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Loan Officer Survey: CRE Focus 

May 14, 2024

Last week the Federal Reserve released the results of its April 2024 Senior Loan Officer Opinion Survey, which tracks lending standards and demand for commercial and consumer lending.

Why it matters: The quarterly covers over 80 banks and specifically tracks underwriting quality and demand for various types of CRE loans. The following summary is excerpted from the Fed press release with reformatting and editing for clarity.

The survey describes the results in “net share,” which are the percentage differences between the fraction of banks that reported tightening standards or strong demand versus weaker standards and weaker demand.

• The summary describes the net share with the following ranges: “unchanged” less than or equal to 5%; “modest” greater than 5% and less than or equal to 10%; “moderate” greater than 10% and less than or equal to 20%; “significant” greater than 20% and less than 50%; and “major” greater than or equal to 50%.

By the numbers: The Fed highlighted the following key takeaways for CRE, which include 1) construction and land development loans; 2) multifamily loans; and 3) nonfarm nonresidential loans.

• Tightening Standards: Over the first quarter, significant net shares of banks reported tightening standards for all types of CRE loans. Such tightening was more widely reported by “other banks” than by “large banks.”
• Weaker Demand: Meanwhile, a moderate net share of banks reported weaker demand for construction and land development loans, while significant net shares of banks reported weaker demand for loans secured by nonfarm nonresidential and multifamily residential properties.
• Foreign Bank Branches: Similar to domestic banks, a significant net share of foreign banks reported tighter standards for CRE loans. However, in contrast to domestic banks, a modest net share of foreign banks reported stronger demand for CRE loans over the first quarter.

Go deeper: The survey also details various aspects of bank credit policies for CRE loans.

• Tighter All Around: Banks reported having tightened all the terms surveyed for each CRE loan type.
• Widening Spreads: The most widely reported change in terms, cited by major net shares of banks across all CRE loan types, was the widening of interest rate spreads on loans over the cost of funds.
• Smaller Amounts: Significant net shares of banks reported tightening maximum loan sizes, lowering loan-to-value ratios, increasing debt service coverage ratios, and shortening interest-only payment periods for all CRE loan types.
• Shorter Maturities: Significant net shares of banks also reported tightening the maximum loan maturity for nonfarm nonresidential and multifamily loans, and a moderate net share of banks reported doing so for construction and land development loans.
• Reduced Market Areas: Significant net shares of banks reported reducing the market areas served for nonfarm nonresidential and construction and land development loans, while a moderate net share of banks reported doing so for multifamily loans. Foreign banks reported tightening across almost all terms for each CRE loan type.

What they’re saying: Almost all banks said tightening of credit policies on CRE loans over the past year was tied to less favorable or more uncertain outlooks for CRE market rents, vacancy rates, and property prices.

• Major net shares of other banks cited a reduced tolerance for risk, increased concerns about the effects of regulatory changes or supervisory actions, and a less favorable or more uncertain outlook for delinquency rates on mortgages backed by CRE properties.
• The most frequently cited reasons for weaker demand were an increase in the general level of interest rates, a decrease in customer acquisition or development of properties, and a less favorable or more uncertain customer outlook for rental demand.

Yes, but: Of the smaller but sizable share of banks that reported stronger demand, the most frequently cited reasons for stronger demand, as reported by significant net shares of banks, were

• An increase in customer acquisition or development of properties,
• A shift in customer borrowing to respondent banks from other banks and non-bank sources, and
• A decrease in internally generated funds by customers.

Contact David McCarthy (dmccarthy@crefc.org) with questions.

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2024 Presidential Polling Reveals Shifts in Swing States

May 14, 2024

There have been some noticeable shifts in polling for the 2024 presidential election over the last two months. This week, we analyze recent polls for swing states as well as some “stretch” states both campaigns are eager to win.

What’s Happening: Swing State Swings

The “swing-state” chart below provides snapshot of where the race stood in key states on March 1, prior to the president’s State of the Union address and the Stormy Daniels hush money trial in New York, and where it stands on May 10.

Note: The impact of the trial on polling is yet to be fully realized.

Source: https://www.realclearpolling.com/

Go Deeper: In every state except Pennsylvania, former President Donald Trump has lost ground since March 1. The three states where Trump appears to have lost the most ground are Nevada, Georgia, and Michigan. Despite these shifts, Trump still leads the polls in these states, while North Carolina remains hotly contested.

• Nevada: Democratic presidential candidates have carried Nevada since 2008. Other than in 2016, the state has voted for the winning candidate since 1980. While Democrats won with a 2.4% margin in the previous two cycles, that margin was not as close as it was in some other swing states. If President Biden is in trouble here on election day, it will likely be a big night for Republicans.
• Georgia: President Biden won Georgia by 11,779 votes. If Trump can flip this state back to his column in 2024, its 16 electoral college votes will offer him multiple paths to winning back the White House.
• Michigan: Michigan has voted with the winner of the presidential election since 2008. Among the historical “Blue Wall States” of Pennsylvania, Michigan, and Wisconsin, Biden has performed best in Michigan with a 2.8% margin of victory. Biden was ahead of Trump in the polls by about 1% in Michigan until last October when Trump overtook him just as the Israel-Hamas war started.
• The Blue Wall States are all within the standard 3% margin of error when it comes to polling results. If Trump’s strength is overstated by the polls, then a Biden win becomes more likely even if Trump carries the other four swing states.
• North Carolina While viewed as always just out of reach for the Democrats, North Carolina is the most likely to flip out of any on the list above. President Obama last won it in 2008, but it has since been reliably, though narrowly, Republican. Yet, the sub-4% margins give Democrats hope at the possibility of flipping its 16 electoral votes.

Expanding the Map

In every cycle, there is inevitably a period in which campaigns talk about expanding the map to new swing states and, typically, the press follows suit as is the case here in a recent article from Roll Call.

The four states below have been on each party’s radar to flip for a few election cycles, as polling sometimes demonstrates unexpected campaign strength or weakness. Former President Trump is currently polling about 4% to 6% ahead of the vote count he received in 2020 in each of these states.

• Minnesota: In the leadup to the 2020 election, Trump targeted Minnesota as a swing state due to Clinton’s narrow 2.5% victory. However, it landed squarely back in the blue column with Biden winning it by 7% in 2020. Recent polling may keep it in the news cycle, but don’t expect Minnesota to flip. The state has voted Democratic every presidential election since 1976.
• Virginia: A previous GOP stronghold, Virginia has been reliably Democratic since 2008. With the Blue counties in Northern Virginia trending even more Democratic, a flip here is more difficult but would likely usher in President Trump. Biden won the state by a commanding 10%, compared to Clinton’s 5.3%.
• Texas: Over the past decade, Texas voters have been steadily trending towards Democrats, but it has remained out of reach enough to be branded a battleground state. However, the vote margin here will be closely watched for 2028 and beyond, due to its growing population and whopping 40 electoral votes.
• Florida: The once perennial swing state famously decided the 2000 election and has voted with the winner of the election in every cycle since 1976 except in 1992 and 2020. Florida’s rightward shift was well demonstrated in 2022, and it is the only battleground state where Trump improved his vote share from 2016. If this state flips, a second term for Biden would be a near guarantee. With abortion access on the ballot, Democrats may see a pick-up opportunity, but a flip here is unlikely.

Yes, but: The election will likely come down to the seven expected swing states mentioned in the first chart, but the four “stretch" states will play a key role.

The Bottom Line: Biden’s poor standing in the South and Sunbelt states cannot be understated. If he doesn’t improve in Nevada, Arizona, Georgia, and North Carolina, and Trump sweeps all of them. Biden will have to hold on to Pennsylvania, Michigan, and Wisconsin to have any chance to secure a second term.

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FDIC Chair Gruenberg’s Fate

May 14, 2024

On May 7, a report commissioned by a special committee of the Federal Deposit Insurance Corp. (FDIC) and performed by law firm Cleary Gottlieb issued a scathing indictment of the FDIC’s culture:

“Far too many FDIC employees…have suffered from sexual harassment, discrimination, and other forms of interpersonal misconduct for far too long. We find that aspects of the FDIC's culture and structure— including a lack of accountability, fear of retaliation, a patriarchal, hierarchic, insular and risk-averse culture, power imbalances, insufficiently clear guidance and reporting channels, inadequate recordkeeping, and an investigative process that lacks credibility internally — have contributed as root causes to the conditions that have allowed for this type of workplace misconduct to occur."

The report also highlighted FDIC Chairman Gruenberg’s behavior as cause for concern, noting that some employees experienced “deeply unsettling exchanges during which he was extremely “harsh” or “aggressive”: 

“While we do not find Chairman Gruenberg’s conduct to be a root cause of the sexual harassment and discrimination in the agency or the long-standing workplace culture issues identified in our review, we do recognize that, as a number of FDIC employees put it in talking about Chairman Gruenberg, culture “starts at the top.” 

Report background: Following reporting by the Wall Street Journal in November 2023 of the FDIC’s “toxic and misogynistic” culture:

• The House Financial Services Committee and the House Oversight and Accountability Committee opened investigations into the FDIC’s culture.
• The FDIC Office of Inspector General began to examine the “leadership climate at the agency with regard to harassment and inappropriate behavior.”
• The FDIC Board announced the establishment of the Special Review Committee, co-chaired by two non-management Board members, to oversee an independent third-party review of the FDIC’s workplace culture.
• In December 11, 2023, the Special Review Committee appointed Cleary Gottlieb as the third-party reviewer.

Following the report’s issuance, according to American Banker, Gruenberg apologized and said that “as Chairman, I am ultimately responsible for everything that happens at our agency, including our workplace culture.” He added that the FDIC “will spare no effort to create a workplace where every employee feels safe, valued, and respected.”

What they’re saying: Several Republican members of Congress have called for Gruenberg’s resignation. Rep. Bill Foster from Illinois is the only Democrat thus far urging Gruenberg to resign.

Democrats on key finance committees, including Sen. Elizabeth Warren, Sen. Sherrod Brown, and Rep. Maxine Waters, have indicated their confidence in Gruenberg’s ability to implement change at the FDIC and noted that problems at the agency pre-dated his tenure.

According to Axios, White House spokesperson Karine Jean-Pierre did not say whether President Biden had confidence in Gruenberg, but that the chair "apologized and has committed to the [report's] recommendations."

The bottom line: Gruenberg’s current position as FDIC chair is critical as the Biden Administration seeks to finalize regulations, including the proposed bank capital requirements, that require an FDIC vote. If he were to step down, the FDIC board would be evenly split between Republicans and Democrats.

What’s next: Gruenberg, as well as Federal Reserve Vice Chairman for Supervision Michael Barr and acting Comptroller of the Currency Michael Hsu, will be testifying in front of the House Financial Services Committee and the Senate Banking Committee next week for regularly scheduled oversight hearings.

All eyes will be on his performance at these hearings and the level of support he receives from Democratic members of Congress.

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Fed Summarizes Bank Pilot Climate Scenario Analysis Exercise  

May 14, 2024

On May 9, the Federal Reserve (Fed) released a summary of the 2023 pilot climate scenario analysis it conducted with Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase; Morgan Stanley, and Wells Fargo. The summary did not provide details about individual banks.

The pilot exercise aimed to understand large banks’ climate risk-management practices and enhance their ability to estimate, monitor, and manage climate-related financial risks.

It comprised two separate and independent modules, a physical risk module and a transition risk module:

• The physical risk module focused on estimating the effect of specific scenarios on residential and commercial real estate loan portfolios over a one-year horizon in 2023. (All banks assessed the impact of a severe hurricane in the Northeast region on their residential and commercial real estate portfolios.)
• The transition risk module focused on estimating the effect of specific scenarios on corporate and CRE loan portfolios over a 10-year horizon from 2023–32.

According to the Fed:

“The exercise highlighted data gaps and modeling challenges that arise when estimating the financial impact of highly complex and uncertain risks over various time horizons.” 

Specifically, the Fed found that participants:

• Had significantly different approaches to the exercise due to different business models, views on risk, access to data, and prior participation in climate scenario analysis exercises in foreign jurisdictions;
• Used existing credit models to estimate the impact of climate-related risks on credit risk parameters, with some banks suggesting that models could be enhanced to better capture climate transmission channels and associated impacts;
• Faced data challenges, including gaps related to real estate exposures, insurance, obligors’ transition risk management, and infrastructure;
• Noted the importance of understanding insurance market dynamics when modeling the impact of physical risk hazards on credit exposures; and
• Worked with third-party vendors, with some noting that the lack of historical data and the proprietary nature of vendor models inhibited their ability to independently assess model performance.

When the Fed announced the pilot exercise in 2022, Republican lawmakers expressed concern that regulators might try to use climate analyses to direct banks toward or away from specific activities.

However, the report stated that:

“The pilot CSA exercise was exploratory in nature and does not have consequences for bank capital or supervisory implications. The Federal Reserve neither prohibits nor discourages financial institutions from providing banking services to customers of any specific class or type, as permitted by law or regulation. The decision regarding whether to make a loan or to open, close, or maintain an account rests with the financial institution, so long as the financial institution complies with applicable laws and regulations.”

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Congressional Outlook 

May 14, 2024

With the election seasons heating up and must-pass items dwindling, Congress will focus on hearings, messaging bills, and legislation to set up for the post-election lame duck session and 2025. Here’s what’s on tap for this week related to financial services.

Oversight of Regulators. The House Financial Services and Senate Banking Committees will convene hearings this week focused on the oversight of financial regulators.

• Witnesses will include Fed Vice Chair Michael Barr, FDIC Chair Martin Gruenberg, and OCC Comptroller Michael Hsu. Gruenberg has reportedly been setting up one-on-one meetings with HFSC and SBC Members as he prepares to testify in the wake of a third-party report on misconduct at his agency.

SEC Legislation. The House Financial Services Committee is expected to vote soon on Republican legislation that would fence in SEC regulations.

• One of the bills, introduced by Rep. Barry Loudermilk (R-GA) would overrule an SEC requirement that securities exchanges provide investors’ personal data as part of CAT reporting except when it’s related to an investigation.
• Another bill that is not yet finalized, led by Reps. Young Kim (R-CA) and Ann Wagner (R-MO), would direct the agency to perform cost-benefit analyses of its rules and review them every five years.

Banking Legislation. The HFSC also plans to vote next week on GOP legislation that would ease regulations on banks.

• Bills expected to be considered include legislation from Rep. Andy Barr (R-KY) that would allow more banks to escape regulations such as the Volcker Rule and debit interchange requirements.
• Other Barr legislation on the agenda would force bank regulators to act on merger applications and require the Fed to review its discount window operations. The markup is also expected to include bills that would curtail the CFPB’s collection of data on small business loans and enforcement of so-called abusive acts and practices

CFTC’s Johnson to Treasury Role. The White House is poised to nominate Kristin Johnson, a Democratic commissioner at the CFTC, to fill a top role at the U.S. Treasury Department overseeing banks. If confirmed, the role as assistant secretary for financial institutions would put Johnson in a senior policy position at Treasury.

Contact David McCarthy (dmccarthy@crefc.org) with questions.

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Fed’s Lisa Cook Remarks on CRE

May 14, 2024

Last Wednesday, Federal Reserve Governor Lisa Cook cited the rise of private credit, the impact of deteriorating CRE assets on small bank portfolios, and cyber risks as top financial stability concerns.

“All told, I view CRE risks currently as sizable but manageable, and I will be paying close attention to the sector in the short and medium run.” -Federal Reserve Governor Lisa Cook

Her remarks, made during a speech at the Brookings Institution in Washington D.C., outlined the Fed’s current assessment of financial stability focusing on four key areas: household and business leverage, financial institution leverage, funding risk, and asset valuations.

Why it matters: Cook is one of the seven members of the Board of Governors of the Federal Reserve, which regulates member banks and has a hand in crafting and approving bank regulation.

What they’re saying: Cook emphasized that CRE encompasses broad asset classes and geographies, and that the Fed is carefully monitoring concentration risk in small and regional banks. Excerpts from her speech are below:

• “CRE is a broad asset class, encompassing multifamily housing, hospitality, retail, warehouses, office buildings, and many other business properties. Accounting for this heterogeneity is important in assessing the risks associated with CRE.”
• “On average, CRE loans make up only about 5%of total assets at large banks but around 30% of assets at smaller banks. Those high concentrations have caused us to step up our supervisory work with community and regional banks that have significant CRE concentrations and to augment our regulatory data for this sector.”
• “For instance, data available from SEC Form 10-Q filings suggest that office exposures account for a small share of most regional banks' CRE loans.”

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Greene’s Motion to Vacate Johnson Gets Tabled

May 14, 2024

After much back-and-forth last week, Rep. Marjorie Taylor Greene (R-GA) called a motion to vacate the chair, directly challenging Speaker Mike Johnson (R-LA).

Democrats came to Speaker Johnson’s aid as promised and the motion was tabled by a vote of 359-43. Tabling the motion effectively kills it for now, but 11 Republicans opposed the motion to table, meaning they wanted to proceed with a vote to oust Johnson.

Why it matters: Johnson survived … for now. If Democrats had not come to his aid and all members had voted along party lines, the motion would have made it to the House floor and Johnson would be out of a job.

What they’re saying: Some conservative members, namely those trying to oust him, are calling Speaker Johnson a “uniparty speaker” as he is only still in the role due to support from Democrats. They have accused him of not being a true conservative for cutting too many deals with Democrats and this could be a sign of future challenges for Johnson.

Former President Trump, who has been supporting Johnson, posted this statement to Truth Social shortly after the vote.

“With a Majority of One, shortly growing to three or four, we’re not in a position of voting on a Motion to Vacate,” Trump stated. “At some point, we may very well be, but this is not the time.”

It is a stark reminder that things could be quite different for Johnson if Republicans retake the White House, House or Senate in January.

The bottom line: This isn’t the end of Speaker Johnson’s trouble with his caucus. If anything it demonstrated that his narrow majority is quite fragile.

The November elections will make all the difference in his ability to govern, both in how many seats the Republicans win, and, even more crucially, who wins those seats.

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Global ESG Practitioner Survey Results Published

May 7, 2024

According to the 2024 ESG Practitioner Survey by Workiva, an international consulting firm, over 80% of companies not subject to the EU’s Corporate Sustainability Reporting Directive (CSRD) still intend to comply. The survey polled more than 2,000 people involved in ESG reporting from organizations across North America, Europe, and Asia.

Additional key findings include:

• 87% of respondents find it challenging to adapt reporting processes to comply with new regulations;
• 88% believe that assurance over ESG data increases the likelihood that a company will achieve its goals;
• 98% say they are confident in the accuracy of their ESG data, but 83% also believe that collecting accurate data to fulfill the CSRD requirements will be challenging; and
• 88% of practitioners say that having a strong ESG reporting program will give their organization a competitive advantage.

Why it matters: The survey’s findings also reflect the reality for U.S. companies, since the EU’s recently passed Corporate Sustainability Due Diligence Directive (CSDDD) “will require thousands of companies, both inside and outside of the EU, to integrate human rights concerns and environmental impacts within their governance.”

However, the survey found that 78% of practitioners are concerned with their organization’s ability to collect and share information with other organizations in their value chain.

Finally, according to survey results, organizations that don’t adapt, “will struggle to absorb the additional workload required to comply with the CSRD, CSDDD, SEC climate disclosure rule, or standards established by the International Sustainability Standards Board (ISSB).”

CREFC recently circulated its 2024 Sustainability Survey among membership and is currently analyzing the results. Stay tuned for the report.

Please contact Sairah Burki (sburki@crefc.org) with questions.

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Greene Plans Motion to Vacate Vote on Speaker Johnson

May 7, 2024

What’s happening: Rep. Marjorie Taylor-Greene (R-GA) is not backing down from her pledge to hold a motion to vacate vote on Speaker Johnson. Greene has pledged to force the vote sometime this week.

In recent months, Rep. Greene has repeatedly stated that Speaker Johnson should be removed from the speakership. Her main grievances against him include:

• A bipartisan government funding deal he negotiated with Democrats in March.
• Foreign aid funding packages for Ukraine, Israel, and Taiwan.
• Re-authorization of the U.S. warrantless surveillance powers.

She is currently joined by Rep. Thomas Massie (R-KY) and Paul Gosar (R-AZ) in her bid to remove Johnson. They believe that Speaker Johnson has been too willing to work with Democrats and is undermining their power in the majority.

Rep. Greene had this to say about the planned vote:

“Every member of Congress needs to take that vote,” she said. “I can’t wait to see Democrats go out and support a Republican Speaker and have to go home to their primaries. … And I also can’t wait to see my Republican conference show their cards and show who we are.” 

Meanwhile, Speaker Johnson retains the most important endorsement of all, former President Donald Trump. Trump said in early April, 

“We have a speaker. He was voted in, and it was a complicated process. And I think … it's not an easy situation for any speaker. I think he's doing a very good job. He's doing about as good as you're going to do.”

Johnson’s standing: The politics of this moment are unique, as Speaker Johnson is only seven months into his term after replacing Speaker Kevin McCarthy.

• The effort to oust Johnson is likely to fail since Democrats in recent days have pledged to save him if Greene follows through on her plan.
• Democrats have specifically pledged to table the “motion to vacate,” preventing the vote to oust Johnson from ever reaching the House floor.

This development makes the effort to oust Johnson a moot point but it is a significant moment for procedural and political reasons:

• For Greene to fully execute her plan, she would need “a motion to vacate” to first reach the House floor and then pass it by a simple majority.
• If passed, it would immediately remove Johnson from the speakership as it did to Speaker Kevin McCarthy in October.
• By supporting the motion to table, Democrats are pledging to stop the motion from ever reaching the House floor, thus saving Johnson’s speakership.

Tabling the motion, or not voting against it, allows Democrats to protect the Speaker while not casting a vote for Mike Johnson. A vote for Johnson could be politically radioactive for Democrats and the Speaker.

• However, if Johnson’s speakership is preserved by procedural support from Democrats, this could hurt his standing within his own party and possibly embolden other Republicans to further voice their frustrations with him.

The bottom line: The drama surrounding the vote could portend power struggles in the next Congress, if the GOP maintains a narrow majority.

Rep. Greene for her part had this to say about Speaker Johnson’s future, in an article published by Real Clear Politics:

Greene told RCP last month that Johnson is “not going to be Speaker under President Trump,” especially after he helped muscle through an appropriations bill funding the Department of Justice now prosecuting the former president – or as she put it, “after he funded for President Trump to go to jail.”

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