The Small Balance Intersection Update - October 28, 2024

Quote of The Day:

"Each Monday is a new chance to shine and reach for your dreams." Unknown

Welcome to the October 28th edition of The Small Balance Intersection! Today, we explore pressing issues in real estate: a call for modernization in mortgage regulations to support consumer choice, persistent economic and childcare challenges for women shaping the workforce, and rising risks in commercial real estate lending as banks delay addressing defaults. Additionally, we examine the top real estate trends for 2025, from elevated financing costs to the push for sustainable development. Let’s dive into these developments shaping the industry.

Reform Road

The Mortgage Bankers Association (MBA) calls for updates to Section 8 of RESPA to reduce administrative burdens and better align with modern market needs. In their white paper, the MBA suggests re-evaluating Marketing Services Agreements (MSAs) and desk rentals, adjusting regulations to increase flexibility and fairness. The group is also collaborating with regulators to refine digital marketing guidelines and improve consumer information.

Gender Equity Ave

A Bank of America report finds women-focused sectors added 20% of U.S. GDP in 2023, despite persistent gender pay gaps. Rising childcare costs, which have jumped 13% since 2021, are pressuring many women to reduce work hours or leave the workforce. Addressing these economic strains could boost workforce stability and household financial health.

Maturity Wall Blvd

The New York Fed warns that banks’ “extend-and-pretend” approach in commercial real estate (CRE) lending may destabilize the financial system. By extending loan terms on distressed properties, banks face increased default risk as property values drop and refinancing options shrink. With nearly $1 trillion in CRE debt maturing in 2025, smaller banks may face closures if pressures continue.

Caution: Uncertain Terrain Ahead

The Counselors of Real Estate (CRE) identifies top 2025 real estate issues, including geopolitical uncertainty, high financing costs, and climate-driven insurance hikes. Rising office vacancies are fueling efforts to repurpose underused urban spaces, aiming to revitalize city centers. Sustainability, AI integration, and regulatory developments will also shape market stability and investor confidence in the coming year.

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Did You Know:

$15.9 billion -The amount that is expected to be spent on all federal races in the U.S. this election cycle, eclipsing the $15.1 billion spent in 2020, according to Open Secrets, a nonpartisan group that tracks campaign spending. U.S. elections are now about 40 times more expensive than those in Germany and the U.K.?

Reform Road

Modernizing RESPA Section 8 for a Competitive Mortgage Market

The Mortgage Bankers Association (MBA) has published a white paper calling for major reforms to Section 8 of the Real Estate Settlement Procedures Act (RESPA) to better align the law with modern mortgage industry practices and consumer needs. The MBA’s report, titled “RESPA at 50: Key Reforms to RESPA Section 8 to Better Serve the Modern Mortgage Market,” critiques the law’s limited success in reducing settlement costs and highlights the administrative burden on lenders and settlement providers. MBA President Bob Broeksmit argued that outdated regulations limit competitive marketing opportunities and reduce consumer choice, advocating for a shift in how Marketing Services Agreements (MSAs), desk rentals, and digital marketing are regulated. Key proposals include re-evaluating MSA and desk rental guidelines based on fair market value rather than restricting compensation outright, enabling digital marketing that does not mislead consumers, and allowing greater flexibility in affiliated business arrangements (AfBAs). The white paper also recommends removing outdated requirements, like redundant disclosures and the inclusion of affiliate organizational charts, to enhance consumer understanding. Additionally, the MBA urges the CFPB to revisit certain regulatory interpretations to account for subsequent legal precedents, creating more precise compliance boundaries and liability limits for lenders and service providers. The association is prepared to collaborate with the CFPB, Congress, and industry stakeholders to implement these reforms.

For a detailed breakdown, access the full white paper here.

Gender Equity Ave

Women Drive Economic Growth but Face Persistent Pay and Childcare Challenges

Bank of America’s recent report highlights the economic contributions of women-focused sectors, revealing that industries with high female employment—like healthcare, education, and leisure—contributed close to 20% of U.S. GDP in 2023. Payroll growth in these “women-intensive” sectors has consistently outpaced broader market trends, reinforcing women’s role in post-pandemic labor market strength. Despite these gains, a significant gender pay gap persists; Bank of America’s data suggests women’s median annual income in 2024 lags behind men’s 2019 average by more than five years, though women’s wages have grown faster since 2020, particularly with job changes.

However, challenges remain, particularly around childcare costs, which have risen 13% since 2021, outstripping overall inflation. High childcare expenses are prompting many women to reduce working hours or leave the workforce altogether, a trend that’s intensified since mid-2023. For households paying for childcare, dual-income arrangements are decreasing, reflecting financial pressures and limited childcare options as federal stabilization support wanes. This disparity in caregiving responsibilities not only impacts women’s career growth but also constrains overall economic productivity. The study underscores the need for more robust childcare solutions to support labor participation and financial stability for working families.

For full details, view the Bank of America report here.

Maturity Wall Blvd

Extend-and-Pretend Lending Spurs CRE Risk

The New York Fed warns that U.S. banks’ “extend-and-pretend” practices in commercial real estate (CRE) lending could destabilize the financial system. Banks have frequently extended loan maturities rather than addressing rising defaults directly, creating a wave of debt that may not be repaid, according to a report titled “Extend-and-Pretend in the U.S. CRE Market.” Rising defaults or an “orderly” restructuring of these loans will significantly impact banks’ balance sheets, with the strategy already linked to three regional bank collapses in 2023, including Silicon Valley Bank. Since the Fed’s 2022 rate hikes, banks extended many distressed loans, which in turn limited their capacity to originate new CRE or business loans, with CRE originations dropping by up to 5.3% since Q1 2022. Analyst Rebel Cole from Florida Atlantic University notes that loan-to-value ratios have risen about 20%, increasing default risk as many properties have decreased in value. He estimates 25% of larger banks may close within a year, and up to 1,000 smaller banks could fail under similar pressures. S&P Global reports that the maturity wall for CRE loans could reach $1 trillion in 2025, peaking at $1.26 trillion in 2027, with borrowers facing “rate shocks” on refinancing at higher interest rates. While the Fed's recent rate cut may offer some relief, the growing maturity wall poses a substantial risk to financial stability. Read more.

Caution: Uncertain Terrain Ahead

Top Real Estate Issues in 2025: Key Challenges and Opportunities

The Counselors of Real Estate (CRE) identified ten critical factors likely to shape U.S. real estate in 2025, with broad implications across residential and commercial sectors. Political uncertainty, including upcoming elections in over 70 countries, could impact regulation, taxes, and trade, creating caution among real estate investors awaiting economic clarity. Financing costs remain high despite recent rate reductions, and CRE predicts cautious deal-making and the potential for more distressed asset sales as $1.8 trillion in commercial real estate loans mature by 2026. Global conflicts, notably in Ukraine and Gaza, are intensifying supply chain disruptions, inflation, and labor shortages, contributing to investors’ increased risk assessments. Insurance premiums are rising due to more frequent natural disasters, affecting especially high-risk sectors such as residential and hospitality real estate, with owners pivoting towards alternative risk management strategies. Housing affordability issues persist, driven by inventory shortages, while multifamily construction remains concentrated in major cities, pushing renters’ cost burdens higher. The rapid adoption of AI offers efficiencies but presents data challenges and demands extensive computing power, spurring new data center developments. Sustainability efforts are increasingly critical in real estate, particularly in response to climate-related risks, though U.S. regulatory actions lag behind Europe. Meanwhile, the high office vacancy rate is spurring efforts to repurpose office spaces into residential or other uses, potentially revitalizing urban centers. Finally, the gap between buyer and seller price expectations is narrowing as the real estate market moves toward stabilization. Read more.