As just reported by the WSJ, there exists a little known legislative “fix” in the “mix” that just may shore up the troubled commercial real estate industry.

According to sources in the know on Capital Hill , there is legitimate momentum in both chambers of Congress, with the House version actually having a shot at getting a vote as soon as this Fall, September 2010.

The Problem(S):

• As we all know by now, the deep recession has sent delinquencies on commercial real estate loans soaring as high vacancies have dried up property owners’ revenue. In fact, commercial real estate prices have plummeted by 40% in some markets from the highs seen in 2007.

• As we have reported in this Blog on many occasions, trillions of dollars of commercial real estate debt are coming due over the next few years amid a crash in property values that is making it difficult for owners to sell or refinance. This phenomena, better known as Extend and Pretend, is a temporary solution, but one that would rather be eliminated if a better, more secure solution could be crafted.

• Large banks  – such as Wells Fargo, J.P. Morgan and Bank of America —  that aggregate commercial real estate loans into bonds have been unwilling to hold smaller loans, even for a short while, before packaging them for investors. The federal guarantee would spur them to purchase such loans, injecting liquidity into the market.

• Community banks – who are largely at risk due to significant commercial real estate loans in their portfolios – could use the proceeds to make new loans, helping to buoy prices.

The Proposed plan:

• The yet-to-be  introduced legislation would authorize a temporary plan that would trigger the U.S. Treasury to provide as much as $15 billion to $25 billion in guarantees on new loans to the sector.

• Under the measure, Treasury would guarantee bonds backed by small-balance loans financing strip malls, office parks and other commercial properties.

• In exchange, Treasury would collect fees in the amount of 2% of each underlying loan in the bond.

• To qualify for the federal backing, it is proposed that the bond would have to carry an investment-grade rating and each underlying loan in the security would have to be for $10 million or less. The program would phase out after three years.

the Opposition: The plan is likely to face resistance from lawmakers trying to rein in spending. How legititimate is the risk and possible failure of all the banks and the overall impact to the economy is Commercial Real Estate should faulter? Is this legislative initiative worth it? What are your thoughts?

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