May 9, 2011
Debate over Housing Finance Reform Continues
Despite Clear Congressional Intent to the Contrary, Regulators Propose Rules to Impose Margin Requirements on Derivatives End-Users
House Subcommittee Passes Proposal to Encourage U.S. Market for Covered Bonds
Joint Committee on Taxation Continues to Examine Proposal to Update REIT Rules
NAREIT Submits Recommendations on Obama Administration's "Better Building Initiative"
Policymakers in Congress and the Obama Administration continue to stake out positions in the debate over the future of housing finance and the reform of the Government Sponsored Enterprises (GSEs) such as Fannie Mae and Freddie Mac.
On Apr. 5 and 6, the Subcommittee on Capital Markets and Government Sponsored Enterprises of the House Financial Services Committee considered and approved eight targeted bills related to housing finance reform. Among other things, these proposals would increase the guarantee fees charged by Fannie and Freddie and require a more rapid wind-down of their retained portfolios than has been called for by the Obama Administration. For a record of this markup, CLICK HERE. These bills now await consideration by the full committee before they will be taken up by the House of Representatives.
While the conventional wisdom inside the Beltway is that few, if any, legislative proposals related to housing reform will make their way to President Obama’s desk prior to the 2012 elections, there remains a possibility that some consensus will develop. For example, NAREIT understands that at least one comprehensive, and bipartisan, proposal crafted by members of the House Financial Services Committee may be unveiled in the coming weeks.
As this process continues, NAREIT will continue to advocate on behalf of our mortgage REIT members, who have a proven track record of providing liquidity for the housing finance market. We will also partner with other real estate industry organizations to ensure that lawmakers understand the role that the GSEs have played in the multifamily and senior housing sectors.
NAREIT, under the guidance of its Derivatives Reform Task Force and in coordination with the Coalition for Derivatives End-Users, continues to support efforts to create transparency in the over-the-counter derivatives market, to reduce the risk posed by major participants in swap markets, and to provide for the continued ability of "end-users" to utilize low-cost bilateral derivatives agreements to manage their business risks.
On Apr. 12, the CFTC and the bank regulators proposed regulations establishing margin requirements on uncleared swap transactions. To read a Coalition for Derivatives End-Users analysis of these proposals, CLICK HERE. Of particular concern is the fact that the bank regulators proposed to, under certain circumstances, impose margin requirements on non-financial end-users who are not required to centrally clear their derivatives transactions. Additionally, these rules would not allow physical assets or other illiquid assets to satisfy margin requirements.
This stands in stark contrast to the clear Congressional intent that these requirements should not be imposed on any end-users of non-cleared derivatives. To view the Congressional Record transcript a colloquy between Chairmen Frank and Peterson, in which Chairman Frank states, “we have given the regulators no authority to impose margin requirements on anyone who is not a swap dealer or a major swap participant,” CLICK HERE.
Additionally, prior to this proposed rulemaking, the new Democratic Chairmen of the Senate Banking and Agriculture Committees joined with the Republican Chairmen of the House Financial Services and Agriculture Committees in sending a letter to the regulators to once again underscore the Congressional intent that new margin and capital requirements should not be applied to end-user transactions. To view this letter, CLICK HERE.
The House Financial Services Committee is expected to consider legislative proposals to ensure that the statutory language of Dodd-Frank is consistent with the stated Congressional intent, thereby protecting end-users from margin requirements. On Wed., May 4, the Subcommittee on Capital Markets and Government Sponsored Enterprises passed H.R. 1610, a bill proposed by Rep. Grimm (R-NY) to create a clear end-user exemption from margin requirements. To view the legislative proposal, CLICK HERE. To view a Coalition letter supporting this proposal, CLICK HERE.
Additionally, on May 4, the House Agriculture Committee passed H.R. 1573, a bill introduced by Chairman Lucas (R-OK) to delay the implementation of the derivatives provisions in the Dodd-Frank Act. While this proposal may ultimately pass the House, NAREIT understands that it will not be considered in the Senate.
On May 3, the House Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises passed H.R. 940. Introduced by Rep. Scott Garrett (R-NJ) and Rep. Carolyn Maloney (D-NY), this proposal would facilitate a U.S. covered bonds market. To read the legislative text of H.R. 940 as it was introduced, CLICK HERE.
Covered bonds are securities issued by banks and backed by pools of loans, which would remain on the issuer's balance sheet. This allows banks to borrow against the value of the underlying asset pool, and to use this capital to extend additional loans. It also protects bond investors by ensuring interest payments, and by giving them recourse to the underlying assets in the case of a bank default.
The full House Financial Services Committee is expected to take up the proposal in the coming weeks, and Sen. Chuck Schumer (D-NY) is reported to be considering introducing a similar proposal in the Senate.
NAREIT has been working with its members and with several Members of Congress to develop the “Update and Streamline REITs Act” (or US REIT Act), which would assist REITs by delivering new management and operational efficiencies across a broad range of areas.
Among other things, the US REIT Act would amend the REIT rules by: 1) modifying the REIT dealer sales "safe harbor" so that a REIT can sell up to 20% of its properties annually (up from the 10% limit today), and utilize a taxable REIT subsidiary to market its property; 2) repealing the current preferential dividend rule for all SEC-registered REITs; and, 3) clarifying and modernizing various REIT income and asset tests.
The Joint Committee on Taxation (JCT), the nonpartisan Congressional organization that provides technical expertise and support to the tax-writing committees, is reviewing the US REIT Act. Once the JCT has prepared a revenue estimate it is anticipated that Rep. Pat Tiberi (R-OH) and Rep. Richard Neal (D-MA), two senior members of the House Ways and Means Committee, will introduce the proposal on a bipartisan basis in the House of Representatives. In addition, NAREIT expects the proposal to attract similar bipartisan support in the Senate, including the support of the Ranking Republican on the Senate Finance Committee, Sen. Orrin Hatch (R-UT).
On Apr. 7, NAREIT submitted formal recommendations to the Department of Treasury on ways in which the Obama Administration’s “Better Building Initiative” could be implemented with respect to REITs. This submission was made in response to the president’s FY2012 Budget Request that proposed to, "replace the existing deduction for energy efficient commercial building property expenditures with a tax credit and also allow taxpayers to take an alternative credit for placing in service" more energy efficient properties. The Treasury Department has further described the proposal by stating that "special rules would be provided that would allow the credit to benefit a REIT or its shareholders." The submission is a follow-up to a Mar. 14 meeting between NAREIT staff and Treasury officials.
Specifically, NAREIT’s submission contains potential alternatives for improving the cost-effectiveness of retrofitting activities, including 1) the ability to assign and/or transfer the credit to third parties (including tenants and service providers); 2) indefinite carry forward of the credit to offset any potential REIT-level tax liability (including, but not limited to, tax on retained net capital gains); and, 3) the conversion of the credit to an economically equivalent deduction modeled after existing section 179D, provided that existing E&P rules are revised so that REIT shareholders could realize the benefit of the increased deductions from the REIT’s taxable income. NAREIT requested that Treasury consider implementing the proposal in a manner that provides the greatest variety of alternatives in order to encourage REITs to invest in retrofitting activities.
To view NAREIT’s submission to the Treasury Department, CLICK HERE.