being able to see a nice view of Atlanta. Even though there are buildings in the way now, because of the empty offices they have in the upper levels of those buildings you can just look right through the windows and enjoy those views again. And that is having a very, very dramatic affect on the value of businesses. I guess I’ll summarize in this last minute. I think the commercial office market, if you look at the life of an office building, it’s almost like an aircraft carrier. You can’t brake it on a second’s notice, and you can’t accelerate it on a second’s notice. And what you’re going to continue to see as leases roll over the next three, six, nine, 12, 15 months that you’re not seeing now is empty offices where tenants are still paying coupon rate and contract rate because that’s their obligation, are going to continue to shrink because that represents their actual need for the space. They are going to continue to aggressively renegotiate their lease rates to reflect current value, not what they agreed to pay in 2001, when they entered into that lease. And so, I think you’re going to continue to see on the demand side an incredible reticence to engage in any kind of borrowing. And I’ll stop there. [The prepared statement of Mr. Elliott follows:] VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00118 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00119 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 171 here 55522A.077 jbell on DSKDVH8Z91PROD with HEARING 113 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00120 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 172 here 55522A.078 jbell on DSKDVH8Z91PROD with HEARING 114 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00121 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 173 here 55522A.079 jbell on DSKDVH8Z91PROD with HEARING 115 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00122 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 174 here 55522A.080 jbell on DSKDVH8Z91PROD with HEARING 116 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00123 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 175 here 55522A.081 jbell on DSKDVH8Z91PROD with HEARING 117 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00124 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 176 here 55522A.082 jbell on DSKDVH8Z91PROD with HEARING 118 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00125 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 177 here 55522A.083 jbell on DSKDVH8Z91PROD with HEARING 119 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00126 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 178 here 55522A.084 jbell on DSKDVH8Z91PROD with HEARING 120 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00127 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 179 here 55522A.085 jbell on DSKDVH8Z91PROD with HEARING 121 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00128 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 180 here 55522A.086 jbell on DSKDVH8Z91PROD with HEARING 122 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00129 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 181 here 55522A.087 jbell on DSKDVH8Z91PROD with HEARING 123 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00130 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 182 here 55522A.088 jbell on DSKDVH8Z91PROD with HEARING 124 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00131 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 183 here 55522A.089 jbell on DSKDVH8Z91PROD with HEARING 125 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00132 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 184 here 55522A.090 jbell on DSKDVH8Z91PROD with HEARING 126 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00133 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 185 here 55522A.091 jbell on DSKDVH8Z91PROD with HEARING 127 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00134 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 186 here 55522A.092 jbell on DSKDVH8Z91PROD with HEARING 128 VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00135 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 Insert offset folio 187 here 55522A.093 jbell on DSKDVH8Z91PROD with HEARING 129 130 Chair WARREN. Thank you very much, Mr. Elliott. Mr. Barry. jbell on DSKDVH8Z91PROD with HEARING STATEMENT OF HAL BARRY, CHAIRMAN, BARRY REAL ESTATE COMPANIES Mr. BARRY. Thank you very much for having me, and I really appreciate the opportunity to be here. A lot to think about. You all said a lot of things that made me do more thinking. Let me begin with a quick introduction of who I am. I am president of Barry Real Estate Companies. I am an Iowa native, but have been in Atlanta and involved in commercial real estate since 1966 and as a developer since 1975. Mr. Neiman, you may remember John Portman. I was partnered up with John Portman on a development in the suburbs as Portman-Barry, and in the 1980s, we were the guys that built the big, spec buildings and hoped they would lease as office buildings. And we proved that didn’t work. And in 1995 we formed Barry Real Estate Companies. And, hey, as opposed to big, and spec, and empty, our approach was take the supply and demand that you referred to earlier out of the equation, but build to lease properties, so a little different equation. You have to learn how to meet the demand of that prospect and how to show him how you can deliver a building whether it be a year later, or two years later, or even longer, but how to develop, design, and finance a property. Give him the lowest possible rent structure, but also create the lifestyle for that tenant. Well, we’ve had a hell of a run at it. It’s been good, about four million feet. We’re a small entrepreneurial Atlanta-based company that has been able to develop on a user-basis throughout the country. And so it was rolling really good until, as you know, this started happening about two years ago. And let me talk about some of our problems with our existing portfolio and then—and then the pipeline, as I see it today. On the existing issues, in downtown Atlanta we are developing a project not too far from here and when you go out, as you go down the expressway, you’ll see this. You’ll see part of it. You’ll see a building that’s leased to Ernst & Young and other tenants, a preleased building, and across the street you’ll see the Southern Company building, two buildings. We went into an area that the last new building that had been built in downtown Atlanta was probably 15, 20 years ago, and we saw this movement to midtown, and we saw the exodus to the suburbs, and I was part of that, but we saw a real opportunity downtown. And so we felt we could make a deal that moved the headquarters of Southern Company down there. It worked. So we bought the next site and built the Ernst & Young building. You will see our W Hotel is there as well. But in the process of that, we said, look, this is the urban center of Atlanta. This is where it should happen. This is where—we talk about commuting, and we all know Atlanta created the colossal traffic jam 24 hours a day. You know, it is awful. And so we said there’s a better way. There’s a better way than public transportation. That better way is walking to work, that is live, work, play communities. And so what we did over the last four years, five years, in red, and I can submit you copies of this, is a total of nine blocks that we assembled. Some of which we have under contract, part of which we owned with Mr. Stockert and Post Properties to VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00136 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 jbell on DSKDVH8Z91PROD with HEARING 131 build residential on it, but a total of nine blocks. A focus on urban living—a live, work, play, walking community—Atlanta is beginning to figure it out. There’s a better way than sitting in the automobile. And so we we’re headed toward the most exciting thing I’ve ever done. But guess what? With this recession, it hit us really hard. So about a week ago or two weeks ago, it hit the press. We have a lender, a bank who has a loan on the best site we’ve got, the one where that big building’s planned. We designed that building out for various users. We’re not going to start a spec building at that size. In fact, back to our user-driven philosophy, we don’t start spec buildings. You don’t have a tenant; you don’t build. Take the supply and demand risk out of it. Chair WARREN. Mr. Barry, we’re out of time here. Mr. BARRY. Are we out of time? Chair WARREN. Do you want to give us a sentence on how the story comes out? Mr. BARRY. Well, I want to move onto one other thing. That is, very quickly, we tried to finance. We were lucky. Our user-driven business signed leases with the U.S. government to build four GSA facilities in St. Louis, Minneapolis, Cincinnati, and Portland, Oregon. Finding a bank—a U.S. bank to finance government-leased buildings in today’s market—Mr. Silvers, you’re laughing. You know where I’m coming from. It’s been a real chore. Chair WARREN. Thank you, Mr. Barry. So I’d like to start with my questions with the reason we do field hearings. I read a lot of different speculation about where we are in this commercial real estate downturn. And here we are in Atlanta with five people who have clearly got dirt under their fingernails and are trying to live through it. And I would just like your assessments. And where we can, give a little bit to back it up. Where are we in this? You know, is it that we’ve gone down and we’ve hit bottom, we’re near bottom? Mr. Elliott, you gave us some startling numbers about how far we’ve gone down, but you’re talking about continuing to shrink. Can you give us some sense of what it feels like and what kind of data you can point to on where you think we are in this? Mr. Stockert, you look like you’d like to jump in first. Mr. STOCKERT. Well, I’ll just—I can speak for the multifamily—— Chair WARREN. Please. Mr. STOCKERT [continuing]. Housing market. I think that we are nearing the bottom of fundamentals in our business. And I think many of us in the business feel like we are starting to at least see some glimmers in the way of some modest upturns in GDP that we might reasonably assume are going to lead to some job growth during the course of the next couple of years. The better fundamental factor for us is that the supply of housing of all kinds is coming to a near standstill. So, if you look at Atlanta at the peak, we were permitting 70 thousand housing units, and that wasn’t just because people were nutty in development. There were 150 thousand people moving into the metro every year. We were trying to meet that demand for housing. And of course we overdid it. VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00137 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 jbell on DSKDVH8Z91PROD with HEARING 132 But today we are on pace to do six thousand permits, seven thousand permits in this market. So I get excited, as an owner of multifamily and one who’s got a reasonable balance sheet, because I think that we will come to a point where we will be undersupplied in housing. Chair WARREN. So you think, at least in residential multifamily, you look like you’re near the bottom just because of a supply and demand—— Mr. STOCKERT. Well, yes, on the fundamentals. We’re going to have a terrible year in cash flow because the rents that we banked in last year are going to run through to the next year too, so cash flows are going to be down. Chair WARREN. I hear you. Mr. STOCKERT. But, we can see some light. Chair WARREN. Mr. Burnett. Mr. BURNETT. Yes. I’ll address the residential single family, which I do believe we are at the bottom of that marketplace. And particularly in the last several months we have seen an improvement in home sales, particularly in our foreclosed inventory, and we are down significantly on the number of homes in foreclosure. I think that’s being driven by two primary factors. First of all, we know that interest rates are poised to increase, and, so, if people want to buy a home they need to strike now while rates are still low. And second, I think the first-time home buyer credit has been effective here in Atlanta, which is an affordable housing market. But, surprisingly, we are now seeing a pickup in lot sales for the first time because, as Dave said, we had about six thousand building permits issued this past year. And that’s about two years consecutively that we’ve built virtually no products. So finally lots are beginning to sell. Chair WARREN. And can I just ask, you don’t think you have a shadow inventory problem that as things pick up you’ve got a lot of banks and others that didn’t foreclose, and therefore, more property is going to gush back onto the market and push it back down. Mr. BURNETT. I think from the banking perspective we are in a better position there because we have new product versus competing with a mortgage lender who has foreclosed on an existing home. When you’re selling a brand new product that’s never been lived in, it simply is more appealing. Chair WARREN. Okay. But that doesn’t mean that the whole market is at bottom. It only means the new market is at bottom and starting to turn out. The sale of previously owned homes—— Mr. BURNETT. Correct. And I think that the new market will lead us out of this. Existing home sales will continue to be much more sluggish. Chair WARREN. Thank you. Mr. Elliott, can I ask you? Mr. ELLIOTT. Thank you. You used a great term, which is shadow inventory. And I’m afraid that on the office side, unlike hotels which have their tenant base walk in every night and apartments, which have their tenant base walk out or not every 12 months, office leases are signed for ten or 15-year periods. And when someone quotes a 15 or 20 percent vacancy rate, they are not factoring in unused office space, shadow inventory that, when leases continue to roll in their natural course as they will every year over time, VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00138 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 jbell on DSKDVH8Z91PROD with HEARING 133 that you’re going to continue to see large users giving back ten, 20, 25 percent of their space. So no, I don’t think we’ve hit bottom, because I don’t think we’ve accurately reflected what, on the user’s side of the commercial office sector, the real use is. Chair WARREN. Thank you. That’s very helpful. Mr. Barry. Mr. BARRY. Well, just maybe on a positive note. In 1995, we began to see the markets come back, and we started doing userdriven type office buildings. We’re seeing some of the same thing today. As far as multi-tenant buildings, it’s a disaster. But if there are users that have specific needs that may want to do build-to-suit buildings, in our focus that’s around the Southeast, we’re seeing some of that now. Chair WARREN. If the panel will indulge me, I’d like Mr. Olasov to give us his thoughts on this too. Mr. OLASOV. Yes, just very briefly. I would say that what we are seeing in commercial real estate, we are into the second wave of weakness. The first wave I would characterize as structural, which is that there is just too much leverage on commercial property markets. The debt got too complicated. That raises all sorts of governance issues. If you take a look at the Moody’s research showing peak to trough, where peak was October 2007 and where we are right now, all commercial property, all property types, all regions are down 43 percent. A big chunk of that’s attributable to leverage problems and what I would call debt, debt structure, and capital stack problems. Now we are starting to see the second wave, and I would echo what Mark has to say. Different collateral types have different life cycles largely dependent on the duration of the leases. So if you take a look at the property types that are most demonstrably the weakest, you start with the shortest possible duration lease. That’s a hotel. That’s a one-night lease. And we’re seeing delinquencies in CMBS pushing 20 percent in hotels. Multifamily is the next shorter duration. Office, at the other end of the spectrum, tends to be longer term, more stable tenants, but, as you start seeing lease rollover, this is going to move from the capital problems to fundamental problems in operating income. And we haven’t even begun to see that play out yet. Chair WARREN. Thank you very much. Mr. Atkins. Mr. ATKINS. Thank you. I’m just going to follow up with that too. So actually that was perfect. I wanted to explore a little bit more than our former panel of bank regulators who were talking about some of the steps that they’ve taken from a regulatory aspect to try to make it possible for banks to lend more. So I was wondering your perception, both as the banker in one case and with respect to either servicers or users in that business, how do you perceive the general attitude of banks to lend and whether that is because of, you know, perhaps over-weeding examiners who are maybe too tough, or not tough enough on the other hand, or because there are other internal aspects that are keeping lending down, or is it more of a fundamental economic question that we have right now? So if you start Mr. Burnett, and we can go down the line. Mr. BURNETT. It is difficult for me to speak across the board. But I know in our specific situation I have been very pleased with the relationship we have been able to maintain with our regulators through this, particularly here at the local level. They have had a VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00139 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 jbell on DSKDVH8Z91PROD with HEARING 134 good balance between the things that need to be said and the way that they say it. I will say that they are under pressure as well, obviously, to perform in their responsibilities. There are some accounting issues that must be enforced that are real Achilles to our industry right now. There are some regulations coming from Washington on liquidity that are very difficult that put banks in impossible positions of perilous liquidity. Those are not things that are decided at the local level, but they must be enforced by the local regulatory commissioners. I don’t want to take a lot of time, but I can go into a lot of different issues on accounting and the way you have to account for your loan loss reserves and interest rate caps on deposits and things like that that are all working against capital and liquidity, the two things most important to our industry right now. Mr. ATKINS. Mr. Olasov, and then we’ll just go down quickly. Mr. OLASOV. I don’t think that there is any issue that there is significantly less capital available for lending to meet prudent credit requests—certainly in commercial real estate. There’s a complete drought to meet the needs of either new legitimate business properties, or, I think more acutely, in terms of refinancing this enormous wave of commercial mortgages that are coming due over the next three years. And it’s easily observable. All you need to do is take a look at call reports of the banking system to take a look at a decline in loans outstanding. But I think more importantly and more perniciously, if you go to the H–8 Federal Reserve reports, you see lines of credit, either corporate lines of credit that have been cut. Again, peak to trough 1.7 trillion dollars. This is the lifeblood of businesses, who then go into the marketplace to use space to create new jobs where at the bottom you have part of the food chain of small businesses. A lot of small businesses live off credit card borrowings. Credit cards, lines of credit available are down a trillion dollars, again peak to trough. That is absolutely observable, and very clear, and obviously it has extraordinary knock-on impacts on the economy, and specifically with respect to the ability of all the powers that be in Washington to start removing props that have been holding up the economy for the last year. That’s the reason that I thought the third quarter GDP growth of three-plus percent was a very false positive, and that concerns me. Mr. ATKINS. Mr. Stockert. Mr. STOCKERT. Yes. I don’t want to repeat everything everyone said, but it’s true. I do think in fairness it’s true that you can’t get the loan, or is it that you can’t get the loan you want to get. You certainly can’t get the loan that you got before. Mr. ATKINS. Right. Mr. STOCKERT. And most of what we all are focused on at the moment is refinancing existing debt. Although there is not a lot of construction financing available, there is also not a lot of demand for that, because most of us, other than some in select cases where you’ve got builders, you just don’t see the demand for it. But we live in the public market, and the public market has really been out front. In terms of price discovery, our stocks, the REIT stocks, hit their lows in March. That was a come to Jesus moment for all of us. That was price discovery on our assets. And since that time VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00140 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 jbell on DSKDVH8Z91PROD with HEARING 135 asset pricing in both the public markets and in the private markets has come back up a little bit. So back to the early comments about mark-to-market accounting. We do have to get the prices of discovery. We have to get to the right kind of reasonable price discovery, because, had we done it at all in March of 2009, we would have collapsed everybody and everything. And that would have been inappropriate to do. You know, we’re getting closer today where we’re finding realistic asset values in my opinion. Mr. BARRY. Well, just quickly, one more time. I mean, on the four GSA deals, there’s not financing in the marketplace. And we will get there. We are still working on them, and we will get there, but the banks are basically out of business. And it has nothing to do with balance sheet, our balance sheet. Mr. ATKINS. Thanks. My time is up. Chair WARREN. Thank you very much. Mr. Silvers. Mr. SILVERS. I want to follow up on my colleague’s line of questioning here. Mr. Barry and Mr. Stockert, if I understood your initial testimony, Mr. Barry, you showed us a layout of properties in downtown Atlanta. Am I right in understanding that currently you cannot proceed on that project? Mr. BARRY. Well, the key block in the middle of it had a loan with a bank that has since been taken over by FDIC. We tried to extend the loan. We tried to do a workout, something short of continuing full payment. That didn’t happen. They amortized on us. We have since agreed to come out-of-pocket and to carry it. I don’t know exactly why we’re doing it, because I don’t think anything is going to happen in a year. We agreed to extend it for a year, to pay the interest, et cetera. And we’re going to try to salvage that block because of what it means to Atlanta. What it means to Allen Plaza, and what it means to us. Do we have a tenant for it today? No. And it’s the heart of what we’re trying to do and what we’re trying to prove in downtown Atlanta. Mr. SILVERS. Let me just follow-up on this and I would invite any of you to respond with respect to this project or with respect to other projects, and Mr. Olasov, and Mr. Elliott, with respect to your clients’ projects. It strikes me that, whether it’s the GSA buildings or high-density downtown residential real estate, it’s consistent with, I think, the overall direction of the economy that certainly President Obama has laid out—we want to be more energy efficient, have less traffic, and the like. With respect to the TARP, which is after all what brings us here, do you have thoughts as to what steps could be taken to make it more likely that projects that are economically beneficial are going to create jobs, steps that could be taken under the TARP to make that more likely? And, in doing so, I would hope you could respond to that question, I hope you could respond with a specific reference again to what the problems are. Mr. Barry, you said the problem is not the creditworthiness of the developer, but some other problem. There has been some talk about both the broader economy and the question of whether, say, the CMBS markets function and the like. So touch on what you see the problems are and then what the Treasury Department could do using the TARP that could be responsive, including their work in TALF or whatever comes to mind. VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00141 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 jbell on DSKDVH8Z91PROD with HEARING 136 Mr. BARRY. Well, I’d like to take that one more time. I don’t know what the answer is. What I can tell you is that we get the impression that there is blockage. That whether it is a capital problem, a liquidity problem, or a direction that the banks do not want to take—but any more real estate, regardless of what type it is, they don’t want to make any deals. Mr. SILVERS. Now, what size bank are you talking about when—— Mr. BARRY. Well—— Mr. SILVERS. When you’re looking for financing, who do you start with? Mr. BARRY. Well, the St. Louis deal was a 150 million, and most of the other FBI facilities that are under a lease to build, they are in the 55 million range. As such, we go to all the top banks in the country. Mr. SILVERS. And they’re not lending? Mr. BARRY. They’re not willing. Mr. SILVERS. Others? Mr. OLASOV. It’s probably worthwhile to put some parameters on this. If we look at who holds commercial mortgages right now, and obviously that springs from the original source of the lending. You’ve got 3.4 trillion. Of that, you’ve got about 1.3 trillion in commercial mortgage banks. You’ve got another 700 billion in CMBS. You’ve got about a quarter of a trillion dollars in life companies and then the GSEs and pensions and others kind of play into that. So, obviously, the commercial banks have been the largest source of commercial mortgage lending over time apart from the multifamily market that Mr. Stockert was talking about before. Now, let’s take a look at where we are. Life insurance companies are actually back in the market. There’s a certain kind of life company product that they might be allocating 30 billion dollars to what might be a four to five-hundred-billion-dollar ask this year. Commercial banks are shrinking their commercial real estate portfolios for lots of very obvious and justifiable reasons, including regulatory pressures, and, again, the preservation of regulatory capital. CMBS might see ten billion dollars. It got up to 230 billion dollars in 2007. That’s not going to be the source of lending. So we have to go back to commercial banks, which puts it back at the feet of TARP and COP. The way to get there, in my estimation, is to start with what motivates banks to lend or not to lend, which is the preservation of regulatory capital. And that’s why the white paper that I have addresses the opportunity to allow banks to start stripping out problem loans. And in the presence of those problem loans, they are not going to continue to lend—for all the vagaries that we discussed before. Chair WARREN. Thank you. I just want to stay on time, but I hope we can come back to this. Let me just say for those of you who may have noticed. We had originally scheduled this hearing for ten to 12:00. I think this is very valuable. If you can stay a few more minutes, what we’d like to do is finish this round of questioning and then do a lightening round, one more round of short questions. And then we want to be able to take comments from anyone in the audience who would like to come forward. We’re VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00142 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 jbell on DSKDVH8Z91PROD with HEARING 137 going to have to keep them very brief, but we’d like to do that. So I hope we can get everyone out of here in maybe about 15 minutes, ten or 15 minutes. But if you can bear with us, we would be grateful for that. Mr. McWatters? Mr. MCWATTERS. Thank you. Tell me about your access to foreign capital, through either U.S. managed hedge funds or other sources, and specifically what role FIRREA has played for an investment in the Real Properties Tax Act, and also some of the other restrictions that may be placed upon potential foreign lenders who make loans in the U.S. Any thoughts? Mr. BARRY. The one FBI facility that we’re very close to getting done is with a Swiss institution providing a letter of credit. Through investment banking, selling bonds, and using that letter of credit as collateral, we’re real close. Mr. MCWATTERS. Okay. Mr. BARRY. And we’re beginning to see some of that. We went had long, long conversations with the Japanese, similar conversations. They’re not quite ready. It didn’t happen, but we spent several months with them. Mr. MCWATTERS. And there have been no discussions with sovereign wealth funds or hedge funds? Mr. BARRY. No. Mr. MCWATTERS. Mr. Elliott, any thoughts? Mr. ELLIOTT. I think they are impacted with the same fundamentals that U.S. banks are, which is until there is a reasonable return or they can price themselves in a way that would be attractive for a developer to get a return, they are not going to get in the market. But being responsive to your question of whether there are regulatory issues that they face, I haven’t seen that. That’s not suggesting they don’t exist. I just haven’t seen it. Mr. MCWATTERS. Okay. Mr. Burnett, I assume you don’t have a response, but Mr. Stockert? Mr. STOCKERT. We really haven’t encountered a lot of international capital confidence. Mr. MCWATTERS. Well, are you involved with the REMIC rules? They have been liberalized lately, making them a little more userfriendly, but they still seem to, at least what I’ve heard from some people, impair the flow of capital. Mr. OLASOV. We deal extensively with special servicers and CMBS. I’m getting ready to go out to Las Vegas to moderate a panel with them. And they consider the liberalization that came out of the IRS back in September to be a complete non-event. Mr. MCWATTERS. Okay. That is what I’ve heard also. How would you suggest modifying those rules, the REMIC rules? Mr. OLASOV. Well, it doesn’t lend itself to a 30-second schedule. I’m not—honestly, I’m not sure that—that the REMIC restrictions are what ties up the special servicers. I don’t think that it particularly ties their hands in seeking the highest NPV resolution. Mr. MCWATTERS. We’ve heard a lot about special servicers and conflicts of interest and the like. What’s your perspective on that? Mr. OLASOV. Again, I’ll try to keep this brief, but you’re raising some very fraught topics. I would say that there was a bargain made really going back to the RTC days that kick started the new CMBS market. That in bulk, the alignment of interest between VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00143 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 jbell on DSKDVH8Z91PROD with HEARING 138 special servicers and B-piece investors, those bond investors holding the riskiest piece of the CMBS, was on net a good thing, not withstanding the conflicts. In retrospect, I think a lot of people would argue that moving the discipline, of those B-piece investors out of the CMBS through CDOs, collateralized debt obligations, where they fervently took their equity off the table, should be reconsidered. Mr. MCWATTERS. Okay. Thank you. My time is up. Chair WARREN. Thank you. Mr. Neiman. Mr. NEIMAN. Thank you. My question goes to Mr. Burnett. I am very interested and appreciate your candor with respect to the receipt of TARP capital and the experience that you had. I would like to have a clear message, though, as to some recommendations that you gave to us with respect to the use of TARP funds for community banks. I’m getting a sense that you do not feel that TARP has been sufficiently responsive to the needs of community banks. At our last hearing with Secretary Geitner, we pressed him on the details of the October program they announced, which was specifically directed to community banks and tied to specifically to small business lending. He responded that there was a reluctance from those banks to participate because of a stigma. Could you talk about the need for additional TARP funding through capital programs and how can it be changed, if you do support those, in order to make it more receptive to bankers? Mr. BURNETT. Well, I think that any time that private capital is available versus public capital, as a business person, I would choose that route to benefit the taxpayers. However, I think that at this point, public capital, at least in our sector of the industry, is simply not available from institutional levels, and there are numerous reasons for that. One of those is primarily—we’ve now created a system of shelf charters where a charter can be obtained and then capital can be raised from institutional investors to buy failing banks with FDIC assistance. I’ve had numerous institutional partners say, why would I invest in your bank, when if I hang around long enough, I may pick you up with an 80 percent agreement? So those sorts of transactions have taken public capital virtually out of the market. That and the general concern on what the future of smaller banks is. I think Secretary Bair has said openly addressed the number of failures forthcoming. And investors don’t know what to expect from Washington, in terms of closures this year or next year, so they are sitting on the sidelines. So it is perhaps TARP that may be the only source of capital for banks in our sector. If you look at TARP across the board, I believe about eight percent of all U.S. banks receive TARP. I think there were 26 here in Georgia. Mr. NEIMAN. If you would support seeing an expansion of those programs for community banks, how would you change the program in order to implement it more effectively? Mr. BURNETT. I would support seeing an expansion of the TARP program. I think, in all candor, the conditions are going to have to be changed. I know in our case a year ago, when we applied our company was in better shape than it is today, but because community banks were put at the very bottom of the stack of the applica- VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00144 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 jbell on DSKDVH8Z91PROD with HEARING 139 tions by the time they got to any of those banks, the deteriorated banks no longer met the standards. Mr. NEIMAN. So, recognizing the limitations on raising private capital in this market, how would you describe the reluctance of community banks to participate in TARP programs, particularly the October program announced with respect to small business lending? Mr. BURNETT. In all candor, in my circles, I have not found banks that were reluctant to participate. What I found in Georgia is the bank’s applications simply were not acted upon. Mr. NEIMAN. I want to also ask Mr. Stockert. What is the most important message that we should leave here with respect to the impact CRE is having on affordable housing and any proposed changes that we should be recommending to Congress or the Treasury to address those concerns on the impact on affordable housing? Mr. STOCKERT. Well, very clearly, and I said in my remarks, we feel that preserving the GSEs that are providing the good, sound, liquid financing to our industry is very important. And beyond that, we don’t really deal with affordable housing per se, but I certainly can get you some more information on other suggestions we might have in that realm. Mr. OLASOV. Excuse me, Superintendent Neiman, I feel very forcefully about this, and I just wanted to support on very strong terms what Chris was talking about. And, obviously, there are some alternatives, in terms of promoting community and regional banks and attracting new capital. We’ve had a number of discussions with the FDIC. I think Mr. Atkins talked before about the ‘‘F’’ word, forbearance. I know that’s a bad term, but at the end of the day, the FDIC is chartered to find the least cost resolution. If you take a look at a 140 bank failures last year, the estimated losses against total assets was 25 percent. We’ve reached out with a number of institutions to find some form of matched funding where possibly open bank assistance could be provided along with investment on a subordinated basis. That’s in conjunction with what one of your previous witnesses, I think Charlie Calomiris, talked to you about—the need to put public subsidies in a senior position to private capital. Not being able to do that means that you’re going to restrict new private capital coming into banks, and everyone agrees that the banks need to attract new capital. Mr. NEIMAN. And doing that through FDIC programs. Chair WARREN. So let me just follow up in a slightly different direction on this same question. I think part of the question we are trying to ask is what works best to get new money into good projects, whether it’s refinancing the existing projects or it’s trying to finance new construction. And we’ve heard a lot about the extend and pretend softening with accounting standards and so on. We talked about loss recognition and the problems associated with loss recognition. I want to start with you partly because of your written testimony and what you’ve been saying here today, Mr. Olasov, but we’re going to be short on time. But do you want to take one swing at how we should be thinking about that problem? How do we get the money in the banks, and then out of the banks into the projects? VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00145 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 jbell on DSKDVH8Z91PROD with HEARING 140 Mr. OLASOV. I think that it all starts with cleaning up balance sheets. If you take a look at bank crises around the world, we’ve got some very good examples of what happens when there are not deliberate actions taken. Japan, obviously, is always a hot topic. And I remember meeting in mid 1990s with the Japanese DIC, where year after year we would go through this same dance with them that never led to any kind of outcome. It all had to do with papering over the problems with the Japanese banking system. My fear is that we’re going to prolong the agony unnecessarily by not dealing with the removal of problem assets in a way that does not necessarily entail impairing regulatory capital. Chair WARREN. Thank you, Mr. Olasov. Mr. Stockert. Mr. STOCKERT. Similarly I would say make sure the rules are clear. If we all know what the rules are, we can figure it out. And then the second thing is facilitate price discovery, because that’s what we’re all saying. I don’t think that that’s fully baked in at the banks. I think that’s the big bottleneck. Going back to the affordable housing question for a minute. The housing policy in this country has got to be more balanced. Multifamily apartments are affordable housing, all of them. To live across the street at Post Biltmore, you cannot buy a single family or condominium for anything like what you can rent one of our professionally run, well-appointed apartments. So balance the housing policy. Chair WARREN. Thanks very much. I’m out of time. Mr. Atkins. Mr. ATKINS. Well, it’s too bad, I mean these are some important issues that we’re talking about here, liquidity and capital issues. Ironically, of course, TARP was set up to buy troubled assets, but many of us at the time thought that was going to be impossible because of the valuation issues, regulatory ramifications, and just human nature. And so the public-private partnership is more of a battle still because of those basic issues. So how do we solve this morass, which is essentially what it comes down to, banks holding onto assets and not wanting to sell them? Mr. Olasov, or others, I was wondering if you had any quick suggestions? Mr. OLASOV. Yeah. In fact, I was invited to talk to the OCC about CRE problems a couple of months ago. And I said, by way of establishing my bona fides, that I am an enormous proponent of fair market value accounting, but—and this is important—I think the hole that we’re in is so deep right now. We can talk about numbers later on offline. I’d rather not talk about it online, to be honest with you. I think the overhang of debt in both the residential and commercial markets is so chilling that we’re going to have to start looking at some kind of deferred loss accounting. Mr. ATKINS. Those are fighting words. Mr. OLASOV. I say that very reluctantly. Mr. ATKINS. Anyone else? Chair WARREN. With that breathtaking thought, maybe we should go to the next question. Is that all right? Mr. ATKINS. I’m out of time. Yes. Chair WARREN. Mr. Silvers. Mr. SILVERS. Just to show you how much in sync I am with my friend Mr. Atkins, I want to put this in language that a listener might understand. Mr. Olasov, if we were to take these troubled assets off of bank books, as you’re suggesting we must, and you VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00146 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 jbell on DSKDVH8Z91PROD with HEARING 141 mentioned Japan. I don’t think it’s possible to repeat that problem too many times. If we’re going to do that, not at the prices in March 2009 but at today’s prices, what would the solvency of our banking system look like? Mr. OLASOV. I actually don’t think that it would be prudent for me to answer that online, to be honest with you. Mr. SILVERS. All right. Well, the reason why I raised it—I invite others to comment—it strikes me that when we talk about a capital problem, what each of you and what our prior panel, much to my surprise, seemed to be saying, is that we just don’t have enough capital in our banking system for the assets of our banking system to be deployed properly. Now, I’m not speaking, obviously, with respect to any particular bank, but across the system that seems to be the case, and I think we’ve heard this over and over again. And so what I pose to you all is we need to get these assets off the books, and do so at any realistic price—and I remind you, we’ve got 160 billion dollars in unallocated TARP assets. This would be if we’re going to do something in TARP. That’s for the entire financial system. It suggests that we’re just looking in the wrong place. It strongly suggests to me, at least, that you can’t have this conversation without talking about restructuring the liabilities on bank balance sheets. There’s no other way out. And this is actually where Japan ended. And I invite any comments before my time is up. Chair WARREN. No, you don’t. Your time ran out. Mr. SILVERS. My time ran out. Chair WARREN. We’re going to get there and we are going to do some comments. That’s why I’m trying to be disciplined about this. Mr. McWatters, before I call you for your two minutes, I’m going to say that I very much appreciate each of you coming. I appreciate this. I wish I could stay and hear the rest of the panel. Like everyone else, I am at the mercy of Delta Airlines and an obligation back in Boston that I must get back to. Since the rest of the panel will still be here, I’m going to hand the gavel over to the deputy chair. I will watch the rest of this on video. But thank you very much. I wish I could stay and talk about this. Not just for the rest of the day, but for the rest of the month. Thank you. Mr. McWatters. Mr. MCWATTERS. Thank you. Each of you have described problems, and that’s basically what we’ve heard today. We wouldn’t be having this meeting, if there weren’t problems. If you can take two sentences, three sentences each, what’s a solution? The succinct, almost sound bite type solution to the regulatory problems, accounting problems and the like, if that’s possible. Mr. BARRY. Let me just start with kind of a broad statement. Somebody mentioned a soft landing for the commercial real estate industry. We see the focus on the taxpayer, rightfully so. We see the focus on the banks, on residential moratoriums, mitigations as opposed to foreclosures. But the general feeling that the banking community gives us is that we need some love. We need banks to understand the problems that we have. We need the banks to also understand the potential of what we bring to the table. When I go back over the investment dollars that we channeled into communities, when I think of the jobs that we created in the overall economy, what we do as commercial developers is very positive. But the VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00147 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 jbell on DSKDVH8Z91PROD with HEARING 142 commercial world is in trouble and taking everybody down, and that’s an awful lot of people. I must say that most of them are in the single family development side as opposed to the commercial side. But the commercial real estate world is in a world of hurt. And if there’s a way that you could think about how to give some help to the commercial developers, it would be great. That wasn’t the answer you were looking for, but time has expired. Mr. NEIMAN. I’d like to go back to our discussion particularly with the first panel regarding the CRE guidance. And I’d like to give Mr. Burnett an opportunity to respond and maybe some of the developers and others on the panel as well. How do you assess the impact and the effectiveness of that guidance, if the intent was to encourage banks to restructure CRE loans and to take write downs where required? Will it meet its objective? Is there other guidance or regulatory action that’s needed? Mr. BURNETT. I am pleased with components of the CRE guidelines. I do think that they will allow us to deal with our problems more prudently. Someone had used the term ‘‘kick the can down the road.’’ Well, right now, if you didn’t kick the can down the road and you truly wrote property values down, we don’t know the depth of the capital hole. But if we believe that our markets are going to recover, and as long as those borrowers can continue servicing the debt even if it’s through restructuring, then it is better to move that problem down the road as long as we have appreciating property values. And I think that’s the real key determinant, do you have properties that are depressed today because of the situation we are in, but in the long term are still are viable, valuable assets. Mr. NEIMAN. Does anyone want to comment on that? Mr. ELLIOTT. I think it’s a positive step in that it allows the property to stay in the hands of good sponsors. I think maybe you made a point earlier about one danger of not good sponsors is actually accelerated deterioration of assets, which is not a good thing. So I do think it’s good keeping the property in the hands of good sponsors. It’s not doing anything on prompting new loans though. Mr. NEIMAN. Thank you. Mr. SILVERS. Well, with that, this panel is excused. We very much appreciate your willingness to stay a little longer than we had promised. And if there are members of the audience, the Congressional Oversight Panel makes it a practice in field hearings to invite comments from the audience. Please limit your remarks and questions to one minute. There is a microphone up front. Please walk up to the microphone and introduce yourself. Mr. MOORE. My name is Ray Moore, and—— Mr. SILVERS. Just give these folks a chance to get—— Mr. MOORE. I was hoping these gentlemen would stay and listen. I would suggest they stay and listen. My name is Ray Moore. I’ve been in the commercial real estate business for 35 years. And I’ve sat here and listened to these gentlemen cry about their particular problems. What they are doing is crying. I would suggest to Mr. Barry that when the project was going very well, Mr. Barry could have paid for that land and had equity in that land, and we wouldn’t be here. I called Senator Johnny Isakson, the individual who empowered this board. He was the one that made it. He spent VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00148 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 jbell on DSKDVH8Z91PROD with HEARING 143 21 million dollars of our taxpayer’s money for you guys to come out, and I would suggest that what you all are doing is you are looking out here at the symptoms. And you are hearing all of the problems. You are out here at the symptoms. We need to go back and understand. I thought what this board was going to do—I inquired to get on this board. I was told that I did not have the national reputation to get on this board. It would have been very short because the problems we’re facing today started back in 1999 with Fannie Mae and Freddie Mac by pressure from Congress and the administrations ever since to implement social programs. Mr. SILVERS. Sir, your one minute is expired. Do you want to wind up? Mr. MOORE. I would like to say this. This is a situation where you guys are supposed to be looking at why we got here, not looking at the symptoms out here. You are supposed to look at the reason. The reason—if you go back and see the reasons—— Mr. SILVERS. Sir, I would ask you to wind up. We mean it when we say one minute. Mr. MOORE. If you look at the reasons why we get here, it becomes obvious to the problem. What they have done is they have overleveraged. These individuals—— Mr. SILVERS. Sir, I’ve asked you for a third time. Please sit down. Mr. BOWERS. I’ll try to keep my remarks to one minute. I would love to write you all a letter. I am Richard Bowers. I have a firm Richard Bowers & Company. I own downtown properties and suburban properties. I lost a property that was a commercial mortgage-backed security. I paid on time every time for ten years, couldn’t get it renewed. So that’s very disappointing. I really believe this economy was created in September of 2007, when virtually all liquidities stopped in the marketplace. And from that point on, from a brokerage firm and from singular developers, there was no liquidity. Demand couldn’t be served. That is the sale of real estate. Values went down. In fact, it was like getting thrown off the top of your building. And employment went down because businesses couldn’t get their funding or lines of credit extended. So what we’ve created is the greatest devaluation in personal wealth ever, the highest unemployment, which is a lot higher than ten percent. And the greatest debt per capita that we’ve ever had, I guess, in the world. I do believe that liquidity is the answer for the market, and there is none at least from where I sit as an entrepreneurial property owner. We go to these banks—— Mr. SILVERS. Sir, I have allowed you to go over as a speaker, but if you want to wind—if you’ve got a final—— Mr. BOWERS. Well, I mean, I don’t believe there’s liquidity in the marketplace despite what some of these people say. The regulators have been over-scrutinizing the banks in my opinion, or the banks are afraid to make loans to reputable businesses and business leaders. I also believe that a lot of this could have been much better handled than it was and still might be satisfied if liquidity could be provided. But I really do believe that either through tax benefits or government underwriting of some commercial loans, either go back 15 or 20 percent, but some of this could be avoided. Otherwise, you are just going to end up bankrupting every entrepre- VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00149 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522 jbell on DSKDVH8Z91PROD with HEARING 144 neurial real estate owner, in my opinion, that has a loan turnover in this country. Thank you. Mr. SILVERS. Thank you, sir. Sir. Mr. BOYD. My name is Bob Boyd. I’m a commercial real estate investment broker. We have a large amount of capital looking for opportunities. And we have dealt with a majority of the Atlanta banks over the last two years looking to buy toxic assets. The difficulty in making those deals happen is a function of the asked price versus the bid price. And the inability of the banks to release those assets to buyers who, in most cases, would pay all cash to buy those opportunities. As long as that continues, those opportunities don’t present themselves to the marketplace. In addition, once a bank is taken over by the FDIC, that very same asset that has been part of our target in the marketplace that we understand, goes to an FDIC pool where it’s completely lost in some pool purchase and as a result is sold at a much lower value than what our original offers have been. And that continues to be a problem. Mr. SILVERS. Thank you. Is there anyone else who wishes to speak? Mr. ATKINS. I just wanted to respond to—I would love to talk offline with the gentleman who spoke at the beginning. But just to clarify this panel here is charged with overseeing what’s happening with the TARP program. There’s another commission, the Financial Crisis Inquiry Commission, which is looking at the origins of what happened. I happen to agree with you that Fannie Mae and Freddie Mac actually are probably a huge problem obviously in the residential mortgage area as well as the commercial area. But you know that is not necessarily what we are dealing with here. But I don’t want to open—— Mr. MOORE. I didn’t realize that this was a separate group. He asked his question. I would like to respond to it. I would just say that TARP funds need to be used to create jobs. Our whole economy is kept up—it’s like a balloon. Not everybody breathes confidence in it. All of our citizens breathe confidence in this big balloon. And so we need to get individual citizens breathing confidence back in this balloon and the problems are solved. Use those funds in there to get jobs to people out here. They are worried about jobs. Job creation is what this needs to be about. And the TARP funds don’t need to be—these guys make mistakes. Real estate is a cyclical business. The bankers keep doing the same thing over and over. The developers keep doing the same thing over and over. Mr. SILVERS. Everyone who spoke had a time limit. I very much agree with your comments, but everyone who spoke had a time limit. Let me just say that—I can’t speak for the other panel members, we each have our own travel plans—but I’m available. I suspect maybe other panelists are available too to continue offline these conversations. We do have time rules, and it’s only fair to stick to them. On behalf of the Congressional Oversight Panel and our Chair Professor Warren, I wish to thank Georgia Tech for their hospitality and help and call this hearing adjourned. [Whereupon, at 12.35 p.m., the hearing was adjourned.] VerDate Nov 24 2008 23:51 Apr 02, 2010 Jkt 055522 PO 00000 Frm 00150 Fmt 6633 Sfmt 6602 E:\HR\OC\A522.XXX A522