Summary
FDIC published guidelines to help banks modify commercial real estate loans: help save us from this "help".
Analysis
No one questions that commercial real estate fundamentals have soured since 2006. You can't know anything about what is going on in real estate markets and miss that point. But now bank regulators have noticed and commercial lenders will be given guidelines, more regulations, and maybe rewards in the form of bank incentives for turning a blind eye to loan problems, a la the single family home mortgage debacle. Just let the FDIC tell you how you should modify potentially bad loan contracts...
The guidelines proposed are to help banks develop what FDIC Chairman Sheila Bair describes as "prudent loan workouts". This is more a protection against even more serious depletion of the FDIC's deposit insurance fund than it is a policy to help save lenders or borrowers from defaulting commercial loans. That serious fund depletion was due to the huge homeowner loan defaults from a bunch of banks that deserved to be taken over by the FDIC because they threw caution to the wind and greedily went for the big bucks when the home market was hot. FDIC didn't see that one coming, so they are trying to get out in front of the commercial tsunami.
Banks need to write off bad commercial real estate loans or sell them to the myriad of investors who have been cooling their heels in bank lobbies, just waiting around for the time when banks will recognize it is better to discount and sell bad loans than to try to deny and delay the inevitable. So many lenders still hope that time (and/or the U.S. government) will cure all balance sheet ills. Wouldn't the FDIC energies be better directed to encourage FDIC-insured lenders with large potential defaults to clean up their act and get positioned to succeed in the coming years?
Most commercial real estate lenders are perfectly capable of doing the math and coming up with modifications to their mortgage contracts where and if warranted, and they do not need instructions from the United States government in formulating workouts. They just need to get real, take their lumps and move on.
This author consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
