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CRE Finance World, Summer 2012

Is 2012 Different, or just 2011 “2.0”? social safety nets from the tens of trillions of unfunded liabilities If that were not challenging enough, we are expected to bump they now face, and — more relevant to CRE — changes to, if not back up against the debt limit, which currently stands at $16.4 outright repeal of, Dodd-Frank. House Republicans have now trillion. Projections suggest we will approach the limit in the fourth passed either in Committee or on the floor outright repeals of quarter of 2012, at which time the Treasury Secretary will take some of the more complex provisions of the Act, namely risk temporary measures to allow continued issuance of debt. The retention, GSE support and the title dealing with “too big to fail” Bipartisan Policy Center estimates those actions will get us to institutions called orderly liquidation authority. That would be a February 2013, when we will hit a hard debt-limit wall. If the bold agenda for a new Congress and executive branch, but a economy is weaker than expected at that point, it will widen the single party structure could make many things achievable which deficit faster and we’ll hit the wall sooner. are viewed now as improbable (case in point: Democrat control of Congress and the White House created Dodd-Frank and health While the impact of the November elections is certainly foremost in care reform). the minds of many, we at CREFC are focused on legislation already enacted – namely, Dodd-Frank and its rulemakings. Lame Duck Congress Fraught with Cliffhangers, “Taxmageddon” More Information, but Little Change to the One major factor in the coming elections will be America’s uneasy Regulatory Playing Field glide toward what has been labeled in Washington as “taxmageddon,” Dodd-Frank has been a bear for the regulators to implement. the enormous tax increases and spending cuts scheduled for the While we believe we may see finality on the Volcker Rule, the beginning of 2013. Not only is the nation bracing for something remainder of the rulemakings affecting our industry are not likely of a tax tsunami, but we’re preparing for a return of that perpetual to be implemented until 2013. Congressional debate – what to do about the nation’s debt limit. No one can yet see a smooth navigation through the coming storm, Risk Retention: Risk retention has generated many diverse opinions but paths away from fiscal calamity do exist. within the CRE finance community about the best form and format for retained risk. Regardless of the final rules, the industry is hungry What is “taxmageddon?” At the end of 2012, all Bush-era tax cuts for certainty on the final CRE finance playing field. As we have said will expire, and the top dividend tax rate will rise to 43.4% from previously, certainty does not mean getting rules done quickly, but 15%. In addition, a provision of health reform provides for a 3.8% rather getting rules done that are both workable for the industry surtax on all forms of investment income. These expiring taxes and allow financiers to handle $1 trillion CRE refinance wave will suck something on the order of $250 billion a year out of our through 2017. Portfolio lending has done well to handle many CRE modestly growing economy. These are in addition to the expiration loans in primary markets, but there is not enough balance sheet of the payroll-tax holiday, at more than $100 billion a year, and lending to handle such a refi wave, nor to cover secondary and expanded unemployment-insurance benefits. Add to our new tertiary markets. Securitization will be necessary to close the gap. collective tax bill other spending cuts about $100 billion, from the sequester set up by the 2011 debt-limit deal, and you’ve got So when will we see a set of final risk retention rules? In our opinion, a serious challenge to any GDP growth for 2013. All told, this not until 2013. However, we do believe we will see some form of fiscal tightening adds up to about $500 billion — more than 3% of re-proposal of the risk retention rules later this year. If regulators GDP. CREFC members don’t need to be reminded of our fragile, decide that material changes to the proposed rule are necessary, anemic recovery. If Congress does nothing to reduce or stop these they must re-propose those changes for further public comment. increases in taxes and cuts to spending, the economy could be Considering the staggering amount of comments already sent to thrown back into a recession. the regulators (upwards of 12,000), it would be hard not to see some changes to the proposed rule. A publication of Summer issue 2012 sponsored by CRE Finance World Summer 2012 7


CRE Finance World, Summer 2012
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