burke .. >> patrick parkinson's remarks came before the panel overseeing the troubled asset relief program. he's joined at the hearing by officials at the fdic and comptrollers at the currency

office among others. this is two hours and 40 minutes. >> good morning. i'm ted kaufman. we're here this morning, and i welcome our witnesses and visitors at a time of economic recovery. a financial panic that plagued our country is over. the dow jones industrial average exceeded its year end peak from 2007. only a few points below its all-time high. housing prices are recoverying. private companies are hiring again putting our millions of unemployed neighbors and friends back to work, but we have a long way to go as everybody know. it's fitting that a crisis goes to government and the extraordinary authority stabilizes the financial system, the troubled asset relief

program has ended. however, threats to the banking system and broader economy remain. our hearing this morning explores the threat in detail, the troubled market for commercial real estate loans. they are what they sound like. loans taken out by developers to buy, build, and maintain commercial properties. anybody who shops in a mall, has been in a building that owes a mortgage. they have terms of 3-10 years, but the monthly payment are too low to fully repay the loan in that period. at the end of the term, the entire remaining balance is due, and the borrower takes out a new loan to finance that property. a borrower reapplies for credit. in today's market, the values of commercial properties have

fallen by a third, many will be turned down. the loans are the greatest risk of those main at the real estate bubble obviously. loans come due for refinancing in 2011, 2012, 2013 and beyond. in essence, this creates a lag between the moment, the market collapses and the moment the economic impact is felt. the fuse is little, but no one knows how much damage it will incur. they have been monitoring the commercial rams market since the first hearing in may of 2009. the panel had a report in february 2010. after two years, the panel is deeply concerned. in fact, just last month, the missed payment rate commercial mortgage backed securities reached an all time high of 3.9%. the commercial real estate market encompasses $3.4 trillion

in debt. if they default large numbers, commercial properties could face a wave of foreclosures, customers, businesses, and renters and properties could face uncertainty and even eviction. small banks could face insolvency as 1300 banks worldwide have concentrations in commercial real estate. concerns also lights up another theme. even in a crisis while you deal with short term dangers, they have to be individual lent to the longer -- vigilant to the longer term threats. banks to the t.a.r.p. if it collapses next year due to losses, t.a.r.p. support serves only to postpone the inevitable. further, more than 500 small banks continue to hold t.a.r.p. money. the greater degree closer to commercial real estate, the lower is the likelihood the

taxpayers recover the money. we are grateful to be joined by two panels of expert witnesses to help us explore the concerns including government regulators and bank analysts. we look forward to your testimony. let me turn to mr. mcwaters for his opening remarks. >> thank you, senator kaufman, and welcome to our distinguished witnesses. there's a little doubt that much uncertainty exists within the commercial real estate or cre market. in order to suggest a solution to the challenges facing this area is critically and the thoughtly identified them as sources to the underlying difficulties. it is unlikely we may craft an inappropriately targeted remedy with adverse unintended consequences. today, the cre industry is faced with both an oversupply of overleveraged cre facilities and

an undersupply of respective tenants and purchasers. in my view, there's a remarkable decline in demand for cre property. over the past two years, many potential ten in a minutes and purchasers have withdrawn from the cre market not because purchase prices are too high doo to the excess debt load carried by many properties, but because the business operations do not presently require additional cre facilities. over the past two years while a series of developers constructed new office buildings, hotel, multifamily housing, and industrial properties with an excess of cheap short term credit, the end users of such facilities suffered the worst economic downturn in several generations. any positive solution to the cre focus problem focuses only on

the oversupply of the facilities to the exclusion of the economic difficulties facing the end users of such facilities is less than likely to succeed. the challenges confronting the market are not entirely unique, but are indicative of the series of problems in the economy. in order to address the oversupply of overleverage facilities, developers and the creditors are currently struggling to restructure and refinance their portfolio loans. in some instances, creditors acknowledge economic reality in lining new loans to market value with perhaps retention of an equity kick or a ride. in other cases, lenders and borrowers kick the can down the road on a short term basis to avoid loss or recognition and capital impairment when there's an adverse tax consequence. while each approach offers

assistance in specifically tailored instances, neither addresses the reality of too few tenants and renters. until businesses begins to hire new employees and expand bises operations, it is doubtful the cre market will sustain a meaningful recovery. as long as business persons have the challenges of rising taxes and regulatory burdens, it is less than likely that they will enthusiastically assume the entrepreneurial risk for economic expansion in a robust recovery of the cre market. it is fundamental to acknowledge that the american economy grows one job and one consumer purchase at a time. the cre market will recover one lease, one sell, and one financing at a time. with the expanding of rules,

regulations, and taxes facing business persons and consumers, we should not be surprised that businesses are reluctant to hire new employees, consumers are cautious about spending, and the cre market continues to struggle. the problems presented by today's cre market is easier to address if they were solely based on the oversupply of overleveraged cre facilities in certain well delineated markets. in such an event, a thoughtful, but painful, restructuring refinancing of foreclosures would result in the material deleveraging and repricing of troubled cre properties. unfortunately, even those properties that are appropriately leveraged and priced must also assimilate a drop in demand from prospebtive ten gnats and purchasers who suffered a reversal in business operations and prospects. although some progress has been

made, the administration can further assist the recovery this area of a market as well as a broader u.s. economy by sending a message to the private sector that they may raise the taxes or the regulatory burden of cre participants and other business enterprises. without such action, the recovery of the cre market will quite possibly per creed at a -- proceed at a sluggish pace that hold cre loans and commercial mortgage backed securities. thank you, and i look forward to our discussion. >> thank you. >> thank you, mr. chairman. good morning. this is the third hearing this panel conducted on the interaction of the commercial real estate market with the troubled asset relief program. our earlier hearings looked at the issue through the experience of the new york and the atlanta

metropolitan areas. this is really the first hearing focused on the national picture and on the viewpoint and efforts of the bank regulators in relation to issues raised by the commercial real estate market. in the february 2010 report as noted, this panel urged the treasury department and the dng regulators to closely monitor the commercial real estate market out of concern that the rapid decline could lead to problems for financial institutions with significant exposure to commercial real estate loans, and in particular, could affect the small banking sector. we noted due to the shorter term of real estate loans compared to commercial residential mortgages, the banking system would face roleover problems for more than $2 trillion loans between 2011 and 2017. loans whose collateral seems likely to have fallen in value dramatically when the loans become due. today's hearing is an opportunity for us to revisit

the question of what is going to happen to smaller banks as commercial real estate loans become due and what impact the developments will have on efforts to revive commercial lending, and on the degree of concentration in our banks system. we do this against the backdrop of smaller t.a.r.p. reaccept yent bank -- recipient banks. against the backdrop as we noted in other reports of the challenges that the treasury department faces in terms of constructing an exit from t.a.r.p. for the smaller recipients of t.a.r.p. assistance. this hearing is an opportunity to look more broadly at the implications of the commercial real estate market for oversight of t.a.r.p. as a whole. several of our witnesses today pointed out in the testimony that real estate loans are

concentrated in smaller banks and are not a problem by and large that threatens the systemically significant institutions. we also have a substantial body of testimonies today that discusses the capacity of banks and other commercial real estate lenders to restructure commercial real estate loans, and the difference that that capacity and flex abilities made in terms of mitigating the impact of the dramatic fall of real estate values. now, neither proposition is a great comfort to me, nor i think would either proposition be a great comfort to the american public if the public understood the implications of the statements. every week, the fdic resolves more failed small banks. those banks are shut down, stockholders wiped out, in many cases, employees laid off, the communities com they serve are left without important institutions. in some cases, in other cases they have new names and ownership. all of --

all of those harmed by these actions know that if they had just been systemically significant, they might be well on their way to enjoying the fruits of the recent many boom in finance. they consider any one of the more 200 american families facing the loss of their home each month due to residential real estate foreclosures in substantial part because of the lack of flexibility in the approach the banks took to residential real estate. now, today, rather than dwell too long on these injustices that appear at this point to be profoundly lodged at the heart of the policy landscape, i hope we can learn something practical from this hearing as so one whether we still have cause to be concerned about rollover risk in cre that was raised, and two, what can we learn from the commercial real estate experience? i look forward to hearing from the witnesses and extend my

thanks to all of you for helping us today. >> thank you, mr. silvers. >> thank you, senator kaufman. i want to start by thanking the witnesses for appearing before the panel today. i appreciate you coming here to help us with our oversight responsibilities. in my opening comments today, i want to touch on a issue that is certainly related to the topics here. that is the role of regulation and regulatory oversight in the recent financial crisis. one common theme in the aftermath of the recent crisis has been that the crisis could have been prevented by more regulation. of course, in our economic system, there's two sources of regulation, that imposed by the market, and that imposed by the government. both forms of government have their strengths and weaknesses. many of the calls for increased government regulation failed to recognize the inherent weaknesses in this type of

regulation. it is important to start off by recognizing that regular regulators are human beings, not superheros that respond to incentives like all other normal human beings. government regulators with no skin in the game have little incentive to closely monitor the companies to ensure they protect investors in the economy. in contrast in a well-functioning market, share hold everies and creditors have a great deal of inacceptabilityive to monitor from -- insenttive to monitor because they have skin in the game. some do a great job, but there are others whose efforts focus on implementing rules in a way to maintain their positions, and it is hardly -- it is hard to know which is which before problems arise. as far as i know no government regulator lost their job because the firm they regulated failed or received a bailout. in fact, in many of the regulatory agencies that received the most blame received additional regulatory authority in the recent dodd-frank legislation. it seems clear that regulators

have little financial incentive to apply the regulatory procedures to yield maximum benefit so we are forced to rely on personal motivation for doing the right thing, hardly a sound basis for effective regulation. we must also recognize that government regulators operate in a political process. when regulators regulate large companies, the executives complain to their legislated representatives about the undue burden of regulation, and the regulators try to limit the regulators. we have seen this process play out time and time again in a variety of settings. when companies are making large profits as often occurs in a price bubble, it is unreasonable to expect government regulators to have the political will to pop the bubble. i'm not saying the way the political process works is inappropriate, just that this dynamic must be kept in mind when thinking about the likely effectiveness of new regulation. we need to recognize how executives, shareholders, and creditors of financial firms

respond to regulation. all businesses, including financial firms, aim to provide the products their customers adamant. customers demand and continue to demand the financial products at the heart of the financial crisis such as collateralized debt and other derivatives. given new government relations, this pushes firms to push more complicated difficult to regulate financial products moving them into a shadowy part of the government sector. with increased regulation, this decreases shear holder's efforts at monitoring managers and allow their oversight to be planted with government regulation. given that regulation pushes companies to hide risky investments and monitor the behavior of executives, government regulation likely leads to a world where there are fewer crisis, but those crisis that do occur are harder to spot and much larger and more

destabilizing. is this is tradeoff we want to make? we agree that financial firms will not be allow to fail removes incentives creditors have to monitor the believer of executives and shareholders. it seems that a more significant solution would be to eliminate the government's guarantee to provide creditors with the incentives to monitor the behavior of firms. claims that the lack of regulation led to the financial crisis or claims somebody is sick because they don't take medication. medicine can kill you or prevent sicknd, but the correct medication is the overall health of the patient, and the disease he has. it is impossible to have a medicine to prevent anyone from getting sick. instead, we follow basic rules. eat a balanced diet, exercise on a regular basis, don't smoke,

avoid drinking to excess that are designed to build resistance to diseases and minimize the effects if we are ill. following the rules, people still get sick. good regulation follows a similar course setting rules to enhance the natural regulators, shareholders, and creditors to oversee managers. even the best government regulation will not prevent the occurrence of future financial crisis, just reduce the frequency, minimize the effects, and make people aware of the risks so they can prepare. responsibility for the a firm's failure does not reside with government regulators, but rests with the managers and owners who made poor decisions. we need to keep this in mind when designing optimal regulation and planning for future crisis. hopefully the testimony we hear today will help us better understand remaining problems in the market so the political leaders can continue to work towards better, more efficient regulation to ensure the stability of the financial

sector. >> thank you, dr. troske. >> good morning, i want to thank our witnesses, the federal regulators appearing today at the hearing of the correctional oversight panel on commercial real estate lending. the panel first explored the issue in the field hearings in new york city in 2009 and in atlanta in jan -- january of last year. in the time since then, there's reason to remain concerned about mounting pressure in the real estate sector. financial stability overall has been returning, but this recovery is still vulnerable to shocks. the concern is that the credit risk and particularly the maturity risk embedded in commercial real estate loans could provide such a trigger in the near term. it is estimated that hundreds of billions of dollars in commercial real estate debt will be maturing in 2014. the prospects of refinancing the debt are uncertain.

as the recession and high levels of unemployment continue to put downward pressure on property values. this could jeep des the viability of loans that were properly underwritten. this weighs heavily on mid-sized and community banks that are more concentrated in commercial real estate than larger institutions. the future of commercial real estate lending matters to more than just a subset of lenders and borrowers. commercial real estate impacts every community on multiple levels so understanding the sector is an important aspect of stabilizing our national economy. we are talking about the office buildings, shopping malls, and hotels that shelter jobs. mortgages that help businesses remain open are critical to economic recovery. commercial real estate also includes multifamily and affordable housing units.

for apartment buildings in particular, there is a concern that the properties' condition deteriorates as the owner's cash flow is converted to making debt payments. tenants who pay their rent on time find themselves homeless because the landlord defaulted on the mortgage. workouts for disstressed loans on multifamily property should be restructured with community goals in mind. my questions this morning, i'll be exploring this connection of the well being of our society and financial stability. there are many open issues such as what steps are being taken at the national level to protect members, renters, and multifamily properties during a foreclosure? are tightened standards set at the right levels to ensure prudent loans, or is credit artificially restricted? are banks adequately prepared for additional loan losses that

may be coming? i look forward to the responses on these issues and stabling commercial real estate. thank you for joining us. >> thank you all. i'm pleased to welcome the first panel consistenting the federal bank regulators. standard tompson, patrick parkinson, regulation for the federal reserve, and david wilson, deputy controller for credit and market risk for the occ. thank you for coming this morning. keep your testimony to five minutes to have adequate time for questions. your complete written record is printed in the official record of the hearing. proceed with your testimony. we'll start with ms. thompson. >> good morning. i appreciate the testimony to testify on bhaft of the fdic regarding the condition of the commercial real estate market and its relationship to the

overall stability of the financial system. the events surrounding the recent financial crisis have taken a heavy toll on economic activity across our nation. the past three years have been difficult for many institutions that focus on cre lending, especially in home construction. in 2009, there were 140 bank failures, last year, 157 banks failed, and many of those failures were caused by losses on construction loans that were made during the boom years before the crisis. some community banks with cre concentrations continue to experience elevated losses. the stressed cre loan exposures take time to work out, and in some cases, require restructuring to establish a more realistic and sustainable repayment program. some loans may not be able to be modified and must be written off. this process of prompt lost

recognition and restructuring painful as it may be is needed to lay the foundation for recovery in the cre market. at the same time, it must be recognized that many institutions with cre's have weathered the financial crisis. in 2008, 2 # 00 -- 2200 institutions had cre concentrations. they continue to operate in a safe and sound manner serving the credit needs of the communities. it is important to note that capital levels that ensured institutions are relatively strong. of the almost 8,000 ensured depository institutions reporting at the embed of last -- end of the last september, 96% are in the well capitalized category. for banks with cre concentrations, 87% are well capitalized. the fdic and other federal

banking regulatory agencies have taken a number of steps to better understand the nature and extent of cre con sennations. the fdic extended supervisory invitations at institutions with cre concentrations. we broadened the programs to better capture outliers. we received more detail information on a quarterly basis on hop nor occupied exposures to better delineate a bank's portfolio. the fdic is joined with the other regulators in encouraging lenders to continue making prudent loans and working with borrowers who are experiencing financial difficulties. although a number of financial institutions have reported poor results for the past several years, there are emerging signs of stablization. year over yeefer earning -- yeefer earnings -- year earnings improved and loan

loss provisions declined. additionally noncurrent loan balances declined with the largest decline occurring in the construction and development lending sector. there are other signs pointing to a slow stablization in the residential and commercial property sector with improvement in prices and vacancy rates. nonetheless, while there's signs, the market is disstressed, and it will take time to work through the issues. all banks, community banks in particular, play a critical role in helping local businesses fuel economic growth, and we support their efforts to make good loans in this challenging environment. thank you, and i'll be pleased to answer any questions from the panel. >> thank you very much. >> members of the panel, thank you for your invitation to discuss the current state of the commercial real estate and the relationship of the overall stability of the financial

system. for the past year, the rate of deterioration has leveled off, and there are early signs of price stablization. however, weakness in markets both commercial and residential continues to be a drag on overall growth in the economy. cre related issues present ongoing problems for the banking industry, particularly for community and regional banking organizations. losses associated with the cre, particularly residential construction an land development lending, are the dominant reason for high bank failure sibs the begin -- since the beginning of 2008. they continue well past the trough of recessions, and we expect this pattern to continue in this cycle. working through the troubled e loans will take time as banks go through the process of loan restructurings. if done prudently, this will reduce the ultimate losses to the banking system, in addition, proper restructuring can reduce

damage done to business and the economy by limiting the force liquid dation of properties that further depress prices. while we expect significant ongoing e related -- cre related problems, worse case scenarios are unlikely. in 2010, late rates on construction and development loans improved by 1%. still, even if metrics continue improving, there's an overhang of stress the cra banks and will stay high for some time to come. approximately one-third of all loans are scheduled to mature over the next two years. this circumstance represents a risk as cra loans have large balloon payments. since the passage of the october 2009 supervisory guides, banks have significantly increased level restructuring of loans.

economic incentives to restructure or finance loans are aided by the low interest rate environments. some rates are also beginning to see a pickup and demand for high quality properties with strong ten nets. since the beginning of 2008, the third quarter of 2010, commercial banks incurred $80 billion in losses related to cre exposure with 5% of the average exportfolio sure outstanding during that period. given past historical experience with the improvement in the broader economy, it is estimated banks have taken roughly 40%-50% of the losses they will realize over the cycle. we can project financial losses facing banks, losses realize this cycle will depend on macroeconomics. cepsivity to the losses is why we continue to emphasize the

importance of stress testing as a critical element of managing risks associates with cre concentrations. progress will take time and depends on banks taking strong steps to make sure problems are recognized, capital refrequents risks, loans are modified in a safe and sound manner, and that loans continue to be made available to credit borrowers. . we'll continue to work and take a balanced approach to ensuring safety and soundness to serve the credit needs of the community. thank you, and i look forward to your questions. >> chairman kaufman and members of the panel, i appreciate the

opportunity to talk about the banks. the occ supervises 1300 national banks representing 18% of all ensured depository institutions and approximately 63% of all idi assets. commercial real estate lending is a prominent business line for banks and is a sector that the occ monitors closely. national banks hold approximately 735 billion in outstanding cre loans, 14.5% of their loan balances. while there's signs that the commercial real estate markets are beginning to stabilize, we are a long way from full recovery. vacancy rates are starting 20 recover, but remain high by historical standards. we expect rates to remain elevated for the next 12 months. capitalization rates, the rate of return demanded by investors have also shown recent signs of

stablization. rates fell substantially from 2002 to 2007 to a point where they did not fully reflect the risks associated with the properties being financed. they then increased marketability in 2008 and 2009 as investors became more risk adversed. recently, they appear to have stabilized particularly for high quality assets, but the spread is demanded by investors relative to treasuries remains wide. a key driver for property values and cre loan performance is not net operating income or cash flows generated by the properties. over all, noi continued to decline due to soft rental rates. while we expect the rate of decline tolessen, only -- lessen, only apartments are expected to show meaningful growth this year with other major market segments expected to turn positive in 2012. property prices have also shown recent signs of stablization.

the property index recorded an increase of .6% in november of 2010, the third consecutive month of price gains. while this is encouraging, we expect the prices to be volatile until writing market fundmentals improve consistently. the trends and performance of loans within national banks mirror those in the broader cre market. while there's signs of stablization and charge off rates, nonperforming loan levels are eel valeted and continue to require significant attention by bank managements and supervisors. the effect of commercial real estate or disstressed commercial real estate on commercial national banks variouses on size, location, you know, type of cre loan. because of the charge off rates for construction loans, let performance in the sector, banks with heavier concentrations

experience losses at an earlier stage. performance is expected to improve more rapidly as the pool of potentially disstressed loans diminished. conversely, banks who lends more focused on income producing commercial mortgages are continuing to experience increased charge off rates. another factor for many community and mid-sized banks is their cre condition sen traitions. -- concentrations. it is a percentage of capital that declined recently, they are still significant for many mid-sized and community banks. cre concentrations and problem workouts continue to be areas of emphasis and occ examination activities and our objectives are three-fold. ensuring that the banks risk rate their loans, that they work constructively with troubled borrowers and maintain adequate loan loss reserves and exalt taking appropriate chargeoffs when needed. we also emphasizing the

importance of stress testing on our assessing whether additional policies or guidance are needed for examiners and institutions to more effectively deal with the risks that cre concentrations can pose to the industry and the viability of individual financial institutions. in some areas, modest signs of improvement, but the cre market faces head winds. ultimate stablization requires restoring e quale lib yum and demand of supply and demand that hinges on recovery of the overall economy. this is not painless, and we expect port portfolios will be a drag on performance for the next 12-18 months. during this period, the occ will take a balanced and measured approach in the supervision. >> thank you, mr. wilson. we have questions about small

banks. i want each of you to comment on how much you think that overhang on small bankings aivets recovery. >> i think it is impacting the recovery, but when we issued the guidance on the cre loan workouts, we're seeing restructurings. for the banks in our portfolio, they have a close and good relationship with their borrowers. we have 4700 institutions where we are the primary regulator for, and people are located in the communities. the have a high touch with their borrowers and are familiar with the markets, and it would be a win-win for them to work out and restructure the loans. we've been encouraging them to do so and encouraging them to acknowledge when they can't work the loans out so they can take

the losses right away. >> dr. parkinson? >> i think it is affecting the recovery as senator was saying. all of us have been saying that we've been every sizing the importance of prudent workouts and certainly monitoring what the banks do in that area, but even with prudent effective workouts, many of them have large volumes of assets that are extremely troubled, and in the course of working them out, further losses are going to be recognized, and in some cases, that jeep jeopardizes their ability to play the role they need to play, and i don't think at this stage, there's much we can do about that other than be sure they follow the workout guidance to mitigate and limit whatever damage their troubled condition would otherwise produce. >> mr. wilson? >> yes, i have similar comments. i mean, there are a number of severely disstressed community banks that probably won't make

it, and, you know, there is no real silver bull let, but the -- bullet, but the best we can do is be sure we're fair and consistent, and we are consistent with our workout guidance because in many cases, that's the best for the bank. that's the best for the customer, and as was mentioned before, it's also best for the community. >> many times we talked about borrowers and there's good relationships. the borrower say they can't extend the loan, can't work it out because the regulators. i've heard this time and time and time again, so, ms. thompson, do you have comments you can address to this complaint? it is -- i mean the person that these borrowers blame is not the banks, it is they blame it on the regulators. >> you're absolutely correct. we hear that all the time, and we really as regulators, try to take a balanced approach to supervision. we want banks to make good prudent loans. we don't want them to create

further problems by kicking the can down the road. we think it's important there's good underwriting standard, and as long as a bank is making good loans, we are encouraging that practice both for small business lending, residential cre, and we just think that the regulators are trying to work with institutions so that we can have a safe and sound banking system with good loans because we know what happens when a bad loan is made. >> dr. parkinson? >> consistent with that. we're certainly aware of the reports, and we've been taking a careful look at what the examiners are.name to follow guidance set out and take an objective and balanced approach. we continue to revert that through training who are very -- who are monitoring the process which includes local management vettings of the reviewing the sample of examine reporting to see if there's any

inconsistencies with the guidance, our monitoring to date suggests by and large the examers are appropriate to the guidance, and we've made it clear if a banking organization is concerned about supervisory restrictions imposed by the examers, they should contact the reserve bank or contact us in washington to discuss and identify the problems. >> [inaudible] >> equally. we agree with that. we do hear that a lot. we are verycepstive to it -- very sensitive to it. when we try to solicit specific examples of a situation where we can follow up, and as pat said, when there's specific situations, our examers are working appropriately, but it's more general that we can't really track it down. >> i'm out of time for questions because i won't ask the question is how many times are the banks blaming you because they don't

want to make the loan anyway. >> last time we had a severe real estate depression was 89-94. the answer was, the resolution trust authority incorporation. rtc purchased lots of loans, sold them at very cheap prices, may not have been favorable for the taxpayers, but it did lead to immediate price discovery as to what was fair market value of the assets. given where we are today, is there a need for an rtc? ms. thompson? >> [inaudible] >> turn the mic on. >> sorry. i worked at the rtc, and we had a -- i think the industry and

the regulators can work through the issue. we are seeing signs of stablization. the cmbs market is coming back. it's not where it once was, but we saw a lot of transactions in the 4th quarter last year. vacancy rates are declining. it seems like the workout process just needs time to work itself through. i'm not sure that an rtc-type entity is necessary at this point. >> okay. thank you. dr. parkinson? >> just to make an observation that the rtc was created to dispose of the assets of failed banks coming through the fdic's portfolio. if the concern is about the overhang of troubled assets at the banks until they fail, there's not a purpose for rtcment i think if the notion was that we create a government to buy troubled assets from commercial banks that were still sound, you'd face the same issue as they did in trying to get the

original conception of the t.a.r.p. program off the ground of at what price and do it in such a way not to create a government subsidy on one hand or not giving a fair price to the troubled institution on the other. >> is there any need for a quasi happen type structure? i read about reaches where the government purchases mortgages, purchases property, holds them in this retype entity, it's not a technical read under the revenue code, holds it, sells interest in it to the public, and then ultimately as the property's recfer -- recover, disposes of the property to the government. the government walks out whole. is there any need for something like that?

>> i vice president given that specific proposal any careful thought, but again, i think the challenges would be many. again, what price would we repurchase the assets from the institutions? where within the government would we have the capacity to manage a read, ect., ect., but i haven't heard that proposal, and therefore i can't give a satisfactory answer. >> what i'm looking for is not necessarily the mechanics, but whether or not governmental intervention, taxpayer funds are needed to solve the problem, or is it a problem to be solved by the market over the next two or three years? >> i think once, i mean, funds have been falling back into real estate reits of late, and i think another point, i think certainly all of us made, ultimately the fate of these and the value of the commercial real estate properties very much is driven by developments in the broader economy whether it's the

path of interest rates on employment so i think maybe the best thing we can do is again try to support the recovery through prudent and appropriate monetary and fiscal policies, and they may be, perhaps. most single handed most effective thing to protect the assets. >> thanks. mr. wilson. >> i agree, i think there's a lot of money out there, private investor money, just looking for the right price. there is price discovery on the most disstressed assets, but i think there's many cases where it makes more sense for the bank to hang on and work with the borrowers if there is a viable source of repayment to repay the loan. i think we probably can work through the process as painful as it would be. >> okay. >> ms. thompson, did you have something to add? >> i think you're referring to an equity trust transaction. it was a transaction used at the

trust corporation for failed assets where the assets were sold into a trust, some performing, other notes, and the government took a percentage share of the downside and the upside, and that works well for assets from failed institutions. i'm not necessarily sure that's necessary right now because the market is starting to open up. some of the problem banks are starting to raise capital, and we are seeing slow sipes of asset sale, and as i mentioned earlier, the market is starting to slowly come back, and i think that especially in the cmbs market, the special servicers have a lot more flexibility to work out the loans as do banks that have a commercial real estate in their portfolio. i think the transaction itself has been done, and i think it's a good mechanism, but i'm not sure it's necessary for an open market. >> okay, okay, fair enough.

my time is up. my take away from this is that from the fed and occ's perspective, there is not the clear need today for direct governmental intervention of taxpayer funds to solve this problem. thank you. >> thank you, mcwatters. mr. silvers. >> thank you. i just want to observe, you know, one -- our work as a panel is coming to an end. this is probably our second to last hearing, and one of the great pleasures of serving on the panel is able to learn from such dedicated public servants as yourselves, and i think when we discuss motivations of folks, it's always apparent to me that people such as yourselves have many opportunities to make a lot of money elsewhere, and i just suspect this when i i know of each of you you spent long careers serving the public for far less than you can make in the private sectors, and the motivations are not dreamed up

of in the economist's philosophies. from that high level to the more mundane, dr. parkinson, in your written testimony, you observed commercial banks have $80 billion in real estate assets. do i take from the testimony and this is to all three of you, but particularly dr. parkinson, these chargeoffs have been essentially driven not by refinancing failures, but by failure of the borrower to make payments. is that fair? do i read that right? >> [inaudible] difficult in parts. they can't reap the loans because they're in trouble whether it's because they don't have sufficient cash to surface a debt or how much that was an ability to make the balloon

payments, i don't know. i'm guessing there's some of both and certain in many cases the fundamental problem is the lack of cash flow, and that in turn would make it it very difficult to make the balloon payments. >> but the reason why the chargeoff occurred, mr. wilson, you're nodding your head. it seems likely given the timing of the refinancing issues and the balloon payments that the reason the $80 billion chargeoffs occurred is in the routine payments than the balloon cash flows? >> i agree with that. really even special servicers and cmbs have a fair amount 6 ability to work with customers, and if there is cash flow there and the loan is matured, that's an issue, but lots of times they can work through those issues if there's a fundamental source of repayment still with the loan. >> ms. thompson, do you have anything to add to this? >> sorry. i think most of the chargeoffs

took place in the adc space. >> yes, i was getting to that. >> no, i was just going to say because there's a distinction between the chargeoffs of the number of adcs and owner occupied real estate, and you notice significant differences in both. >> what pushed it up to 80 billion? meaning, the development loans and the like? >> probably about 66% of all cre chargeoffs as of 9:30 were attributable to adc. >> this hearing is sort of already ranged widely, but it seems to me our fundamental kern here for starters 1 that we got about 34 billion in t.a.r.p. assets in banks through ccp, mostly almost entirely smaller banks, they are exposed.

what happens when loan payments are due? it seems as though, tell me if you disagree, but it seems we have not got to the question yet that the chargeoffs we see are predominantly due to cash flow issues and development loans, not in occupied properties. is that a fair summary of where we sit today in >> i think that's fair. >> our panel is concerned and this is the third hearing and a couple reports, is what happens when the balloon payments hit? mr. wilson, you say that there's a lot of flexibility here. let me ask you this. if i've a t.a.r.p. recipient bank holding public's money, and i come to one or more of you in a year's time with a bunch of loans that have come due, and the borrowers can't make the balloon payments and the problems are refinancing because price of property fell 40% which

is what typical. i'm a bank, and i come to you and i say i want fore barns. i want to rollover the loan even though the value of the property, the collateral can't support the loan. what do you guys say? >> our guidance specifically states, well, we tell the examiners not have banks classify loans because the collateral value declined. we look at the borrow's ability to repay. if you have a boar roarer who can make a repayment, that's the fundamental issue. >> this is a situation where they cbt cannot make -- cannot make a payment. >> there is a payment -- >> they are making ongoing payments. >> if they make ongoing payments, there are flexibilities that the bank's are allowed, and the workout guidance provides specific examples of those transactions. they can modify the loan, extend

the loan, and we would focus specifically on the borrower's ability to repay, but we encourage a modification. >> speaking broadly, unlike the commercial, the construction and development which was a failed project, you really have no cash flow. it's aally we dation problem. it may not be enough cash flow, but there's opportunity to resize the loan, bring additional equity to the table. if there is no additional equity, the bank can charge it down, but not off and restructure the loan. the content is not as high in commercial mortgage which we see is the bigger issue going forward. >> my time expired. thank you. >> dr. troske. >> thank you, i want to continue this line of questioning that mr. silver's started because it's an important one. this is a fairly complicated

problem knowing when you write property down in a dynamic economy where prices flux wait and that affects the value of the property. are there general rules that you can sort of provide us with when you think it's appropriate for a bank to write down a property, and when it's left on the books as is, and what's the cost of benefits from taking either action. starting with you. ms. thompson. >> well, i think that a borrower's ability to repay is a big factor in the conversation whether you modify a loan or not, and i think that certainly foreclosures need to take place and write downs need to take place. i think if banks -- and i think we could likely restructure and modify a loan to

work for the borrower and the bank. i do think that most institutions, especially the smaller institutions, hold these loans and portfolios, and they are very much aware of the appraisals and values that are in their specific communities, so i think that these bankers have really good understanding of what they're supposed to do and when they are supposed to do it. we try not to be too prescriptive, but if you look at the ability to repay, restructure the loan, if not, write it off as soon as you possibly can. >> thank you. >> number one, i think you're right, it is a difficult question. i think senator's right that the local bank probably has the best information to make a sensible judgment about that difficult question, and that the borrower's ability to service even a restructured loan is really a critical thing or

perhaps the bank have to ask themselves, i foreclosure, and then i manage the property and try to maximize the value or leave it in the hands of the original borrower, and the answer depends on the assessment of the borrower and the capacity to really manage the property and maximize the value whether or not they can do that better than i can. >> fundamentally, when we evaluate a loan, we look to cash flow sources to repay the loan, the property, bonified sources, and as long as that's in tact, the value of the property is less important. when the value of the property is important is when the primary sources of cash flow are not there or they are insufficient, then we look to the value of the property and say, you know, that's sort of our benchmark for what you charge the loan down do. we would not do that if there's

sources to pay the loan, the collateral is only a secondary source of repayment. >> i want to expand on something you hinted at that i guess is a related issue. one of the things that we have noted as a panel is the concentration of these cre loans in small and medium-sized banks. do you have a sense of why? what is their comparative advantage in making loans? i assume that's why they are there, and there's questions about whether these loans should be with, you know, concentrated in the small and medium sized banks smghts the alternative would be they should be made by larger banks. how did we get to the situation where the banks hold loans, and what's the advantage in doing this and the cost of doing it. doing this? -- and what is the advantage in doing this?

>> if i am a bar from outside the air, i will not have the -- if i am a borrower from outside the area, they have a competitive advantage compared to other potential lenders. the point that over the years, smaller institutions have become concentrated in cre because of technological changes, they no longer work the most efficient or effective lender. and some sense, their concentration in cre is to result of an adverse selection. so it is understandable why they have ended up where they are. it does pose a risk. one thing worth emphasizing is

that lots of banks with cre concentrations are in deep trouble. lots of banks are managing those concentrations quite well. that comes down to the importance -- the percentage of their portfolio and their capabilities for managing that portfolio. our guidance has not been specified in terms of putting arbitrary limits on the concentration, but trying to encourage institutions to manage them effectively. >> my time is up. guest: dr>> dr. troske -- i thik cre is good in regulating --

looking back over bad practices over prior periods, assessing a bank's asset quality and its capital ratios. there's a growing consensus that in addition to that type of static assessment that there should be a four-looking approach to supervision. -- a forward-looking approach. you focused on stress testing by the regulator and also what you're expecting on the banks. when you look at the reforms, there are additional assessments going forward with a florid- looking approach, whether it be living wills. can you talk about your views on the lessons learned here, and how regulatory supervision has changed. and is a concept been grasping

by regulators? >> yes. we do have a four-looking supervision program at the fdic -- we do have a forward-looking supervision program. we looked at institutions that have high concentrations of commercial real estate that had a volatile funding sources. we have put together a training program for all of our examiners that focuses on not just the financial condition of the institution but the practices of that institution. we are increasing our offsite surveillance for all institutions so that we know, especially those with cre concentration, what their financial condition is. we are concerned about interest rates. this is a low-interest rate environment. we want to stress testing so they can see where they will be if an adverse situation takes

place. we are concerned about the health and safety and soundness of the financial sector. we have had a good response from our bankers with regard to this forward-looking provision approached. >> can you comment also in the cre context as to what is expected on institutions under different economic scenarios as well as utilizing statistical modelling for lost reserving? >> that is an important emphasis that we put out in 2006. it has been reinforced with respect to the larger institution and requires the board to conduct annual stress tests. it requires banks to conduct their own stress test. those debtor $10 billion -- on a semi-annual basis. and to post reports on that.

where there is cre concentration, those stress testing will have to be an important part of that. the cre data collection project. we are collecting loan-level data on cre loans from the very largest cre lenders and that is being expanded. we'll have a better insight into the -- to understand how the values of the loans are being driven by the underlying economic variables. and to be able to figure out how to stress test the existing portfolio. that is an important, recent initiative among the three agencies. >> thank you. we have talked often about better performance data on the residential side.

it sounds like it is just as important on the commercial side. which is like to comment on the expectations of what you would like to say to address some of the risks in going forward on the cre? >> stress testing is an area that focuses at all levels of banks. we would size our expectations to the size of the bank. we would size our expectations to the level of concentrations that those banks have. if you are a community bank without a concentration, we would expect a lower level. we are in the early stages of putting together additional guidance. we are working with the fed and the fdic on that. we are talking about additional tools that the special community banks can use. >> thank you.

i want to follow-up on the concentration of commercial real estate. the effect is there is an overhang. the ability to carry out the other things that the bank does. do you think that affects their ability to make of the loans? >> for a small subset of banks, the one on the ftse problem loan list, that is a true concern. they are focused on working on commercial real estate. we have a large number of banks in all sizes where they are open for business as well as for other lending. i think the disconnect is more -- more of a pullback on the underwriting standards that got too liberal. and so it is a bit of a new world for borrowers. borrowers to qualify, we believe that there is plenty of credit

available. >> dr. martinson -- dr. parkinson. >> i think where a bank has a cre concentration and it is a concentration of work -- of loans. those banks which then when you look at loan growth by the ratings of the banks, the banks could do lowest ratings are contracting loans and at a much more rapid pace and are recovering more slowly in terms of lending. to the extent the commercial role is not managed well, that does have an adverse affect on people to rely upon that bank. >> miss thompson. >> i agree with my colleagues. the level of lending for the larger institutions decrease

while the lending for the smaller community banks that do have the significant concentrations did increase. >> would there be a significant shot on the real estate market? -- myill defer that's answer to my colleague to at the federal reserve. >> i am more interested if that happens for the banks you are looking at, would that be a significant problem for those banks. if interest rates start going up. >> this is a good environment for restructuring. a good environment for rhee financing and modifications and sales. -- fort re-financing -- for re- financing. >> why interest rates are

rising and the most likely they would be rising would be the economy was recovering and the fed was feeling comfortable raising its target rate. i would be willing to accept the risk and the adverse affects of the rising interest rates in that context of economic growth. >> mr. wilson. >> i agree with that. the disaster would be if rates went up and the economy does not improve. i am concurrent with that. when rates go up, in the economy is getting better. hopefully there is more capacity. >> you mentioned stress tests. all of dimensions stress tests. when stress tests come along, do you think they should concentrate -- to determine the stress tests on a financial institution? >> i think the lessons we just went through of the late 1980's

and early 1990's should be applied to commercial real estate portfolios. it has been pointed out that some banks do come through even these severe downturns and cannot the other side even though they have larger concentrations. what we need to do is understand better and size those. it seems that construction and development, we need to pay more attention to those the maybe the permit commercial mortgage. but even that, at some level, a concentration is just too much. if you have a distressed test, you can show that the >> dr. parkinson. >> talked about the importance of stress testing. the extent you have a concentration of cre is important that you stress test your cre portfolio. >> i do think stress testing is

important. especially for commercial real estate. i believe the good underwriting underneath those that are written are probably most critical. >> thank you. if the realnow estate downturn that has not turned around. there's always a point where things were over valued or not enough buyers are not enough tenants. but look in four or five years and things are a lot to different. we have the added benefit of very low interest rates. one of just kick the can -- why not just kick the can down the road? keep that going for 3 or four years, wake up and realize the market has recovered, prices are back up, borrowers are willing

to pay more -- purchasers are willing to pay more, tenants are willing to pay more in rental rates. you got through this mess without the banks recognizing losses, without the banks impairing koppel and without the borrowers recognizing cancellation of indebtedness income. >> what is the problem of that? >> that would be a huge prediction. i think that it is important to recognize and have some transparency for the financial sector so that people know they have good loans or they do not. taking immediate action weather and it is modify and loans or writing the loans off, it seems it is one or the other. kicking the can down their road does not seem like an acceptable outcome the correct doctor parkinson.

>> i would observe that strategy does not uniformly delivered success is stark. the better approach is to look at it loaned by loan, bar or by bar work and make an assessment as to whether they have the capacity to service the debt -- bar or by the borrower -- borrower by borrower. i would agree that we cannot count on kicking it down the road and producing the desired outcome. >> that is not being done -- that is being done some. as a whole, that is not being done. >> in the sense of deferring the problem, we hope it is not being done at all. in fact, that is in the best interest of both the bank and the borrower. guidance tries to make clear

that doing that automatically or routinely to differ losses is not a good strategy. >> mr. wilson. >> i would add our guidance is clear that if you choose to work with the bar, it has to improve the prospects for -- if you choose to work with the to improve the prospects. there needs to be appropriate a crawl on the loan. charge-offs is necessary. -- the needs to be a corporate approval on the loan. >> the best approach is to recognize the economic reality, write it down, recognized the losses, take the hit to capital, and have discovery based on that. is that a fair assessment? back to my first

assessment of rtc structures. that might not be the answer is the financial institutions that were holding the cre or in such perilous shape they cannot absorb the losses, they cannot absorb the hits to capital, and the borrowers cannot absorb the tax hits. is that a fair statement? >>ok. that is it. thank you. mr. silvers. >> to pick up where i left off. so we have a whole bunch of small banks that still have tarp money in the form of cpp. it is exposed to the commercial real estate sector. do any of you have thoughts on what to -- if our policy goal,

and it would be mind if i was the policy maker, is to avoid further concentration on banking sector. if that is our policy goal, if we look like a small robot bank sector, any particular advice to treasury in terms of the management of tarp's investment in small banks over this period when these investments are coming due in commercial real state? >> i think many of the smaller institutions that have tarp are managing their portfolios accurately. i think there is a provision that tarp recipients missed dividends that they could add someone to oversee to the board. i do believe that the institutions -- there are several institutions that have concentrations and they are working their way through the crisis adequately. >> any further thoughts on this

subject? >> mr. wilson? >> i am not close to the tarp program. pursuant to our 2000 and guidance, we have laid out how we would like to see this problem manage. this applies whether a bank has tarp or not occur if the bank needs to be resolved, i think it still needs to be resolved. >> it seems intuitive to me. if our goal is to try to keep the small bank sector healthy, that during this point but when small banks have had cre exposure will have to manage through the rollover of these loans, that it might not be a good idea to compel them to pay the treasury money back during the period. this is not an ideological

observation. it is a practical one. would it be better to get them during the period to be subjective in raising the capital probably? >> i do not think we have been trying to force them to --we don't think absent a raise of capital that they would not be safe and sound had you done that. that really is the issue. we look at each one of these tarp repayments one by one and one to satisfy ourselves that either given the amount of capital they have or the amount of capital they can raise in the market, that post-car payment, they still have adequate capital to bear the risk that may be as a result of troubled cre assets. i do not see us forcing them to

repay. the banks themselves field for a variety of reasons that the sooner they can repay the tarp the better. in most cases, they are quite anxious to repay. >> that is a very helpful. if part of our mandate is to look it is practical aspects of tarp, the other part of our mandate is that congress wanted this rather extraordinary intervention in the financial markets and for tarp to be done fairly. this may be asking too much of the three of you. i would ask you to comment -- what do we say to the executive of the employee or investor in a small bank debt is being unresolved by the fdic against the backdrop of what we did in terms of forbearance to institutions like citigroup and bank of america? how is that fair profit what to

say to the person on the losing end of the un fairness -- unfairness? i guess we say nothing. is that really so? >> obviously the reason for the extraordinary -- the belief that if banks had failed in a disorderly manner, that the economy, the financial system might have been much more worse off, including those smaller institutions that did not benefit directly from that assistance. the too big to fail problem is a big problem. still working through the implementation so old, and how effective they will

be, the jury -- we're working very hard to ensure that the so- called systemically important institutions were held to higher standards. that is the regulatory side of things. in terms of the market, that' there is no longer any authority to do open bank assistance. there won't be any benefit to the shareholders. i think all the agencies agreed that any holder of capital instrument should not benefit in any way from extraordinary assistance. i think the fdic has proposed that holders of blogger-term- -- longer-term debt be ruled out. they should do quite a bit to reinvigorate the market

discipline the >> i think you are right. i would say what took place would help everyone in the economy. i think a lot was done to level the playing field between larger and smaller institutions. i think it tried to take away some of the competitive inequities between the largest and smallest. it did not remove too big to fail. the steps that were taken were necessary and in terms of the orderly liquidation. it will go a long way to help that conversation. >> my time has long expired. thank you. >> one comment i will make about my opening statement. i was hoping to get the point across that regulators had far too much blame for the financial crisis than was warranted. i think it was the manager and

owners of firms. i wanted to ask a question about the fed. i believe the levels of bank reserves have grown back to $1.1 trillion. we could discuss why that is. their suits -- most of that is excess reserves. banks seem to have ample capital city at the federal reserve. does that give you some comfort when thinking about the cre situation? do you have a sense of how much capital is held by these banks, giving them a cushion? >> i do not know the answer to that question. aboutld say if the concerne the availability of lendable funds to meet the needs of credit worthy borrowers, the

fact that the banking system as a whole is -- it pays so very little. i think they have ample motive to go out and find credit worthy borrowers. i think we're starting to see some signs that is tightening the credit conditions as this crisis comes to an end. they are looking actively for credit worthy borrowers to put that money to work. i do not know the answer to your specific question. i suspect that it is that the largest institutions. >> i suspect the same. i wasn't surprised there were not successful. i want to build on that last statement that you made about the overall lending.

i want to ask the three of you -- there is a question about whether there is a lack of demand for a lack of supply. can you give me a sense of whether it is a lack of demand or supply? >> i think it is both. there is a lack of demand. i believe there are bar worse that lacked confidence. i think -- i believe there are borrowers that lack confidence. the biggest issue is collateral values. they are defined so precipitously. i just think that there is plenty of capital in the system. people have to start showing confidence in the financial institutions. i think it is slow. there's a tentative rebuilding. we are working our way to

whatever this new norm is. when people accountable, they will go to institutions, apply for loans, and received credit. people are cautiously optimistic. we're not out of the woods yet. >> i think there is demand on the supply side. when you talk to the banks, i think it is a pretty good indicator for those borrowers. on the supply side, i think there are signs for a stronger borrowers. there is ample credit out there. there has been a real change in terms of the access to credit. some of that -- we do not want to go back to the availability credit that we hadn't 2006 and

2007. we want to go to a new normal. that does mean lots of people that could get credit formally probably won't be able to get it on the same terms today. it must be constraining their spending. again, if they ask what is the alternative, -- what is the alternative? >> i would point out that the demand and supply side that the federal reserve survey shows banks are saying they are not tightening standards beyond what they were. they are seeing demand starting to pick up. they said we do not like to rate the federal reserve pace. we would like to lend the money. i think there is a willingness on the part of our banks to put those back into a good -- back to good quality loans. >> to live. >> i would like -- thank you.

>> i would like to follow up on underwriting criteria. it is so critical. the reference to the reserve senior loan officer survey does show that standard is largely unchanged in the fourth quarter. they are higher over the last decade. the majority of respondents indicate lending standards don't expect to return to long run norms until after 2012. we will remain tighter for the foreseeable future. is this a good thing to think we are -- work underwriting lax?ards to blao >> i think underwriting standards were lax. the return to the basic fundamentals of lending is critical.

making sure borrowers have the ability and looking at other ways to generate income to repay the loans, i think that is critical because of regulators' sometimes were criticized for going too far and have banks in tightening and correcting those standards gone too far? evidence of that? >> regulators are criticized generally in looking at the crisis. there were things we could have done more quickly. i do believe that there were some steps that we could have taken to help deal with this issue. i think that the lending and underwriting standards that we have work collectively on for our guidance. good guidance is prudent and it

will be sustainable in good times as well as bad because dr. parkton, what are you seeing in your assessment of the underwriting standards being used by lenders? >> i think you had it right. there was a lot period of tightening and the king for by based quartet were staters were too lax. more important than the specific standards, when you're assessing whether a summit is a credit- worthy borrower, and i think obviously confidence by the borrowers and by the lenders has been slow to recover. i guess there are hopeful signs that the economy in the last couple of months has been picking up steam. once people are convince that clear path of growth is

sustainable and the most likely pass, you'll get a rebound in confidence. that is probably the most important thing in increasing the demand and the supply of credit. >> mr. wilson, you mentioned taking supply and demand into consideration having an impact on lending levels. you indicated it has a degree depending on the size of the institution, the type of the asset. can you elaborate so we can get a better sense of loan levels, whether big and small banks or the variety and type of loans? >> for example, in the community banks that do have big concentrations of commercial real estate, what we are going through right now, they are more sensitive. -- more sensitive of those risks. there probably are more tighter than they would have been. underwriting standards on almost

any asset from 2006 or 2007 were too liberal. the pendulum swings too far the other way as things try to recover from problem loans. we are seeing evidence that they are coming back to balance pretty quickly, especially in leveraged loans. there are stories that the recap deals are very prevalent. pricing is getting tighter. in commercial real estate, pricing has tightened dramatically in the past couple of months. we feel like the supply and demand factors are coming back into balance. >> how much is preservation of capital at play into that issue of supply? >> that is a big problem with the community banks that are under stress. to some extent, it is in issue for all banks.

it was sensitive and that is why the committee had to face in the goes through 2018. to be sensitive to that issue did not constrain lending because of capital requirements. >> thank you. >> i want to thank you for being here today. i want to thank you for your public service. i continue to be impressed with the overall quality and competence of the people who served in the federal government. anyone watching would be proud of the fact that you are representing all americans and doing a competent, intelligent job. i want to thank you for that. the second panel will come forth. mr. silvers has to leave. mr. silvers has to leave.

>> will come. thank you for being here. thank you for working through these thorny and complicated issues. i am pleased to welcome our pal, matthew anderson, managing director. richard parkus, from morgan stanley research. .nd jamie woodwell thank you for coming. your complete written statement will be entered into the record. we begin with mr. anders said. >> thank you for the opportunity

to discuss commercial real estate and bank stability. i will discuss real estate values declines and the resulting mortgage maturities and some aspects of our outlook for the economy. i should add the views expressed today are my own and not necessarily that of my employer. an important feature is the dramatic decline of property values. commercial property values have fallen by approximately 42%. that is larger than the decline in the 1990's when commercial real estate value fell by nearly 1/3. the rising volume has put pressure on the commercial real estate debt market and will continue to do so for the next several years. it has surpassed $300 billion in

2009. the commercial real estate debt maturities will climb to approximately 3 $25 billion a year. rising volume has resulted in a large amount of maturing loans that are underwater. as much as half of the loans are currently under water and that torture $51 billion is under water by 20% or more. as of the first quarter of 2007, more than 2700 banks and 30% of total bank account had a concentration. the greatest countries were among banks up to $10 billion in assets or a 56% of banks in those groups cre concentration. the number has fallen since 2007. just under 1300 banks and

thrifts had a cre decline from the first quarter of 2007. part of this reduction is the result of outstanding debt. $300 billion of cre has been trimmed over the past two years. banks there received funds from tarps -- with tabulating concentration figures for banks and thrifts to received investments including banks that it repaid the funds with the result that's 32% of the recipients compared with 50% of recipients. delinquency rates have been declining. early estimates of 2010 indicates rates and commercial mortgage -- we maintain a watch

list of banks that appear to be at elevated risk of failure. this was proven -- non- performing real estate loans have been the largest problem loan type through banks on this watch list. non-performing commercial real estate loans of the main problem loan type. conditions are improving, albeit slowly. the commercial real estate market, net operating income has been reduced by 50% or more. liquidity has been returning. this is been noted where new issuances occurred in 2010. the parent company expects this trend to continue with new issuance during 2011.

we believe the recovery will be a ridiculous translate into increased demand. delinquency rates will increase. this process looks likely to last several more quarters. we're concerned about the volume of underwater mortgages that will mature over the next several years. continued demand for refinancing for loans will constrain inflation-adjusted growth in the commercial mortgage market over the next decade. we believe growth will more closely resemble the 1990's went annual growth was 0.8% rather than 9.4%. i thank you and the other members of the panel. this constitutes my formal testimony. >> thank you. >> my name is richard parkus.

i am chair of the research committee of the finance council. i would like to thank the panel for giving me the opportunity to discuss the current state of commercial real estate and the potential impact on banks. i would like to emphasize the opinions i share today are those of my own. the question of whether commercial real estate will be the next shoe to drop is often heard. this shoe dropped to six years ago. commercial real estate has gone through the most severe downturn since the early 1990's. the downturn has been even more severe in the early 1990's. the vacancy rates have soared to greater heights. the drop in property prices has been much larger than during the

previous episode. with respect to commercial real estate loans, most analysts expect the loss rates for cmbs originated during the bubble years of 2005 through 2008 will exceed the 9% to 10% losses experienced during the 1990's, possibly by as much as 4% or 5%. the credit crisis had a severe impact on commercial real estate markets. financing for large, high- quality properties, so-called trophy properties virtually disappeared. the bill believe of financing was set -- the availability of financing never completely dried up. some regional and community banks continue to lend, albeit at reduced levels. tarp brought calm. the flow of capital return

quickly. the trickle of new capital has since grown into a flood. financing markets for a trophy assets has fully recovered today. financing is widely available and that favorable rates. the story is not as positive in the financing markets for smaller properties. the market remains highly dislocated and has seen little improvement since the depth of the crisis. the vast amount of capital that has targeted the trophy property segment has not made its way into the market for smaller properties. in some summary, -- this is reflected in the large difference in property price appreciation between the two segments. trophy property prices declined

39% between the 2007 market peak and the 2009 market trough, but has increased 70% since that trough. for the market as a whole, prices were down 44%, peak to trough, and have been effectively been unchanged since that time. improve the availability of financing is a critical step in the price recovery process. one of the main sources of financing is banks, both regional and committee, many of which continue to struggle with loan portfolios. taking steps to improve the availability of financing for small properties would undoubtedly improve the availability of these banks to work through their problem loan books. core commercial real estate loans and bank portfolios art exhibit the legacy rates in the

5.5% range. at least part of the reason relates to the fact that a significant portion of bank loans are floating rate. as short-term interest rates plunge, required monthly mortgage payments decline by as much as 60% to 70% or more. we believe the delinquency rates on banks and commercial real estate loans would be far higher, comparable to those of fixed rate loans in cmbs, which did not receive the benefit of debt payment relief. cuts both ways. this could have negative impacts on the performance of floating rate loans. and bank portfolios. higher interest rates would

require mortgage payments. they could lead to declining property prices, exacerbate the already significant majority of maturing debt problem. without question, the biggest uncertainty facing commercial real estate debt markets it is the near term maturing debt. approximately $1 trillion will mature through the end of 2013. $375 billion of construction loans in bank portfolios that matures over the st. period brings the total to almost $ 1.4 trillion. many maturing loans are receiving maturity extensions. we speculate the same is true in banks. simply extending problem loans does not represent a comprehensive solution to the problem as a whole. maturity extensions will help some borrowers.

many are too far under water to be saved by this approach. a critical ingredient for managing smoothly through the mountain of commercial real estate debt maturity that lie ahead is a well functioning financing market. this is important for smaller properties, since they make up most of the maturities. the revitalized cmbs market has the potential to play a key role in helping to improve the availability of financing, particularly to smaller properties. enough to reduce the degree of stress as we work our way through this deleveraging process. i think you for the opportunity to share my views and i would be happy to enter any questions you might have. >> to live. -- thank you.

>> in my testimony, i like to cover three general areas. the first is to correct some myths. the second is to highlight current conditions and trends. the third is to note some key factors that will affect commercial real estate market going forward. commercial real estate -- went industry professionals speak about this, they are speaking about office buildings, apartment buildings, shopping malls, warehouses, and other properties that have space in exchange for rental payments. this is distinct from two other markets. owner-occupied commercial real estate and construction loans. owner occupied commercial real

state is closely tied. these distinctions are a key reason for some of the confusion about commercial real estate and help commercial mortgages have been forming in recent quarters. i think it is important to close clarify a few myths. the first is that banks are being weighed down. the second is there has been a wave of long maturities threatening the system. bank and thrift to legacy rates for commercial mortgages remain lower than the average for the overall place of business. commercial and multifamily mortgages continue to have the lowest charge off rates of any major loan type. since 2006, banks and thrifts charge-offs $127 billion of credit-card loans, $70 billion

in industrial loans. $53 billion in other loans to individuals. but just $27 billion of commercial and multi-family mortgages. there has been a wave of commercial loan maturities weighing on the market. on monday, the third annual study will be released detailing $1.4 trillion held by non-bank lenders. the studies have shown that with a typical loan term of 10 years, most investor groups are spread over a relatively long period. this is in direct contrast to other forms of credit such as credit-card debt. commercial paper with the entire market matures every 80 days or less. we see the influence of the broader economy. the economy began to show modest

growth during the third quarter. there was little new space coming on line. the impact has been marginal. property sales have picked up. they have not been high enough to keep up the mortgage -- the most significant factor in the performance of commercial real estate markets will be the performance of the broader economy. vacancy rates rose as jobs were lost, consumers pulled back in spending. economic growth is needed to reverse this trend. commercial real estate finance markets will be driven by property incomes, and values, and interest rates and where the markets are when loans come due. loans will mature and rollover. to the degree they do not, the existing equity and as a last resort, mortgages will be

resized to 50 capital stock. the great recession has strained every part of the u.s. economy. long leases and borrowing terms has helped moderate the recession's impact. thank you for the opportunity to discuss this with you today. >> can -- i like to start -- my first question to all three of you has -- as the commercial real estate market hit bottom? >> i think so. the value -- price indicators would indicate that we have hit bottom for roughly a year. as mr. parkus mentioned, for prices haveeplaces,

increased. we have not seen much in the way of strong price growth, and these for the broader market. >> mr. parkus. >> i also do believe that the commercial real estate market, in terms of fundamentals, we have to be careful what we're talking here about. in terms of the rents and vacancies, those dramatic declines that would give seen in the performance of the actual properties, i believe is approaching a bottom, and we will probably be at the bottom sometime in 2011 or 2012 for most property sectors. so yes, i do believe that that has -- we're at the bottom. the bigger question is, how long to we move along the bottom, as mr. anderson was saying. in terms of price improvements, we have seen dramatic

improvements for a relatively small proportion of the commercial real estate universe, which focuses really untruth the assets and higher-quality institutional quality assets. and middle of improvement for smaller assets relatively. >> echoing some comments that were made, there are many aspects to the commercia real estate market. you can look at a whole range of different things. they move in relation to one another. prices probably are the leading indicator. they bore one of the leading indicators of the decline. now they are probably one of the leading indicators of a return. we have seen greater strength in the last quarter. i think is interesting to look at the different types of markets for a primary market with more institutional

investors is probably more driven by investor yields than what competitive investor yields are, where the tertiary markets are probably more driven by the fundamental economics of what is happening in that market, the job growth, and how those are supporting individual properties. >> back to your question, how along theit bump bottom? >> our best estimate is that it will take several years for individual properties, the cash flow, the net income to begin to improve substantially. we think that a vacancy rates will begin to come down gradually probably sometime in late 2011 or 2012. but those improvements will tend to be offset by the sort of delayed or lagged impact of

declining rents. declining rents do not flow through into property revenues until space changes. as space changes, it will change those rents in the properties even as rents are rising, begin to rise, space will be rolling in many cases to lower and lower rents. so that will drive the recovery out several years, we believe. property level improvements are probably late 2012 or maybe even 2013 phenomenon. i should say robust, a very significant improvements, which we do believe will also become. >> mr. anderson. >> i would generally agree. i think you have looked sector by sector. in the multifamily sector, there is some improvement. the lodging sector has shown some improvement, as well.

lodging tends to be volatile and highly correlated with economy. with an improving economy, the lodging sector is an early beneficiary. -- office jobs are off almost 2 million jobs from the peak in 2007. it will take quite a while to build those jobs back up again. i think we're looking at a multi-year impact in the office market. >> echoing that last point, i think that sector is important. but the different types of commercial properties, you could think of it hotel having a nightly these. self storage haven't a monthly lease. the more muted the not impact

your hotels and multifamily is seeing positive impact. >> thank you. >> following up on that, it does not seem like any of you see a double dip in the next few years. >> that is not a big feature of our outlook. it is possible. and external events can drive the economy back into recession, but it is not a major part of our outlook. >> i do not see anything like that. it would have to be driven, again, by some extraordinary surprised which is economy-wide. >> the market is being driven

very much now by the economy. where the economy goes, so well -- so will the return of commercial real estate. >> and our rights by would definitely have an image -- an outright spike would have a definite impact on real-estate. the low interest rates have definitely benefited borrowers and lenders from the standpoint of avoiding some of the distress that could crop up in that segment, and also the broader commercial mortgage market. i think for banks, about half is floating rate, half is fixed rate. those are probably pretty good figures. a surge in interest rates could have an negative impact on borrowers ability to pay.

>> i agree with mr. anderson. i think that rising interest rates do pose a non-trivial threat to commercial real estate, especially if the rate increases are significant. it also depends on what drives the interest-rate ies.someon .. previous panel made the very good point that if rate increases largely reflect a buoyant economic condition, where the fed is trying to rein in surging economic activity, that would be one scenario. that type of rising interest rate would be less problematic. on the other hand, today there is a lot of concern about future inflation, through commodity price inflation. that fear can get embedded in

interest rates as well, as it appears to be in long-term interest rates already. it really depends on whether the interest rates are at the short end or the long and are rising, and what the source of the push up board is. >> there is enough. >> -- fair enough. >> if you think of the different cohorts of loans, loans that were made in 2001-2002 that might be coming due and now, they were made with relatively higher interest rates then we are experiencing now, so you have a bit of a cushion. as you get to 2004, the interest rates working -- interest rates were much lower, so they is will be coming due now and higher interest rates could have more of an impact on them.

>> it sounds like you anticipate a slow recovery of the market over the next few years. may i assume from that that you do not see the basis or the need for aid targets -- for a tarp 2? >> i do not know about the out right knee. it would certainly have an impact. -- outright need. it would certainly have an impact. it would help clear the market of troubled debt that much more rapidly, but it would also have a cost and impact. there would be a significant increase in the rate of bank closures, whereas what we have been seeing is a high rate but,

really, a process of working through problem banks. it would have an impact on the market. you'd have a sharp drop in prices, and it would come at a great cost. what we had in the early 1990's was a market that cleared, and then rapid growth after that. our outlook is for pretty much more of the same of what we have been experiencing for the past couple of years, just stretched out over a long period. >> during my opening remarks i referenced multi-family housing as a category of commercial real-estate. properties might deteriorated as rental income is transferred

from maintenance to debt service. renters could possibly lose their homes. how do you see the impact on multi-family housing? >> for us, we focus on bank loan performance very closely. simply put, the delinquency rates on bank multi-family loans have been highly correlated. >> if you look at what has been happening with the homeownership rate, every percentage point drop in homeownership rate means essentially a 3% increase in demand for rental housing. with the drop in home ownership, we have seen a large surge in demand for rental housing. a lot of that is for single

family rental housing, but there is a fair amount going into the apartment sector as well. notwithstanding the fact that apartments do have those annual leases that turned over the course of the recession, the multi-family sector, the apartment sector, has been among the better performing commercial real-estate sectors in terms of fundamentals. that has rolled over to generally good performance in many of the different investor groups that lend money for multi-family mortgages. the one exception there is in the cmbs market, multi-family mortgages do have a delinquency rate that is higher. >> do we face a shortfall in available rental properties? >> a lot of folks have studied that. we have looked at some of those numbers as well. it does appear that with the

vacancy rates, there's still a relatively high levels. with that demand, those vacancy rates still remain high. we will see once we burn through much of the demand is there. >> are there ways that bankers and borrowers are working together with local and state financing authorities to ensure that tenant living conditions are not negatively impacted by the commercial real-estate crisis? >> i guess i would just put up there that the servicer and the lenders themselves of and have some of the greatest stake in making sure the property maintains its ongoing operations and value, so they are working very closely in those situations to keep those properties operating well. >> are there any unique issues that should be highlighted distinguishing multi-family from other cerere's?

>> our outlook for multi-family is dramatically better than for other sectors in the near term. as some of my colleagues have mentioned here, the restricted state of credit for the single- family housing sector has redirected much of the new family formation process to multi-family, and we have seen dramatic improvements in vacancy rates, dramatic improvements in rents over just the last three- six months. we think that will continue. the medium term demographics look very good. in terms of the very stressed operating environment that we have just come through and the impact on residents in these properties, i would also very much agree that the absolute

most important objective of special servicers is to make sure that the properties do not deteriorate to the extent that they have any control over that. and they do, generally. keeping enough cash flow to keep up maintenance and other property expenditures is very, very high, otherwise the value of the properties deteriorated. >> years servicers of commercial rs ofages are -- your server i commercial mortgages are better our servers of' servic residential mortgages? >> and did not say that.

>> the want to look and what happened over the early part of the decade. iit has often been characterized that there was a bubble in the commercial real- estate market. that is not a particularly useful concept. recently, an economist presented data that suggested the relative to 2000, investment in commercial real-estate actually fell in real terms. resources were flowing into residential markets, dragging the price of land, the price of labor and the price of input. would you characterize it as a bubble? was a reflective of what was

going on in the housing market, or was it simply over- optimistic investors in the real-estate? >> it is a great question, and i think it is really important to understand what the market has been going through. it is one thing that we cinclude in our written testimony. at real estate prices as compared to the dow jones industrial average. there are parallels. absolutely, construction costs were high during that time and rising. when one looked at property performance, it was very strong. mortgage performance was very strong in that preceding time. i think it did lead to a lot of

optimism that people wish they could rewind a little bit right now. >> i would say that there was a bubble. i would say -- i cannot define a bubble. i cannot do it here. but i would say that what we saw in the early part of this decade -- and let's not forget. commercial real estate went through a mini-downturn in 2001- 2002, and really did not come out of that until late 2003- 2004. because of that, we saw relatively little over-building this time around. over-building was beginning to show its ugly face in 2006-2007, but was cut off very quickly in 2008. we owe the previous downturn a

gesture of thanks for keeping the over-building away this time. what we did have coming out of the last downturn was extraordinarily low interest rates, as we have right now. extraordinarily low interest rates drove many investors to demand riskier and riskier products. we also had a tremendous increase in the size of the pools of so-called "hot money" in the international finance market, seeking yields wherever. all of those conditions came together to create bubble-like conditions, not only in commercial real estate, but across the spectrum in terms of leveraged loans, in terms of all credit products. in terms of corporate bonds, we saw a loosening of lending

standards driven by a loosening of what investors would accept. the demand for yield was dramatic and was driving -- really drove the decline in lending standards. in normal conditions, investors do not put up with that. in those kinds of conditions with extraordinarily low interest rates, investors were amenable to almost anything. >> i would add quite a few comments. i think there was a bubble. in terms of the definition of a bubble, maybe one definition would be a rapid rise that is really unsustainable. now, whether you would know it was unsustainable at the time may be something else, but certainly one feature of the price increase that occurred during that time was that it was almost all based on pricing as opposed to income.

the way real estate prices are generally thought of is in terms of an income stream that is capitalized. the capitalization rate came way down during that time, and that drove all of the increase. net operating income grew a little bit, but not that much. it was all from declining capitalization rates. how did the cap rates come down? well, part of it was the availability of financing. a very liquid debt market very much contributed to declining cap rates. if you had to pay all cash for the property, you would have a very different standard for what sort of price you would pay. whereas, if you could borrow ever greater amounts, which borrowers could heading into the bedroom, you can pay ever higher prices -- heading into the boom, you can pay ever higher prices

and still generate a return. good cash flow performance helped keep delinquency rates very low. it appeared from a lender's standpoint to be a very safe, low risk area to be landing in. -- lending in. i think those factors really played together. i remember vividly in 2006 seeing a presentation, a very credible argument for why cap rates could be 5% or even lower and that was unsustainable. i went in as a disk beleaguer and came out, not exactly -- as a disc believer -- disbeliever, and came out, not exactly being a believer, but believing there were credible arguments as to why the pricing could remain

where it was sad. >> thank you. >> i would like you to comment on when you expect to see the majority of losses from defaults. >> we do not have any models that would predict that. i do think, based on the loan maturities survey that we are looking at, as folks have discussed, there is sort of the income perspective on thing and then the maturity perspective. which will be driving those? different investor groups have very different maturity profiles, so that if there is a maturity issue facing mortgages, a different investor groups will see them at different times. instance, have int a 40-year maturity.

credit companies and banks have a short-term period to the degree one is focused on maturity, one would look at those schedules. to the degree was focused on income-driven, then we are back to the discussions of different property types having very different situations where, for instance, hotel, multi-family, those are short-term lease terms. they have probably seen the bulk of the hit to their noi, whereas the longer-leased properties were not as dramatically hit by the downturn in terms of their bottom line, but likewise will not see as quick of a rebound. >> i think it depends on the location or the investor base. mbs, we are beginning to see

losses ramp up very quickly now. it depends on the extent to which problem loans are pushed out and extended, and how long the process lasts. there will be a combination of loan extensions and foreclosure and liquidation. losses are already ramping up very quickly now. we expect losses to remain high for this year and through next year. the difference is that the sources of losses in the near term are from term defaults, what we refer to as term defaults, where properties simply cannot make the mortgage payments and are foreclosed and liquidated. sometime in 2012-2013, that will come more from maturity-related defaults. on the bank side, it really is a question about, i believe, when banks seriously begin to deal with the problem loan

portfolios. >> when do think that will be? >> i think within a couple of years. i think the regulators we heard from today are right. i think as soon as individual banks have the financial wherewithal to deal with these problems, they're being forced to deal with them, but it will also be dragged out because many banks do not have the wherewithal to date. >> actually, we do model that for banks to try to estimate what the ultimate losses will be for banks and how far along they are through that process. banks in aggregate, including large and small banks, are through 50%-60% of the defaulted commercial real estate loans.

we are past the halfway point, but there is still quite a bit more to come, we think. the earlier panel noted that banks have been provisioning less over the last few quarters. you can kind of take that two different ways. you can take it as a glass half full interpretation, that banks see the light at the end of the tunnel and feel less of a need to add to loss allowances. the converse of that would be that, i think that there is an 10 intense pressure to maintain capital. -- an intense pressure to maintain capital. there is certainly an incentive to work through the problems, but banks have been doing it for the last two-three years, and given that they are past the halfway point, i think they will be added for another couple of

years probably. -- at it for another couple of years, probably. >> do you think it would be critical that congress provide more money to bailout financial institutions due to their commercial real-estate loans? >> that gets to an area really outside of my domain. i guess i do not feel that i should be speaking to a question about really addressing how to deal with banks. my expertise is in commercial real estate. if i understand your question. >> fair enough. >> i do not think i have the adequate knowledge to address

that adequately. >> my question is, can these banks work through a commercial real-estate problems by themselves, or do they need assistance? small banks and large banks both? it sounds like, given a few years, things will turn out ok. it is going to be rocky for a while, but it is going to turn out ok. that would lead me to believe that there is really not a need for an rtc, tarp 2, or something along those lines. >> i think i've understand what you're getting at. an rtc is traditionally for banks in receivership. does it make sense for the fdic

and regulators to consider an rtc solution for the large number of loans that they are taking in from failed banks? they should certainly consider it. it is another form of securitization, and quite frankly, that is what gave rise market in the first place, in the early 1990's. on the other hand, you have to look at the cost benefit analysis. how much can they get by liquidating loans in the way they are currently doing? it is difficult for me to make that cost-benefit analysis. i would certainly think that it is a potential outlet. whether or not it is more cost- effective than the current disposal methods, i do not know. >> ok. help me understand, since all three of you think the market will turn around in the next few years, taking the approach of simply extending loans today at

favorable rates. we have low interest rates. rowling those on a short-term basis versus dave -- rolling those on a short-term basis versus the other approach? in one sense, i think you have to look at it alone by loan, bar or by a borrower, a property by property. -- bar work but are aware, property by property -- borrower by borrower, property by property. if lenders are of the general view that markets are gradually

improving, then at least in cases where they think the borrower will get right side up again and be able to ultimately keep current on payments and ultimately repay the loan, that is a sound strategy, as long as it works out. in cases where the bank does not really think that is too likely, it would not really be appropriate, especially if, for whatever reason, the value recovered a year or two or three from now might be lower than it would be right now. then certainly it makes more sense to put the pressure on now and try to deal with that problem sooner. in terms of modifications and charge offs, that has to do with whether the bank, after their analysis, and it seems that to be a better income them outright foreclosure.

-- a better outcome than outright for closure. the borrower does have to be current in order to even qualify for that. >> and there could be some incentive to do that, not so much because that loan in two or three years is going to be in the money, but that the institution itself may be stronger in two or three years, able to observe a loss in two or three years. >> i basically agree with that. that if you have a borrower with a loan in the market, in order to refinance, the market has a maximum ltb.

that makes sense as long as you believe the borrower has good intentions, as long as the property is likely to improve as opposed to deteriorated. there are many cases where we think extensions make a lot of sense, but there are many cases where extensions clearly do not make a lot of sense. there are many loans out there that are not 85 ltb, they are 130 ltb. these loans will not be a viable in the future under any scenario. that is what happens when you have a 40%-50% price decline, and the original ltb was not 70, but 90 or 95. in those situations, we do not

think that is a helpful approach. >> thank you. i find it interesting, and hopefully constructive, to make some comparisons between the commercial real-estate prices and the residential mortgage prices. when you hear about the factors that contributed to investors seeking higher yields, a weak underwriting, low equity, too much leverage, too much focus on collateral, lots of similarity. until you get down to the comparison that on the residential side, a high number of borrowers were less sophisticated and did not understand what they were getting into. brokers took advantage of those borrowers. that they do not see on the commercial real-estate side. we have some of the most sophisticated developers in the country. can you speak to this issue? are there lessons learned, or

making comparisons or differences? >> a lot say that for the most part on the commercial real- estate side -- i would say that for the most part on the commercial real estate site, certainly what we see, we deal with borrowers, for the most part that are fairly sophisticated. one of the huge differences, i think, between residential and commercial, is the degree of fraud that was out there. there was a lot of a pay city in the residential side, and there was up -- a lot of opacity in the residential side, and there was a lot of outright fraud. in the commercial real-estate side, there was not much fraud. you might be able to find a couple of questionable loans, but we are not here because investors did not understand the

nature of the loans that were being made. i think we are all guilty in the sense that very bad loans that clearly should not have been made were made. >> was the same euphoria applicable, the feeling that prices would always go up? >> yes. i think the idea that rising prices just validates -- the idea that prices will always rise just gets built in to a mentality, and when you have, as an investor, you need to reach a certain debt hurdles. you're willing to cut corners. you are willing to believe that, well, maybe this will perform. maybe this clearly inadequate loan -- and then, maybe the next time, maybe this even worse

quality loan will perform. you get swept away along those lines. >> you see this from both the commercial and residential side. >> i might draw a distinction between the reasons for purchasing a home, and the reasons for investing in a commercial property. someone purchasing an office building or a shopping center is looking at that as an investment, as something that is both going to drop in income and, essentially, get dividends -- draw in income, and essentially, get dividends. the heightened expectations versus the income of a property can lead to prices exceeding the growth of income, which is something that we saw during 2005-2007 period.

but i think we need to realize they're a very different motivations between those purchasing houses and those purchasing real-estate. >> i would agree. there was not the subprime element in the commercial real- estate market. as you pointed out, they're generally sophisticated borrowers that understand the terms of what they're agreeing to. >> so sophisticated it a good vantage of the system? what's the might of been -- so sophisticated that they took advantage of the system? >> there might have been a little bit of that going on. the irony is that ever higher prices -- the sense of risk was diminished. and yet, that was when the risk was greater. >> thank you.

>> a number of you have made distinctions between sectors of the commercial real-estate market in your comments. unlike to -- i would like to explore that a little bit more. what are some of the differences that are producing these different performances? >> i think the big difference is in the price performance. we're seeing trophy properties and institutional quality properties appreciate at a much more significant rate and smaller properties not. i think that is largely the result of institutional investors. when institutional investors come in, they look for higher-

quality properties. there has been a tremendous interest from institutional investors all over the world in high-quality u.s. commercial real estate properties. smaller properties are typically outside of their purview. they do not invest in small, multifamily, for the most part, small, multifamily properties. they invest in large office properties in gateway cities. my point was that there was a very significant bifurcation going on between the haves, the very best, and kind of the have nots, which was a very large portion of the commercial real- estate sector. >> listening to your comment, it seems like you indicated that the differences were reflected in the fact that the trophy properties were seeing a greater

appreciation in price. there is a reason of why they had an easier time getting financing. >> they had an easier time getting financing because there is an intrinsically greater demand from those type -- for those types of assets. if you have an asset for which there is a lot of interest, lenders will be very interested as well. >> to pick up on the demand for trophy properties argument, i think that is true. what you tend to see in a market downturn with lower rents is occupants or occupiers of space being able to move up the quality of space at roughly the same rent. they may move from a peak- quality space in the office

sector -- a b-quality space in the office sector to an a- quality space with little change in rent. what happens then is that the b-quality spaces experience greater vacancy. >> you focus on commercial development and construction. that seems to be the difference between your view and some of the other views we have heard. can you expand on that a little? >> sure. it seems like everyone is peeling off the construction activity that was driving a lot of the numbers we have seen in that broader category. in terms of the distinction between primary, secondary,

tertiary markets, a think what you have there is, in primary markets, you have a $100 million investment, in a tertiary market, $500,000. large, institutional investors who are drawn to those hundred million dollar investments -- it would take a whole lot of tertiary market investments to get to one of those major market investments. there is a natural break with more local investors playing in the smaller secondary and tertiary markets. larger, more in institutional players are in the primary markets. the credit crunch probably had more of an impact on those large, international, institutional investors, and then then the recession had more

of an impact on date tertiary investors. slightly different forces impacted different investors. >> a lot like to emphasize the demand from lenders. -- i would like to emphasize the demand from lenders. the ultimate lenders, in many cases, are not the banks, but investors in cmbs. those investors have a strong preference for high-quality assets, when you can get them. why would lending focus on trophy assets vs smaller assets? i think -- and large banks as well. >> that concludes our meeting. i want to thank you for being here today, for your excellent testimony and dealing with our questions. i also want to take a moment to thank a member of our professional staff.

we of had 27 hearings, and everyone of them has been organized by patrick mccready. i want to thank you for your good work. this is not our last hearing. until the next time, which will be our last hearing, this hearing is adjourned. [captioning performed by national captioning institute] [captions copyright national [inaudible conversations] sound

>> all environments of politics had fallen apart. it then polluted and destroyed and violent. >> it is remembered as someone who was looking wended johnson's boot the whole time and had no mind of his own. people didn't understand pressures he was under much which runs to the vice presidency.

>> the latest labor department figures show unemployment dropping to 9% in january with the economy adding a net 36,000 jobs. on "washington journal," we discussed the jobless rate at the georgetown university and the workforce. this is a half-hour.ho >> let me introduce to you our final guest. ed otephen rose.ed t we are pleased to have them back i want to read the details of the ap story on the unemployment rate which is hard to interpret i want to see if you helped us understand it.

job growth remains the weakest spot as other economic indicators point to recovery strengthening.

what does that all mean to you? guest: first of all, there are two separate surveys. the two main numbers come from different surveys. one as a survey of employers, and that is the 36,000 number. normally we consider that a stronger number for the total because it is kind of like administrative survey and employers obviously know how many are on their payroll. the unemployment number comes from a survey of people, the census population survey. that is only about 180,000 people. we ask individuals are they looking and we do a lot of follow-up questions on that. basically what you have is an unemployment survey setting 36 and another saying 500,000.

these are monthly variations and we shouldn't get too concerned about necessarily the low numbers and we should be looking at the multi-month trend. the multi-month trend, though, is still low on employment gains. let us just _ that. if we don't start creating over 100, 200, even over 300,000 jobs a month, the unemployment rate will be high for a long time. that is the question that i will be addressing over the course of today's discussion. is it possible by april we could be seeing 300,000 or more a month? i would argue lukewarm. we will see what happens next month. the unemployment rate going to ninth -- going to 9% was pretty dramatic. i would not be surprised to see it rise the next couple of months. these are statistical issues. these are not precise numbers.

even employer surveys, who we survey changes because of small companies that are forming and falling apart. none of the numbers are rock- solid. host: where is the fulcrum as to where the economy is right now question of guest: what we know is the recession still -- recession set up by a financial crisis takes longer to get back on track. >> are we getting back on track? guest: at this moment the indicators are positive. one of the more positive indicators is companies have $2 trillion in their coffers in cash. if confidence were to be regained, it would be surprising how fast we could start to have employment go up. it has been a dicey thing. companies have been staying on the sideline. it is like, who goes first?

demand for somebody else's product -- they can expand, which creates demand for my product. it is called a virtuous cycle. as the economy grows, it is just wonderful to watch. we just don't know when it will start. for instance, if you go back to the last time we had 10% unemployment, which was in 1983, they were predicting that was going to stay for a year or two because they did not expect a lot of job growth but then all of a sudden the economy started to grow and employment growth, which would be the equivalent of 400,000 jobs a month in the middle of 1983. host: one more issue on the table. i really want people to get to your calls. we will put another line on the screen because we have a line just for job-seekers. those who have been looking and have been unsuccessful. tell us your concerns or your observations. we invited you in because in "

the washington post" -- lots of jobs but fewer workers with skills to fit them. what do you see happening? guest: i think that is a bit of an exaggeration. employment is always -- there are rough spots and there are mismatches, as to call them, of skills versus seekers and everyone likes to believe that the stories about when walmart announces they will have a 500 jobs, and line of 5000 people waiting for them. but that does not always happen that way. and when it doesn't happen that way -- that is, you have a situation where there is a large number of unplayed -- unemployed and seemingly jobs better not filled it becomes news because it is unusable. why can't these be built? the best estimates i have seen -- a friend of mine at northeastern did a study for the federal reserve board. he argued the bass -- that the

responsibility of mitch match of the unemployment rate was about a percent and have or two -- 2%. about 20% of the unemployed don't have the right skills to get the jobs. but most jobs, there are people looking. this is a recession. and the long term, i would argue we obviously need to upgrade the skills of the labor force. but i think that most of the unemployment was due to the recession rather than a mismatch of skills. host: stephen rose, sr. prof. -- he has written a book "rebound: why america will emerge stronger from the financial crisis." we are talking about jobs and the economy. lagrange, ky. good morning to my, who is a job seeker.

caller: i think a lot of these corporations are sitting on the trillions of dollars until they get the right politicians. if we start taxing on this money until the start investing maybe we will get jobs. that is my comment. thank you very much. have a nice day. host: tax policy and job creation. guest: tax policy is pretty neutral to job creation. i did not think we will need to tax them anymore. corporate tax reform is on the agenda. the worst of both worlds, high marginal rate but lots of loopholes, and that may change in this congress, and that would be a good thing that i think, again, it is a business cycle of fact. our taxes, compared to our competitors in europe, are lower, so i really did not see it as a major effect. host: milwaukee, nancy, independent line. caller: has that ever been a

survey done on older workers, say, over 45. the ones who did not grow up with computers, who are trying to compete with the younger workers. it is impossible. i am 50. i have friends over 50 and it is almost impossible for us to find work anymore besides pushing carts at wal-mart and there are not that many cards anymore. host: are you looking for a job right now? >> yes, i am. i found a job and fired after two months because i was not fast enough. i am at a loss. host: what job had you been working at, the major job, that you lost? caller: ne customer service type of job. there are lots there but the older workers are getting laid off, they are getting replaced by the younger workers, and what are we going to do? host: are older workers having a harder time?

caller: 100% true. this is a weakness of when you have the deep recessions and restructuring, companies -- all but workers tended be more expensive. as the caller said, sometimes are not as familiar with the newest technology. when you are in the family and have a computer problem, it will be the 14-year-old that will help you rather than the mother or father. there are many studies and it is clearly confirmed that when somebody over 50 gets laid off, it is much harder to get re- employed. this is just a weakness we have -- weakness. maybe we need safety net programs and more special programs for older workers. host: phenix city, alabama. this is charles. republican minority caller: good morning, mr. rose. host: yes sir, we can hear you.

caller: i said good morning, mr. rose. guest: good morning. caller: i have a question and nobody seems to want to touch it. if we go here and track back of loss -- this country basically was billed as a blue-collar country. the loss of blue caller -- blue- collar jobs of was a result of nafta and wto. if this thing was reversed, jobs would come back. put tariffs on these products coming in, revenue comes in. why does everyone refused to acknowledge this? these job exits have been going on since 1994, which was mr. clinton and his democratic party. i will rate -- wait for your answer. guest: free-trade hat -- free trade has more support among republicans than democrats. nafta certainly was passed under the clinton administration but it acted with a majority of republican votes. that said, after nafta passed, one should remember ross perot

ran an 1992 on the great sucking sound that would happen if nafta passed. i was with the clinton administration at the time at the department of labor and starting in 1994 -- again, it took time. when clinton first came on and the first 18 months it was caught the jobless recovery but once it started to take off there was remarkable job growth -- 21 million net new jobs created. by the end of 1999, the highest unemployment rate of the population that we ever had in the history of the country. certainly, nafta in the short run can't be said to have caused job loss. the terms of trade -- it is easy to look at and say we could have done that, and why couldn't -- stop that and produce it at home. by and large, what happened is productivity advances. if we look at coal production or steel production, it can be

measured quite easily. millions of metric tons. we actually produce the same amount of coal and steel today as we did in 1960. we do it with one quarter of the labor force. in fact, world wide, manufacturing employment as a share of unemployment is down significantly and that every country. this is what productivity does. it frees up what is required in the past, workers are needed to produce and allows us to go and other things. so, while i think we need to clearly negotiate trade agreements with labor conditions and we have to be wary of situations like the chinese artificially keeping their currency very low, i think this is a small effect. the notion we can grow our way back on the basis of manufacturing is unfortunately i think a myth. host: this is a tweet --

guest: home foreclosures is indeed a negative factor. one of the reasons it is taking so long for us to get back on our feet. in a recession, let's say in the 1950's and 1960's, a lot of people said they were really driven by housing and auto, the drivers of economic growth. one of the things the u.s. economy is good at is reacting quickly to things. therefore, when the housing market was strong, we really expanded housing production. unfortunately, when you expand housing production and then the housing market craters, what you are left with is a lot of inventory. it will take a while before we can clear the inventory and start getting construction going again. foreclosures, obviously, is a drag on christ -- prices, puts more units on the market. this is one of the reasons why it is taking so long for this

recovery to get off and start going strong. host: talking about jobs and the economy with a doctor stephen rose from georgetown university, nationally recognized labor economist and his later -- latest book is "rebound." georgia. jim is a republican. caller: i really wanted to talk to senator bingaman -- guest: i will do my best. caller: my company went out of business two years ago. employed nine people. the federal government has done absolutely nothing to help the small businessman stay in business. host: what kind of company did you have? caller: grappling business -- over 60 years. host: why did it go out of business? caller: pricing as much as everything -- oil, hangers, anything you bought was doubling

in price in the last two or three years. it was just a losing proposition. my business is not the only one. there have been a half a dyfed -- doesn't cleaners that closed up. host: and hit in 2008 by people cutting back on dry cleaning in a bad economy. caller: you are right. host: you said you want more federal writ -- support. what could the federal government have done? caller: could put up small business loans to the people who wanted to stay in business but they have not done that much. the obama administration and the democrats have cut more jobs than we can shake a stick at. they are in contempt on oil drilling -- and how many jobs that would produce, i don't know. guest: one of the virtues of our economy is flexibility.

on for -- fortunately it has an upside. when market forces change, you can go out of business. when an economy is working well, about a million jobs each month are being created and slightly less than a million are being let go. so we have a vibrant, churning economy. both democrats and republicans are committed to small businesses. there is only so much you can do. the sba is funded and there are loans available, but obviously when you apply for these loans, they will be looking at the market and how viable these things are. i know politicians are committed to this. and again, this is an effect of the recession and hopefully we will turn the corner soon. host: for stephen rose,

brooklyn, a democrat. caller: to may, the real number of unemployed is closer to 30 million if you count those off the rolls and not being counted. taking a couple of years to bring back jobs. i want to know how dr. rose feels about unemployment expenses particularly for the 99ers. guest: this has been an important issue for the administration and pushed hard to get extensions passed and passed again. surveys asked a lot of detailed questions. as the caller notes, there are various ways to measure unemployment. other categories, change if -- to change it closer to 17% is involuntary part-time, people will want to work full time but can only find part-time jobs. that is the main number. then another number call discouraged workers. people who say they are not