On July 21, President Obama signed the financial regulatory reform bill (HR 4173), or FINREG, into law. NAA/NMHC was victorious on key issues that had threatened to disrupt the industry’s access to capital.
Among them:
• Securitization/Risk Retention Requirements. The commercial real estate industry secured a significant victory when conferees agreed to retain (with minor modification) an amendment offered by Sen. Mike Crapo (R-ID) that explicitly allows “third-party (B-piece) investors” to satisfy new “skin-in-the-game” provisions that require originators and issuers of asset-backed (mortgage) securities (ABS) to retain 5 percent on their books.
As originally written, the Senate bill did not allow for different assets to be treated differently, but NAA/NMHC and others successfully argued that commercial mortgage-backed securities (CMBS) should be treated differently than other ABS because they have subordinate investors (B-piece buyers) who underwrite the investment and purchase the first-loss position. Without this change, CMBS lenders would have been required to increase their capital set asides, which would have increased the cost of and reduced access to CMBS capital.
Additionally, the final bill directs the Federal Reserve Board and other financial regulators to study the impact of the risk-retention rules and the new accounting rules (Financial Accounting Standards 166 and 167) on credit availability and to recommend legislative and regulatory changes to improve capital availability if necessary. Both provisions should help support the resurgence of the CMBS market.
• “End-User” of Derivatives Regulations. NAA/NMHC and others also successfully excluded commercial “end users” of derivatives—including apartment firms—from central clearing requirements, including new margin and registration requirements. The final package only applies these provisions to “financial firms,” excluding firms that use swaps to hedge interest-rate risk. The measure does authorize regulators to impose initial and variation margin on these uncleared trades, however.
• Assistance for “At-Risk” Multifamily Properties. NAA/NMHC turned back efforts to “force” vaguely defined “at-risk” multifamily properties into bankruptcy without the consent of the owner in order to convert them to affordable housing. Instead, the compromise bill directs HUD to develop a program to provide new equity to “at-risk” multifamily properties and to create long-term sustainable financing programs for such properties based on current rental income and operating and replacement reserves. Importantly, the measure specifies that any transfer of at-risk properties requires the agreement of the owners.
• Resident Foreclosure Protection. The compromise bill would extend until 2014 a previously enacted law (PL111-22) that protects households renting a property facing foreclosure. Among other things, the law requires the “immediate successor in interest” of a foreclosed property to assume any existing Section 8 housing assistance payment contracts and to allow Section 8 renters to remain in place for the term of the lease. These provisions were scheduled to expire (“sunset”) at the end of 2012.
While the NAA/NMHC victories helped mitigate the legislation’s impact on the flow of credit to the apartment industry, attention now turns to the rulemaking process. Independent analysis of the measure finds that it directs federal agencies to issue nearly 200 rules to implement the law, and it gives them the authority to act on up to 350 provisions. By contrast, Congress Daily reports that the 2002 Sarbanes-Oxley corporate governance law had 16 rulemakings.
The risk retention requirements and the derivatives provisions are among the areas where regulators will have the greatest influence. For that reason, NAA/NMHC will continue to closely follow the implementation of the law and will work with regulators to ensure that the apartment industry’s unique needs are fully understood.