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Minnick’s plan to help struggling commercial real estate market gets House hearing

Minnick’s plan to help struggling commercial real estate market gets House hearing

Idaho Freedom Foundation staff
July 29, 2010

Idaho Congressman Walt Minnick’s plan intended to help small banks making loans for commercial real estate received its first hearing from a U.S. House Committee Thursday morning.

“This will stabilize their balance sheets so they can both survive and again begin lending to the builders, developers, and small businesses who will create the new jobs required for our economy to recover,” Minnick said at the beginning of the House Financial Services Committee hearing.  Minnick led the meeting and sat in the chair of committee chairman Rep. Barney Frank, D-Mass.

Minnick’s proposed legislation would set up a three-year program in which the U.S. Treasury would help financial institutions, primarily smaller banks, package their commercial real estate loans as mortgage-backed securities that can be traded to investors.    These loan guarantees by the Treasury could total up to $25 billion, though it would charge a fee to banks who use the program.

The need for such a program, according to Minnick, is that the value of property used by businesses has dropped 40 percent in two years, a $2 trillion loss caused by economic conditions.  That drop has made it difficult for small banks, which typically are the main source for these kinds of loans, to issue loans to new businesses.

Minnick said that another House committee estimates that up to 2,000 smaller banks are at risk because the value of their loans for commercial real estate exceed the banks’ capital.  He told a New York Times blog that this program would let them repackage their loans and take a loss, but stay solvent.  “They would have to take some haircuts, but not catastrophic haircuts,” he said.

“We need this to jumpstart the free market, and I think that’s what it’s designed to do,” said Todd Lindsay, a partner with the firm U.S. Capital.  Lindsay testified during the hearing that Minnick’s plan isn’t a bailout for financial institutions or a silver bullet for small banks.  He also said he expects other private-sector investors to take over the Treasury’s role in the process, since they could charge lower fees.  “The profit incentive for the free market to step in and take the government out of this business is incredible.”

Minnick has worked on getting bipartisan support for the plan.  Idaho Rep. Mike Simpson is one of two Republicans in the House co-sponsoring the legislation.

The top Republican in the committee, Rep. Spencer Bachus of Alabama, said GOPs in the House wouldn’t dismiss Minnick’s legislation.  Other Republicans on the panel said it is ill-advised, untimely, and essentially another bailout that would cost taxpayers money.

Minnick dismissed those claims, as did Lindsay and several of the other witnesses at the hearing.

The committee did not vote on Minnick’s plan.  It would need approval from the committee before it could get a vote in the full House.

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