A commercial secondary market growth bill introduced by Rep. Paul E. Kanjorski, D-Pa., has the commercial real estate market and mortgage bankers closely eyeing the ramifications of regulatory waivers.
The bill's centerpiece is the certification of "secondary market facilitating organizations," which would be determined by the Treasury secretary. With this certification, any private or public entity that meets the prescribed eligibility standards would receive Treasury Department waivers from a wide array of statutes and regulations in order to promote the development of a more efficient secondary market.
Kanjorski, chairman of the House Banking Subcommittee on Economic Growth and Credit Formation, created the bill to help spur economic growth and ensure sufficient credit at affordable rates for the nation's businesses. While few bankers favor the bill, the commercial realty sector is lauding it.
"It isn't a big step," said a real estate industry source. "But it is a step in the right direction. There's lots more that could have been introduced--ideally, we'd like to see more standardization of documents and documents more easily rated by the S&Ps of the world."
With the responsiblity of deciding what regulations would be waived, Treasury Secretary Lloyd Bentsen can expect a flood of recommendations from pro-legislation groups, if passed. Many organizations have already mapped out their strategies.
A report from the National Realty Committee, an industrywide umbrella group, on developing a secondary market to provide liquidity proposes the adoption of policy modifications to remove the barriers to commercial real estate debt securitation. The proposals include:
* requiring bank regulators to clarify the amount and allocation of capital required of holders of senior or subordinate interests to eliminate over-reserving and facilitate private credit enhancement;
* allowing the Internal Revenue Service to provide for the availability of real estate mortgage investment conduits for restructured commercial loans;
* allowing Congress to extend the benefits to securities created by the Secondary Mortgage Market Enhancement Act of 1984 to comparable commercial market securities;
* cutting the qualifying percentage from real estate investment trust incomes gained from the sale of newly acquired properties for more "active" asset management;
* allowing for the greater retention of capital by REITs; and
* allowing the transfer of real estate assets to REITs on a tax-free basis.
"Creating an efficient secondary market may be one of the most promising initiatives available to Congress to promote economic growth across the country." Kanjorski said in a release announcing the bill.
Bankers expressed concern about what the bill may do to marketwide standardization and competitiveness.
"What bothers us about this secondary market scheme, is that small business lending would come under heavier loan term standardization. and this might later be applied to all small business loans. Eventually nontraditional loans would be discouraged as well," said Stephen Verdier, the Independent Bankers Association of America's senior legislative council.
Kanjorski, who worked closely with the IBAA and other banking organizations on the specifics of the bill, said he's heard this argument and others from the banking community but contends the plan is still sound.
"Our ultimate goal is to allow the private sector, through the new secondary market, to take business, commercial and community development debt and equity investments, place the in scrutinized pools, and create investment products which are attractive to pension funds and insurance companies," Kanjorski said. "This is the only way we are going to be able to leverage the vast amount of capital which is necessary for new business development and the expansion of existing businesses, without significantly increasing the federal deficit.
"If the private sector financial entities want to reap enormous potential profits associated with operating in the new secondary market without existing legal and regulatory impediments, they will have an obligation to fulfill certain public policy objectives. This will still be a profitable business."