[quote=Allan from Fallbrook]Dave: Doesn’t this, in essence, also take care of the Mark-To-Market/Mark-To-Model balance sheet valuation problem as well, in that it ignores that aspect (underlying valuations) of the problem?

I realize that P&I is a cash flow/Income Statement/Statement of Cash Flows issue, but this appears, to me at least, to also throw a veil over the underlying asset valuation problems, which would undoubtedly be a huge counterpart to the whole CRE portfolio.[/quote]

Kind of, yes. Basically, what it does is it says, “Hey, you’ve got this CRE loan that’s paying as agreed. There’s no issue with meeting the obligations of the note. BUT, the LTV is higher than we’d like. We (the FDIC) would like to see it at 80%. Instead it’s at 90%-110% (depending on its vintage and other factors). And we know that the owner probably doesn’t have a dime of cash to put into the thing. So, instead of re-classifying this loan as a TDR when it matures and you (the bank) re-book (or extend) it at a high LTV, we’re going to let you keep it on the books as a performing asset.” So, in essence, all of these TDRs-in-waiting just got a bump in value – for the bank’s balance sheet purposes – of 20% or so from where they would have been re-marked as a TDR.

Now, is this bad? Yes and no. The bad part is that, in theory at least, it encourages more speculation. But the offset here is that the speculators are basically dead. Most folks are now in survival mode. So, I don’t think there’s a great deal of moral hazard in this approach. In addition, it’s not like the banks are saying, “Hooray, more money to lend!” On the contrary, they’re saying, “Shit, just dodged another bullet. Gotta get tough on these borrowers.”

This is just another “forebearance-like” maneuver by the FDIC. And recall, this ONLY appears to apply to properties that can meet their debt obligations. If you can’t meet your obligations AND you’re underwater from an LTV perspective, you’re fucked. As you should be.

As a taxpayer, this makes sense. I’d prefer that these “borderline” loans work themselves out over time, rather than re-classify them, put more banks at risk of failure, with a bigger burden on the FDIC Insurance Fund, etc.

[quote=Allan from Fallbrook]Dave: Doesn’t this, in essence, also take care of the Mark-To-Market/Mark-To-Model balance sheet valuation problem as well, in that it ignores that aspect (underlying valuations) of the problem?

I realize that P&I is a cash flow/Income Statement/Statement of Cash Flows issue, but this appears, to me at least, to also throw a veil over the underlying asset valuation problems, which would undoubtedly be a huge counterpart to the whole CRE portfolio.[/quote]

Kind of, yes. Basically, what it does is it says, “Hey, you’ve got this CRE loan that’s paying as agreed. There’s no issue with meeting the obligations of the note. BUT, the LTV is higher than we’d like. We (the FDIC) would like to see it at 80%. Instead it’s at 90%-110% (depending on its vintage and other factors). And we know that the owner probably doesn’t have a dime of cash to put into the thing. So, instead of re-classifying this loan as a TDR when it matures and you (the bank) re-book (or extend) it at a high LTV, we’re going to let you keep it on the books as a performing asset.” So, in essence, all of these TDRs-in-waiting just got a bump in value – for the bank’s balance sheet purposes – of 20% or so from where they would have been re-marked as a TDR.

Now, is this bad? Yes and no. The bad part is that, in theory at least, it encourages more speculation. But the offset here is that the speculators are basically dead. Most folks are now in survival mode. So, I don’t think there’s a great deal of moral hazard in this approach. In addition, it’s not like the banks are saying, “Hooray, more money to lend!” On the contrary, they’re saying, “Shit, just dodged another bullet. Gotta get tough on these borrowers.”

This is just another “forebearance-like” maneuver by the FDIC. And recall, this ONLY appears to apply to properties that can meet their debt obligations. If you can’t meet your obligations AND you’re underwater from an LTV perspective, you’re fucked. As you should be.

As a taxpayer, this makes sense. I’d prefer that these “borderline” loans work themselves out over time, rather than re-classify them, put more banks at risk of failure, with a bigger burden on the FDIC Insurance Fund, etc.