Fed Agencies seek comments on proposed accounting standards

As previously highlighted, the FASB (Financial Accounting Standards Board) has drafted updated accounting standards affecting how financial institutions account for CMBS transactions. Since these changes will significantly affect regulated institutions, Fed Agencies like the FDIC have proposed modifications and are seeking comments from interested parties. Here is the text of their request for comment and a link to their analysis....

Agencies Seek Comment on Proposed Regulatory Capital Standards Related to Adoption of Statements of Financial Accounting Standards No. 166 and 167

The federal banking and thrift regulatory agencies are seeking comment on a proposed regulatory capital rule related to the Financial Accounting Standards Board's adoption of Statements of Financial Accounting Standards Nos. 166 and 167. Beginning in 2010, these accounting standards will make substantive changes to how banking organizations account for many items, including securitized assets, that are currently excluded from these organizations' balance sheets.

The agencies are issuing the proposal to better align regulatory capital requirements with the actual risks of certain exposures. Banking organizations affected by the new accounting standards generally will be subject to higher minimum regulatory capital requirements. The agencies’ proposal seeks comment and supporting data on whether a phase-in of the increase in regulatory capital requirements is needed. It also seeks comment and supporting data on the features and characteristics of transactions that, although consolidated under the new accounting standards, might merit an alternative capital treatment, as well as on the potential impact of the new accounting standards on lending, provisioning, and other activities.

Comments on all aspects of the proposed rule are due within 30 days after its publication in the Federal Register, which is expected shortly. ###

Attachment: Notice of Proposed Rulemaking Regarding Risk-Based Capital Guidelines; Impact of Modifications to Generally Accepted Accounting Principles; Consolidation of Asset-Backed Commercial Paper Programs; and Other Related Issues - PDF (PDF Help)

FDIC-PR-151-2009

Media Contacts:
Federal Reserve
Barbara Hagenbaugh
(202) 452-2955
OCC
Dean DeBuck
(202) 874-5770
FDIC
Greg Hernandez
(202) 898-6984
OTS
William Ruberry
(202) 906-6677

CRE deleveraging - a preview of coming attractions

We all know that the prices paid for commercial real estate in the past reflected a premium for the cheap non-recourse debt available at high LTVs....and that the upcoming cycle of maturing and defaulting loans will reflect significant "deleveraging." In article he wrote for CRE Direct.com, a email news service focusing on commercial real estate and structured finance, my friend, Orest Mandzy, its managing editor, used a recent example of a the sale of Hawthorne Works Shopping Center located in Cicero, IL. The property was sold for $30 million to the Sterling Organization. Prudential had recently sold a $36 million mortgage secured by the property which was "performing" at the time it was offered for sale. The estimate is that the loan traded at a 30% to 35% discount from face.....The property purchase was financed in part with a new $19 million mortgage provided by Unum Group.....As Mr. Mandzy observes: " the transaction is a strong example of the deleveraging taking place in the commercial real estate market. The loan that Pru sold had been performing. But it clearly represented a very high level of leverage for the property, part of a former manufacturing facility that was redeveloped into a shopping center in the late 1980s. What had previously supported $36 million of debt now supports only $19 million." OR JUST OVER HALF THE PRIOR PRINCIPAL BALANCE....This is a preview of things to come....

To access the full article, go to:
http://www.crenews.com/index.php?option=com_content&task=view&id=62515&Itemid= or send me an email at pjones@pyramidrealty.com

From Reuters....Sun 16 Aug, 2009...a view of the week ahead....and possibly the next quarter....

GLOBAL ECONOMY WEEKAHEAD-Cheer the recovery, mind the setback
By Emily Kaiser

WASHINGTON (Reuters) – Japan could very well become the third major developed country to pull out of this global recession and, as happened in Germany and France, it may be investors rather than policymakers cheering the loudest.

Japan’s preliminary look at second-quarter gross domestic product is due on Monday morning Japan time, Sunday in the United States (2350 GMT on Aug 16), and is expected to show the economy grew by 1 percent in the April-to-June period.

That would be the strongest advance in two years, and the first positive reading in five quarters.
Yet the Bank of Japan kept its benchmark interest rate barely above zero last week and cautioned that a recent pickup in demand may fade once government stimulus programs end.
Barclays Capital economist Kyohei Morita thinks Japan’s economy will hit a “temporary soft patch” at the start of 2010, a payback from this year’s stimulus efforts. While they temporarily helped to lift demand for items such as eco-friendly appliances and fuel-efficient cars, they did not boost household income, which means demand will stay subdued.

“Without an improvement in purchasing power, we have to expect a reactionary decline in consumption in the first half of 2010,” he wrote in a note to clients.

It is a similar story in Germany and France where reports last week showed GDP turned positive in the second quarter, sparking stock market rallies around the globe. Yet some government officials warned against getting overly enthusiastic because the economy remained far below pre-crisis levels.

TJ Marta, founder of research firm Marta on the Markets in Scotch Plains, New Jersey, thinks the U.S. economy could also return to growth in the current July-to-September period. But he worries that the recovery is resting almost entirely on government supports, such as the $3 billion “cash for clunkers” program that offers incentives to buy new cars.

“We can get a positive GDP print but that’s just the morphine talking. That’s ‘cash for clunkers’ and stimulus coming through,” he said. “There is still no underlying U.S. consumer to support this economy.”

The concern about sustainable growth helps explain why central bankers don’t seem to share the stock market’s confidence in the economic recovery. The U.S. Federal Reserve said last week the economy was “leveling out” but stopped well short of declaring an end to the recession.

Fed Chairman Ben Bernanke is scheduled to give a speech on Friday at the central bank’s annual economic symposium in Jackson Hole, Wyoming. Judging from the title — “Reflections on a Year of Crisis” — the speech will be largely retrospective, but he will probably offer up at least some sense of where he thinks the economy is headed.

TRADE, BUT WHO IS BUYING?

Disappointing reports on U.S. retail sales and consumer confidence last week added to concern that consumption — which accounts for about 70 percent of the country’s economy — remained quite weak. British retail sales data for July, due on Tuesday, are likely to look lackluster as well.

The message is that consumer spending probably won’t be the driving force behind the recovery.

What will be is unclear. President Barack Obama wants the U.S. economy to be more export-driven, something economists have been advocating for many years.

But in the short term, that poses a problem. Domestic demand is weak in most major economies, including Britain, Germany and Japan, which means many countries are also looking to exports to compensate for poor demand at home.

Obama has told the world not to count on the “voracious” U.S. consumer to propel the global economy, yet there is no obvious choice to replace that demand.

Eurostat trade data on Monday will provide some insight into how Europe’s exporters are coping with weak U.S. demand. Germany, by far Europe’s biggest exporter, got an economic boost from trade last quarter but only because imports fell even faster than exports.

While it is highly unlikely that U.S. consumers will bounce back quickly after losing trillions of dollars in real estate and investment wealth, a pickup in the housing market would certainly go a long way toward repairing household balance sheets and restoring confidence.

A string of reports on the housing sector this week, starting with a survey of home builders on Monday, housing starts on Tuesday, and existing home sales on Friday, will be key for gauging whether the market is on the mend.

Still, a full recovery is probably a long way off. Sal Guatieri, a senior economist with BMO Capital Markets, pointed out that home foreclosures reached new highs in July.

“It goes without saying that until savings, unemployment and foreclosures stop climbing, credit-constrained consumers will retain a bunker mentality,” he said.

“While the Great Recession may be history — thanks to inventory rebuilding, renewed export growth and pulled-forward demand — a not-so-great recovery is likely the offspring.”(Editing by Kenneth Barry).

For all news, data, research and analytics, go to www.reutersrealestate.com

"Hold the celebrations and put the champagne away. A sustained recovery in the UK commercial property market is likely more distant than it might seem, as lingering economic hazards threaten a long-awaited rebound." That is the warning from Reuters Real Estate writers Sinead Cruise and Daryl Loo as certain economic indicators paint a picture of recovery in the United Kingdom...the one everyone around the Globe are anxious to witness....This warning is true in the US as well - where the spin doctors put the con into consumer confidence. Heed the advices of the experts quoted in this article:

“People need to be wary of getting too carried away with the potential of the upturn, because the problems of refinancing are lurking over the rest of this year and into 2010,” Ed Stansfield, property economist at Capital Economics, said.

Keith Steventon, head of research at BNP Paribas Real Estate UK, told Reuters: “We’ve been here before. We know it takes time. It’s not zeal we want, but patience.”

FYI: The risk of a double dip recession is increasing on the lips of noted economists around the world....Hold onto the bar, we are in for a long, turbulent ride....

For a complete copy of the referenced article, go to http://www.reutersrealestate.com/monitor/story/152922/1368 or contact me at pjones@pyramidrealty.com with the request.

Last week we had two views of the world appear...first, we had a Deutsche Bank economist predict that the residential real estate market was going to have another, more severe, decline in value while the Feds reported that the unemployment rate fell .01 percent...As my colleague, Steve Felix noted in his weekly On the Road series..."More than not, our colleagues’ feel that another shoe is yet to drop in the commercial real estate industry. With the stock market having had a very good week (although the conversion rate of Canadian to U.S. dollars dropping which is pissing me off) perhaps things are picking up. However, as a taxi driver reminded me this week, “There are still more and more jobs being lost, more and more people losing their homes and more and more people struggling to get by.” So I guess there are two stories in this naked country; those promulgated by the media and our elected officials and those that are the grassroots truth. No one I know is adding to their wardrobe these days, even with ‘sale’ signs as plentiful as weeds in flowerbeds where the gardener has been cut back from every week to every month. This business with the car industry I just don’t know how I feel about it. What makes them so special that they deserve this kind of incentivization just so they can make sales? How about all the other businesses, those owned by individuals (not individuals owning stock but individuals owning and operating the actual business). How about all those businesses closing? Don’t those folks deserve the same help that these characters in Detroit and elsewhere are getting? I just don’t get it. I must be missing something." We do have a dichotomy....and I contend that the unemployment rate is understated are the independent business operators, contractors, brokers and agents who do not qualify for unemployment benefits but are not employed plus those whose benefits have expired and still cannot find a job are no longer considered unemployed.....Talking up the economy may help consumer confidence but when you look at your bank balance and your work in process, it is hard to get encouragement from the statistics and the pundits....what we need is to continue the process of putting a floor to this recession....and the floor is open for ideas.....

Donald Nicolaisen, former chief accountant of the Securities and Exchange Commission, and Financial Crisis Advisory Group Co-Chairman Harvey Goldschmid are emphasizing the importance of independence in setting accounting standards. A report released by FCAG on July 27 made recommendations on how regulators, accounting standard setters and chief financial officers can help prevent another financial crisis by fixing "weaknesses" in standards. "It seems clear that accounting standards were not a root cause of the financial crisis. At the same time, it is clear that the crisis has exposed weaknesses in accounting standards and their application," the report said....Changes in accounting standards from fair value to recording of CMBS and RBS transactions and the accounting for leases are being proposed as GAAP is being merged with IFRS (International Financial Reporting Standards). While the move toward a global set of standards is past-due, it is important for all real estate industry participants to understand the real-life impact these changes will have on the market and our future. Get informed and let your industry group know so they can advise FASB and IFAC on how these changes affect you...

To read the aforementioned article in its entirety, go to: http://www.cfo.com/article.cfm/14155093/1/c_14156779.

The FDIC Chair, Sheila Bair, is once again speaking before Congress. Today it is to the Committee on Banking, Housing and Urban Affairs about the strengthining and streamlining of prudential bank supervision. It seems that there is a proposal before the committee to restructure our bank regulatory system under one roof and would include non-bank financial providers (i.e. securitized bond pools). In her testimony, she will conclude that "A single regularot is no panacea for effective supervision" and that a "unified supervisor would undercut the benefits of diversity that are derived from the dual banking system...." Just as the reforms put in place during the New Deal have created the reality we all have known to date, the reforms being proposed will affect our lives for generations to come....YOU NEED TO BE AWARE -inform yourself and act to protect your future....

For a complete copy of the testimony Chairman Bair is giving today, email me @ pjones@pyramidrealty.com or go to http://fdic.gov/news/speeches/chairman/spaug0409.html

Today, Reuters reported that MIT's real estate index declined 18.1% on increased transaction volume in the 2nd quarter of 2009. The index is down 39% from its mid-2007 peak - and has matched the value decline realized in the 1989-93 real estate recession....This follows last week's GlobeSt. report on the statistics published by RCA in which the headline read "Trillions in Assets on the Hook." As with all cyclical asset purchases, those made at the peak of the market suffer the greatest - and with the leverage used to acquire these assets, that adds significantly to the financial risk.

With this dramatic price decline - and we are not even close to the bottom yet - the wave of commercial mortgage defaults is only a matter of time; however, this time is going to be different from the RTC days. First of all, the securitized loans were predominantly non-recourse loans made to special-purpose, single asset entities - with a "bad boy" recourse carveout that makes the loan recourse to the principals if the borrower voluntarily files bankruptcy. With cash management agreements, it is more difficult for borrowers to accumulate a stash of funds to fight foreclosure. Further, the changes with the bankruptcy law make it a less friendly and more expensive place for borrowers. Consequently, we are going to be in a scenario where lenders will either extend the loan if there is any daylight (equity) at the end of the tunnel or take the property in a friendly foreclosure if there is not....Special servicers are overloaded now, but the tsunami is coming...The only way to minimize it is to re-establish a source for inexpensive refinance capital - and soon. In other words, we need to have investors, special servicers, rating agencies, the Treasury Department, the SEC and other Federal regulators, the Administration and real estate professionals and others work together to create a stucture that works and allows the securitization of commercial mortgages to come alive again....

Please email me at pjones@pyramidrealty.com for a pdf version of the articles mentioned herein.