News

Reconciliation on Track in Congress but Size Could Shrink

September 13, 2021

The House held a number of committee sessions last week to move the multi-trillion dollar reconciliation package that is President Joe Biden’s agenda to expand the social and economic safety net.

House Democrats will hold committee votes this week on how to pay for the massive spending package. On Sunday, a list of tax increases to pay for the spending was released by the House Ways and Means Committee. The proposed increases are not as large as Biden proposed and are subject to change. A full list can be found on this  document which includes:

• Top capital gains rate increases to 25% from 20%
• Top corporate tax rate rises to 26.5% from 21%
• Increase carried-interest holding period to five years from three
• A 3% surtax on individuals who earn more than $5 million
• Cuts some estate-tax discounts, with no effect on family farms and businesses
• Cuts tax rate for businesses with income of less than $400,000 to 18%
• Cryptocurrency subject to additional reporting

The increased revenue from high-income individuals is expected to be around $1 trillion while corporate tax increases are expected to net $900 billion. Senate Democrats suggested a 2% tax on stock buy-backs and Senate Finance Committee Chair Ron Wyden (D-OR) floated a list separate from the House Ways and Means Committee of possible tax increases. Wyden also proposed to raise $270 billion by tightening tax reporting requirements around business partnerships, which he says allow “the wealthiest individuals and most profitable corporations to decide when, and whether, to pay taxes at all.” More specifics on which taxes would increase under the reconciliation bill will be available this week.

Capital gains increases and ending the step-up-in-basis are being actively debated among Democratic tax writers. One in three Democrats on the Ways and Means committee are said to want a capital gains rate potentially around 28%, according Bloomberg sources who requested anonymity. Biden’s plan to raise the capital gains rate on those earning above $1 million to 39.6% from 20% would raise about $322.5 billion over a decade. Some Democrats on the panel also balked at Biden’s plan to end “step-up-in-basis,” which allows appreciated assets to be passed to heirs tax-free, over concerns it would hurt family farms and small businesses. A Senate spokesperson insisted, “Step-up is not off the table. And nothing is settled on rates.”

Specific spending provisions approved by the House Ways and Means Committee last week include:

• Expanding retirement savings by requiring employers to automatically enroll employees in a retirement plan (unless they opt-out), and deduct 6% of wages from paychecks, rises to 10% over time and set target-date funds as the default investment. The committee approved by a 22-20 vote.
  
  
• Paid family leave for U.S. workers, which was approved by a 24-19 committee vote. Of note, centrist Rep. Stephanie Murphy (D-FL) broke party lines after voicing frustrations with the “rushed” process. The debate also raised questions about whether Social Security Administration or the Treasury Department could successfully operate a paid family and medical leave program.
  
  
• Extend through 2025 the recently-expanded child tax credit for children under six of $3,600, and $3,000 for older children. Some lawmakers pushed to make the expansion permanent, but doing so would be expensive and could crowd out other lawmaker priorities vying for a place in the budget reconciliation package.
  
  
• Extend energy credits for renewable energy.
  
  
• Allow the government to negotiate drug prices
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• $25 billion in additional pandemic relief through the Small Business Administration, approved by a separate committee.

Size of Reconciliation

Also still unresolved is the total size of the program. While $3.5 Trillion has been the assumption, Senator Joe Manchin (D-WV) published an op-ed calling for Democrats to slow down and reduce the size of the package to something closer to $1.5 or $2 Trillion. Manchin reiterated this lower number in a CNN interview. The 50-50 Senate gives leverage to any Senator who is willing to insert themselves into the process. But Democratic leaders expect Manchin to eventually back down, according to The Hill.

SALT Deduction

Also unresolved is the extent to which Democrats will address SALT or the State and Local Tax deduction limit. A full SALT-limit repeal is estimated to cost $380 billion. More than 30 lawmakers say SALT is critical to their vote for the overall reconciliation and are pushing for a full repeal of the SALT deduction limits, which they say unfairly target high-tax states like New York and New Jersey and encourages people to move to low-tax states like Florida. However, progressives view that provision as a giveaway to the wealthy.

Housing

Also this week, the House Financial Services Committee will consider legislation by Maxine Waters (D-CA) to spend an additional $300 billion on housing and to expedite the distribution of federal rental assistance that would impose new eviction restrictions on landlords. A hearing on this legislation was held Friday and is discussed in further detail below.

Process to Date

Following the last Policy and Capital Markets Briefing on July 26, on August 9, the Senate passed a $1 trillion bipartisan infrastructure bill by a vote of 69-30 and passed the Democrats’ $3.5 trillion budget resolution by a vote of 50-49 (shortly before 4:00a.m.) on August 11.

Following these monumental votes, attention turned towards the House of Representatives which has a (non-binding) deadline of September 15 to draft the text of the reconciliation bill to expand the economic and social safety net. After a dozen committees vote on their parts of the bill, the package is sent to the House Budget Committee, which assembles the reconciliation bill. The House Rules Committee then votes on the bill before it goes to the House floor for a vote by the end of September. This ambitious timetable may slip as there is not perfect unanimity among progressive and centrist Democrats over the size and scope of the bill.

Contact

Justin Ailes 
Managing Director, Government Relations
jailes@crefc.org 


David McCarthy 
Senior Director, Policy & Government Relations
dmccarthy@crefc.org

News

CREFC's August 2021 Monthly CMBS Loan Performance Report

September 13, 2021

CRE Finance Council has released a report on CMBS loan performance for the month of August .*

Key takeaways:
STEEP DECLINE IN CMBS DELINQUENCIES

• The overall 30+ day CMBS delinquency rate declined by 47 basis points (bps), the 14th consecutive monthly decline and largest since February 2021 (79 bps)
• The delinquency rate is 467 bps lower from its peak of 10.3% in June 2020, but still elevated relative to its pre-pandemic level of 2.2% at the end of 2019
• The pandemic-related CMBS delinquency peak was similar to that reached during the Global Financial Crisis (GFC) at 9.8%. Yet, unlike the GFC, pandemic-related delinquencies were quick to reverse course, falling 40% within 10 months.


• REO asset volume has been significantly more muted during the pandemic than the GFC.
  • The REO rate since the onset of the pandemic has remained consistent at ~1% while the rate following the GFC eventually surpassed 3%
  • The sharp declines in delinquent and special serviced loans suggest that pandemic related REO volumes will continue the trend and be substantially lower than in the GFC

SASB CONTINUES TO OUTPERFORM CONDUIT

• The overall performance for both conduit and SASB CMBS is sound with delinquency rates at 2.8% for SASB and 6.9% for conduit
• The same applies for ‘in-foreclosure’ loans and REO assets at a combined 0.8% for SASB CMBS and 3.0% for conduit CMBS
• Total specially serviced loan rates are also low at 5.4% for SABS and 9.0% for conduit
• The outperformance of SASB CMBS is due primarily to the institutional-quality assets and institutional sponsorship associated with larger loans and the heightened capital liquidity of the borrowers

• Continued Decline in Special Servicing Volume: Loans in special servicing fell 35 bps from 8.1% in July to 7.8% in August, the 11th consecutive overall monthly decline
  • Four of the five major property types saw decreases, with hotel and retail loans seeing the largest improvements
  • The special servicing rate is down from a high water mark of 10.5% in September 2020
  • There are currently $41 billion of loans in special servicing (vs. $14 billion at year-end 2019)
• In-Foreclosure and REO Loans Remain De-Minimis: Given the high percentage of loans in special servicing one year into the pandemic, one would anticipate in-foreclosure and REO rates being much higher; instead they remain low at 1.3% and 1.0%, respectively
  • Low rates reflect forbearances granted by special servicers – forborne loans are captured under servicer watchlist data and special servicer comments
  • As of August 2021, 545 loans across 295 conduit transactions had delinquency statuses of in-foreclosure or REO, while an additional 187 loans across 149 transactions mentioned foreclosure/dual tracking in the servicer commentary. About 39% of these loans are backed by retail properties and ~35% by hotel properties. 2014 and 2015 vintage loans were the most impacted.
  • Servicers do not expect rates to spike if/when foreclosure moratoriums are lifted as servicers continue to report loans as ‘in-foreclosure’ if that is a strategy they plan to pursue once moratoriums are lifted

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STEEP DECLINE IN CMBS DELINQUENCIES

News

LIBOR Update – IOSCO Voices Concern Over Widespread Use of Credit Sensitive Rates

September 13, 2021

On September 8, the board of the International Organisation of Securities Commissions (IOSCO) issued a statement  urging caution regarding the use of credit sensitive rates (CSRs) to replace LIBOR. To the good, IOSCO reiterated the importance of a “continued transition to robust alternative financial benchmarks, i.e., Risk-Free Rates, to mitigate potential risks arising from the cessation of LIBOR, including USD LIBOR.”

Over the past year, several CSRs have emerged to offer the market alternatives to the Secured Overnight Financing Rate (SOFR), the ARRC-recommended risk-free rate to replace USD LIBOR. (Additional detail on these CSRs can be found in the table below.)

In its statement, IOSCO expressed concern that widespread use of CSRs, instead of SOFR, may pose risks to financial stability. IOSCO highlighted SOFR’s robust underlying transaction volumes, observing they are “unmatched by other alternatives.”

IOSCO noted that CSRs will have to adhere to the IOSCO Principles on Financial Benchmarks  and that compliance with the IOSCO Principles is “not a one-time exercise and alternative benchmarks should be IOSCO compliant at all times.” In particular, IOSCO called on administrators to assess whether and to what extent the CSRs are “based on active markets with high volumes of transactions” and whether “such benchmarks are resilient during times of stress.”

Concern That CSRs Similar to LIBOR, Replicate LIBOR’s Shortcomings

A Comparison Across LIBOR Alternatives

An overview of the leading CSRs is provided in the table below. Like SOFR, the CSRs incorporate a bank credit risk component, which some view as more robust that the credit spread adjustment embedded in LIBOR. However, as noted above, the underlying transaction volume of the CSRs is a fraction of SOFR’s underlying volume.

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