Press Release: GMAC Commercial Holding Corp.
April 10, 2002
WASHINGTON, DC -- The following position statement was issued by David Creamer, Chairman & Chief Executive
Officer of GMAC Commercial Holding Corp., the nation's leading financial services resource for the commercial real
estate industry.
Mr. Creamer was among a group of private and public sector officials who met with President George W. Bush yesterday
afternoon to urge Congress to enact legislation providing a Federal backstop for terrorism insurance in support
of the US commercial real estate building sector. In 2001, GMACCH originated nearly $20 billion in commercial real
estate loans and its servicing portfolio exceeded $134 billion.
Are the Terrorists Winning?
The terrorists chose the World Trade Center for their September 11 attacks in an attempt to disrupt the American
economy. By targeting the heart of the US financial center, they had hoped to hit us where it hurts the most -
the pocketbook. The capital markets have shown great resilience. The Dow Jones Industrial Average is 9.7% above
where it was on September 11. To some degree, however, this rebound has lulled us into a false sense of security.
Many economic effects of the September 11 attacks have yet to be felt. The impact on America's commercial real
estate market is just becoming evident.
Real estate is the heartbeat of the American economy. We touch it in every way. Where we work, shop, and live.
We are all invested in real estate much more than we realize. Take a look at the balance sheet of any Fortune 500
company and see the estate exposure shown therein. And balance sheets only show the amortized value - replacement
values are often extremely higher. Also, pension funds and insurance companies invest heavily in commercial property.
A crisis is brewing in the commercial real estate industry. While nowhere near as dramatic as the tragedy of September
11, the commercial property industry is facing an attack that could have a devastating impact on our economy. And
it all relates to terrorism. The question is: who bears the risk of the next terrorist attack? Holman Jenkins Jr.
touched upon this issue in his Business World column recently (``The Importance of Being Larry'' The Wall Street
Journal, March 6, 2002), and with good reason.
Before September 11, the risk of terrorist attacks was borne by the insurance industry. Covered by ``all risk''
policies generally required by lenders, it was ordinary business practice for this risk to be insured. From the
insurer's viewpoint, the cost of providing this coverage was not significant. After all, there had only been two
significant acts of terrorism in the US. One, the Oklahoma City Bombing, was of a Federal building that was self-insured
by the government. So the only domestic act of terrorism that had resulted in an insurance pay-out was the 1993
bombing of the World Trade Center.
The landscape has changed drastically since September 11. The insurance industry has withdrawn terrorist coverage
from ``all risk'' policies: it is generally not available. Where offered, it is only at exorbitant rates. One insurer
recently said it would provide such coverage only in limited face amounts at rates of 5%-to-25% of the value of
the property as an ANNUAL premium!
So who bears the risk of terrorist acts in the wake of September 11? The natural assumption is the property owner.
Where the owner is a major corporation, this is generally true. For those headquarters, buildings and factories
owned and operated by corporations, the owner often bears the risk. But most US commercial real estate is financed
on a non-recourse basis to the owner. In the event of a default by the owner/borrower, the lender's only recourse
is to the underlying real estate. This means that in the event the property is destroyed by terrorism, the lender
is left holding the bag.
So why take pity on the lenders? When we think of real estate lenders, we assume they are large deep-pocketed money
center banks. But the fact is banks do NOT extend most of the commercial property lending in this country. It is
average investors that usually provide the capital for this financing. Fixed income funds. Pension plans. Insurance
companies. 401k investments. Our rainy day and retirement funds.
We invest these funds expecting them to be secure. Sage investments collateralized by real estate - commercial
property insured against destruction. We invest these funds without intending to bear this kind of risk. And now
that the money is invested, suddenly the rules of the game are changing.
It gets worse. Unlike your home mortgage that is paid off in full when the loan matures, commercial property mortgages
usually have a sizable sum outstanding when the loan becomes due. The loan is expected to be repaid out of sale
proceeds or a refinancing of the property. In either case, a new loan is required. The lender's dilemma is straightforward
- do you make a new mortgage without the requirement of insurance for terrorist acts? And if lenders do not finance
the sale or provide a refinancing, the loan will default upon maturity.
It is here that the true crisis has arisen. The impact is not limited to the commercial real estate industry. Other
sectors would feel the effects. The US labor market will be hit hard. The current construction boom could grind
to a halt in the big cities and malls. Many construction workers and skilled tradesmen will start to feel the pinch;
all the new jobs these projects create would be lost.
The potential impact on our commercial property industry and entire economy is so severe that it is difficult to
comprehend. Remember, if the loan goes into default upon maturity for failure to sell or refinance, the lender's
only recourse is to recoup on the value of the collateral. But what is the value of the real estate if potential
purchasers cannot get financing? The impact on commercial real estate values would be reminiscent of the savings
and loan crisis of prior decades.
Clearly, everyone hopes that confidence in our nation's security will return to more comfortable levels and that
the insurance industry will reasonably price this type of risk. ``Let market forces prevail!'' is the cry. The
problem is that market forces do not always intelligently address a problem before it becomes severe. In fact,
the market tends to wait for crises to escalate and opportunities to present themselves.
Our federal government is already poised to take a big hit if matters continue on their present path. If property
values plummet and lenders begin to suffer losses, the government stands behind many of these lenders or loans:
FDIC-insured lending institutions, PBGC-insured pension plans, HUD-insured multifamily properties and Fannie Mae-
and Freddie Mac-owned or guaranteed loans. The problem is that this would be more like a bailout: shoring up an
industry after it has suffered massive losses. The preferred path would be for the government to take less expensive
steps up front to prevent these losses.
The time for action is now. Before property values plummet. Before our retirement assets are depreciated. The government
has considered taking steps to provide a stopgap measure to partially insure against losses from terrorist acts.
Supported by the White House, the House of Representatives passed a measure addressing this issue, but the Senate
failed to support it, allowing a handful of Senators to tie up the legislation and bogging down on unrelated issues.
Congress must take precautionary measures to prevent an even greater disaster.
The General Accounting Office has recognized the seriousness of the problem, enumerating many instances where the
lack of terrorism insurance is having an adverse effect and expressing concern that this could become a drag on
our economic recovery. Federal Reserve Chairman Alan Greenspan recently observed that Congress should stipulate
that the federal government cover this risk. The warning signs are clear. The potential for a severe impact is
real. Congress should act now, before the terrorists win their war on the US economy without making another move.
David E. Creamer
Chairman & Chief Executive
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Contact:
GMAC Commercial Mortgage
Kelley DeSantis, 215/328-1942