COVID-19: Policy Options for Commercial Real Estate and Commercial Mortgage-Backed Securities Markets
INSIGHTi
COVID-19: Policy Options for Commercial
Real Estate and Commercial Mortgage-Backed
Securities Markets
July 13, 2020
Recently, some Members of Congress have raised concerns over the commercial real estate (CRE) and
commercial mortgage-backed securities (CMBS) markets and have cal ed on Treasury and the Federal
Reserve (Fed) to address potential liquidity issues. Chal enges in those markets are discussed in CRS
Insight IN11427, COVID-19 Impact on Commercial Real Estate and Commercial Mortgage-Backed
Securities, by Andrew P. Scott. This Insight examines a few policy options for addressing these issues.
Why Residential and Not Commercial?
Conditions facing residential and commercial mortgage markets have numerous similarities; however,
significant differences arise from the federal government’s involvement in these markets. For instance,
for both residential and commercial tenants, many are struggling to make payments to either their
landlords or lenders. This in turn has created pressures on mortgage servicers who are supposed to
advance payments from borrowers to lenders and investors. Additional y, investors may perceive more
risk in mortgage markets and be less wil ing to buy securities backed by mortgages, making it more
difficult to finance new projects.
The protections in the CARES Act (P.L. 116-136) for borrowers of consumer loans and residential
mortgages, as wel as assistance programs for companies to retain employees, were facilitated by existing
federal government roles in these markets: federal agencies and government-sponsored enterprises are
heavily involved in the residential mortgage market; the Smal Business Administration (SBA) backs
loans to businesses; financial regulators regulate banks; and the Fed serves as a lender of last resort.
Additional y, regulators have provided regulatory relief for banks, and the Fed has established various
liquidity facilities for financial institutions.
By contrast, the federal government has a more limited footprint in the CRE and CMBS markets, both
before the Coronavirus Disease 2019 (COVID-19) pandemic and in the pandemic responses. While the
CARES Act provides relief to residential (including multifamily) borrowers by al owing them to defer
payments for up to a year, this could cause strain on landlords, residential mortgage lenders, and servicers
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by reducing their cash flow. In response, federal agencies have taken actions to assuage concerns over
residential servicer liquidity issues. In contrast, in the CRE market, the federal government has not
intervened in such a manner, and the stresses facing lending markets are more directly linked to
borrowers’ ability to repay rather than a statutory al owance to defer payments. This is an important
distinction, as the normal market procedures for resolving delinquency (foreclosure, special servicing,
bankruptcy) are al stil available to commercial lenders and borrowers.
If similar relief efforts made in residential markets were extended to CRE markets, this could create a
similar type of stress. For example, Section 110601 of the HEROES Act (H.R. 6800, passed the House on
May 15, 2020) would limit some smal businesses’ and nonprofits’ obligations to pay their commercial
mortgages.
Current Federal Support to CMBS and CRE
Although there is currently no Fed or Treasury relief program dedicated to CRE, the broad policy
response to COVID-19 includes support to CMBS markets. The Fed’s response to the pandemic directly
supported CMBS markets in two ways. First, as part of its “quantitative easing,” the Fed has directly
purchased CMBS that comprise federal y backed multifamily mortgages. (Current holdings presented
here.) Second, private CMBS are eligible for purchase through the Term Asset Backed Securities
Liquidity Facility (TALF), a program to support the asset-backed securities market general y. While these
actions boost demand for CMBS, they do not directly address the losses or funding strains faced by the
industry.
CRE may also benefit from the Fed’s broadly-based emergency programs. For example, if an eligible
CRE company issued commercial paper or corporate bonds, it could benefit from Fed programs that
purchase them. However, only large CRE companies are likely to be active issuers in securities markets.
The Fed also created the Main Street Lending Program (MSLP) to offer loans with repayment deferment
for smal er companies. Likewise, some smal CRE businesses may already have access to the SBA’s
Paycheck Protection Program (PPP). In addition, PPP may enhance other smal businesses recipients’
ability to make rental payments to CRE businesses.
Policy Options for Augmenting Federal Assistance
While legislative options to assist CRE or CMBS markets are broad, two options would extend support
modeled on previous COVID-19 policies.
Congress could provide federal loans or loan guarantees to CRE market participants (renters, borrowers,
lenders, servicers, and/or investors) similar to those offered to smal businesses and the airline industry in
the CARES Act through Treasury. This may raise the question of whether other industries, such as CRE,
are deserving of targeted assistance or whether broadly-based relief would be more effective or
appropriate. For example, CMBS and CRE may indirectly benefit from policies that improved the
financial condition of tenants.
Congress could also provide access to liquidity funding by creating a new Fed program. For example, the
HEROES Act would require the Fed to make low-cost, long-term loans to creditors affected by the bil ’s
debt repayment restrictions. Alternatively, the Fed could create such a program under existing authority
subject to approval—and potential y backed by CARES Act funding—by the Treasury Secretary.
However, Fed Chair Jerome Powel recently testified “we don’t do facilities that are designed for
individual industries. We do facilities of broad applicability, and anybody who meets those requirements
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can borrow.” Creating a program dedicated to supporting one industry could lead to criticism that the Fed
was “picking winners,” which could be chal enging for a political y independent agency.
Short of opening a new facility, the Fed could make its existing programs’ terms more attractive to boost
their take up or broaden eligibility, thus increasing the existing indirect support they provide to CRE
markets. Doing so would likely increase the potential future losses of the programs; but, if desired,
CARES Act funding would stil be available to absorb such losses. Because TALF and the MSLP are just
getting started, it may be premature to judge whether take up is sufficiently robust.
Author Information
Andrew P. Scott
Marc Labonte
Analyst in Financial Economics
Specialist in Macroeconomic Policy
Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff
to congressional committees and Members of Congress. It operates solely at the behest of and under the direction of
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