The Structured Finance Association (SFA) released the following statement on testimony delivered today by Federal Reserve Chairman Jerome H. Powell and Treasury Secretary Steven T. Mnuchin at a U.S. Senate Banking, Housing, and Urban Affairs Committee hearing on the federal government’s response to the COVID-19 crisis.
“We continue to applaud the Federal Reserve, Treasury, Federal Housing Finance Agency, and Ginnie Mae for the steps they have taken to support households and businesses during the COVID-19 crisis,” said Michael Bright, chief executive officer of the Structured Finance Association. “We are glad there has been broad, bipartisan support for central bank, administrative, and congressional action and continue to stress that this is not 2008 and that this crisis was caused by a global pandemic, not an industry that has acted irresponsibly. Questions asked today by Senators Scott, Tillis, and Sasse, in particular, mirror outstanding concerns in our industry, but we are pleased with Chairman Powell and Secretary Mnuchin’s acknowledgment that additional actions may very well be needed.”
SFA has been a leading voice during the COVID-19 crisis in calling for responsible action to support the economy. In March, SFA outlined steps it believed the Treasury and Federal Reserve could take and specifically called for prompt implementation of TALF, actions later taken by the Fed and referenced throughout today’s hearing.
Highlights From Today’s Testimony:
“Whether it’s a small business, a residential market, or a commercial market, I am concerned with commercial mortgage backed securities (CMBS),” said Senator Tim Scott (R-S.C.). “There are a number of shopping centers in rural South Carolina and throughout the country that, having spoken to folks that own those shopping centers, 20 to 22 percent of the folks are able to pay their rent. We are looking at a domino effect in the mortgage market, whether it is commercial or the same concern.”
“It is an important market,” responded Powell. “As you know, we have supported the CMBS market with our open market purchases. And that did help the market function. In addition, legacy CMBS are eligible for our term asset loan facility (TALF), which is an asset-backed facility. It is an important market. We continue to monitor it. The 13(3) facility is a lending facility, and that is [a] tool we have. Not every problem can be successfully addressed with such a facility, but where it can be, we will act.”
“I want to thank the Fed for expanding TALF to include CMBS,” said Senator Thom Tillis (R-N.C.). “I personally think commercial real estate is under extreme stress and is likely to get worse until we see a turn. One thing I am concerned with is right now we only have 15 percent of forbearances from the CMBS services. That seems like a low number to me. One, do you think that is low? And what more may we need to do to get the servicers and the borrowers to the table?”
“It does seem a bit low to me as well,” said Mnuchin. “We do have a structural problem of loans that are in securitization and how they have to be dealt with for special servicers. So, obviously as it relates to the banks, the banks have more flexibility. This is a technical issue, and we may have to come back to work with Congress on a technical fix.”
“I was also interested in the TALF program and potentially other areas where we could expand,” added Tillis. “I am thinking about new issues: CMBS, RMBS, installment loans. Have you thought about that and have you also thought about less than AAA?”
“We have thought about all of those,” responded Mnuchin. “We have prioritized the current facilities, but as the Fed Chair and I have said, we will look at all of our options to make sure we support jobs across the spectrum.”
“The Fed has taken a number of actions with its 13(3) facilities and the April 9 announcement that the term asset-backed securities loan facility (TALF) would be expanded to include commercial mortgage backed securities, as well as static collateralized loan obligations,” said Senator Ben Sasse (R-Neb.). “The Wall Street Journal described that expansion as ‘the Fed will in effect be buying the worst shopping malls in the country and some of the most indebted companies.’ Could you give us your perspective on this expanding, and are they right on the risk levels of some of these properties? As American goes through this, lots of people are not just doing telecommuting for the president, but in Silicon Valley, we see a lot of companies planning to migrate their long-term strategy, and I would assume that’s what we are going to see for commercial property across America. The taxpayers should not be on the hook for flooding into that space. Can you explain how you would respond?”
“In TALF, we were supporting asset-backed securities markets broadly,” responded Powell. “That’s consumers. That’s car loans, credit card loans, etc., in addition to the CMBS you mentioned. Now, we are only buying the AAA-rated piece, and we are only buying it with a good size haircut, so the credit risk is very, very low on this to us. The same is true of the CLOs.”
NOTE: CEO Michael Bright is available for interviews. Please direct all inquiries to Micah Johnson at [email protected].