A joint industry coalition comment letter was submitted to regulators regarding the proposed Basel III capital rules. The letter requests
that the regulators extend the comment period from 90 to 150 days; it also
request that they engage in a study of the impacts the proposed regulations
will have on non-financial businesses (e.g., real estate). Comments on
the proposed rules are currently due by September 7, 2012.
Also a letter was sent to regulators from Rep. Peter King (R-NY) raising a number
of concerns about the impact the proposed rules will have on credit capacity --
particularly with smaller banks.
Background
On June 12, 2012, the Federal Reserve, OCC and FDIC proposed
regulations implementing the Basel III capital accords. Basel III is an
international agreement that updates capital and liquidity requirements for
banks and other financial institutions. This 750 page regulation will impact
the ability of non-financial businesses to raise capital and increase their
costs of borrowing.
In
a series of three separate but related proposals, the regulators proposed
substantial revisions to the U.S. regulatory capital regimen for banking
organizations that, if adopted, will have a significant impact on the entire
U.S. banking industry. The U.S. rules are based on the core requirements of the
2011 international Basel III Accord and in significant part on the
“standardized approach” for the weighting and calculation of risk-based capital
requirements under the 2004-2006 Basel II Accord. Importantly, the
proposals will extend large parts of a regulatory capital regime that was
originally intended only for large, internationally active banks to all U.S.
banks and their holding companies, other than the smallest bank holding
companies (generally, those with under $500 million in consolidated assets).
Commercial
Real Estate
Most
commercial loans will continue to be risk-weighted at 100 percent. The one
significant change is for “high volatility” commercial real estate loans
(“HVCRE loans”), a subset of ADC loans. HVCRE loans will be risk-weighted at
150 percent. A lender may be able to return an ADC loan to the 100 percent risk
weight through underwriting and the imposition of certain terms, as follows:
•
The LTV
ratio is less than or equal to the “applicable maximum supervisory LTV ratio.”
•
The
borrower has contributed at least 15 percent of the appraised “as completed”
value of the property. The contribution may take the form of cash or
unencumbered readily marketable assets, or the borrower may have paid
development expenses out of pocket.
•
The
borrower has paid to the bank the capital charge that the bank will have to
incur on the loan and has done so before the bank advances any funds.
•
The
contributed capital, which may eventually include capital generated internally
by the project, must remain in place until the project is completed, the
facility converts to permanent financing, or is sold or paid in full.
•
Permanent
financing by the bank must conform to the bank’s underwriting criteria for
long-term commercial mortgage loans. An ADC loan to finance one- to four-family
residential properties, however, may continue to be risk-weighted at 100
percent.
Residential
Construction and Multifamily Loans
The
current risk-based capital rules assign a risk weight of 50 percent to certain
one-to-four family residential presold construction loans and to multifamily
loans. A 100 percent risk weight applies to a presold construction loan if the
purchase contract is cancelled. These risk weights are fixed by statute and
cannot be changed. The proposed Standardized Approach, however, adds several
new conditions to both kinds of loans in order to qualify for these risk
weights.
Presold
construction loans must meet several prerequisites designed to ensure that the
property will, in fact, be sold on completion. Two notable new requirements
are, first, that the builder incur at least the first 10 percent of the direct
costs of construction (land, labor, and construction) before the builder may
begin to draw down on the loan; and, second, that the loan amount may not
exceed 80 percent of the sales price of the presold residence.
Loans
secured by mortgages on multifamily properties will remain eligible for the 50
percent risk weight if several conditions are met. For example, a newly
originated multifamily loan cannot be risk-weighted at 50 percent and must be weighted
at 100 percent. If, after at least one year, the borrower has made all
principal and interest payments on time, the loan will be eligible for the 50
percent risk weight, if other conditions are satisfied.
These
conditions include the following: (i) the LTV ratio does not exceed 80 percent
on a fixed rate loan or 75 percent on a loan where the rate may adjust; (ii)
amortization of principal and interest must occur over a period of not more
than 30 years, and the original maturity for repayment of principal is not less
than seven years; and (iii) annual net operating income of the property must
exceed annual debt service by 20 percent for a fixed-rate loan or 15 percent
for a loan where the rate may vary.
Basel
III Working Group
NAR has formed a staff level working group with various real estate groups in
Washington. This group is meeting regularly to share information and develop a
collective strategy on these proposed rules. Questions, please contact:
Vijay
Yadlapati
Commercial
Policy Representative
National
Association of Realtors®
Ph:
202.383.1090
Fx:
202.383.7580
