Mortgage Observer

CRE Finance Council’s Stephen Renna Gives Post Election Analysis of Challenges Ahead

Prior to the November elections, all meaningful efforts to address our looming fiscal problems were put on hold by legislators until the outcome was known. Well, we now know the outcome, and it’s not that much different than pre-election, as far as the balance of power goes.

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Illustration by Thomas James.

So lawmakers return to the nation’s capital knowing they can no longer avoid the tough choices. The self-imposed deadlines they made for dealing with our fiscal mess are upon them. Can President Obama and Democrats and Republicans in Congress figure out a way to get beyond the intractable fiscal positions each has staked out and enact meaningful solutions? Our nation’s economic future depends on it. And the commercial real estate finance industry has much at stake.

President Obama and a divided lame duck Congress have less than a month to reach consensus on tax rates, budget cuts and raising the debt ceiling or the nation will head over the “fiscal cliff.” This issue will be the No.1—and only—priority for the remainder of this year and likely the first quarter of 2013. The Congressional Budget Office predicts the country will drop into another recession if an agreement cannot be reached on our long-term fiscal future.

Immediately following the November elections, President Obama, Speaker of the House John Boehner and Senate Majority Leader Harry Reid all spoke about the necessity of working together to find a solution for the nation’s long-term fiscal health to avoid going over the fiscal cliff. However, listening to their speeches, it became clear that they have not changed their negotiating stances from the debt-ceiling debacle. President Obama, bolstered by his re-election, again voiced his opinion that taxpayers making more than $250,000 a year should pay more, and any deal on the fiscal cliff must include such revenues. Senator Reid mirrored the president’s position. In response, Speaker Boehner stated that he can support revenue increases in order to reach a deal. He added that broadening the tax base through lowering overall tax rates, while closing tax loopholes, is the right way to move forward.

Will two parties that cannot agree on the starting point for negotiations reach a deal? With less than a month to go, it is likely that the lame duck Congress and the president will reach a short-term agreement to fund the government and extend rates until the next Congress can be installed. Given that the American public elected a divided government for 2013 that bears a striking resemblance to the last Congress, we may end up simply kicking the can down the road.

If long-term debt and revenue decisions are to be made next year, both sides will likely have to give ground. Can Speaker Boehner and the Republicans accept increased taxes for the highest tax brackets, and, in doing so, will they get something meaningful in return in the way of entitlement reform or spending cuts? Will President Obama and Congressional Democrats move off the $250,000 income threshold? It’s a political number. There is nothing magic about it. Will they give in on real, non-defense spending cuts?

There isn’t likely to be a grand bargain on taxes and spending in the lame duck session. At best, expect there to be an agreement in principle that outlines the broad parameters of a deal that Congress will have to enact in many pieces during the first six months of 2013. It’s possible that the Simpson-Bowles report could provide the principles, or the near-agreement Speaker Boehner and President Obama almost came to last year. Such a budget deal could put into place heretofore unknown polices affecting commercial real estate broadly and CRE finance more specifically.

Regardless, our industry will also face a laundry list of new regulations and laws that were in limbo until the American public made its political decisions in November. Roughly 33 percent of the 398 required rule-makings under Dodd-Frank have been completed, leaving a substantial majority outstanding. Many of the rule-makings that apply to CRE, including risk retention, will be finalized next year.

Regulators, just like everyone else in this country, were awaiting the results of the November elections prior to finalizing most major rules. With the president re-elected, many of the timelines for rule-makings will remain the same. Furthermore, regulators are aware that a split Congress allows for minimal changes to Dodd-Frank. However, there are likely going to be new leaders at regulatory agencies who may change the outcome of many rule-makings, including the Securities and Exchange Commission, the Treasury and the Commodities Futures Trading Commission.

The final regulatory decisions made on each rule-making—as well as the combined effect of the final rule-makings—will play a crucial role in determining both the playing field for and the amount of liquidity supplied by the CRE finance industry.

Lawmakers have punted on real fiscal reform so many times it’s hard to imagine they will suddenly change their course in 2013. However, we are getting close to the end of the runway.  We can see the wreckage in Europe that unrestrained fiscal policy brings. The year 2013 is shaping up to be an inflection point for our fiscal policies and the direction of our economy.

What any forthcoming national fiscal and monetary policies will mean to the economy, and to the commercial real estate finance industry in particular, remains to be seen. More granularly, we expect several legislative and regulatory policies in 2013 that will directly impact commercial real estate finance.