FDIC Adopts Guidance on Prudent Commercial Real Estate Loan Workouts

[davelj]

This is HUGE. A major problem for a lot of banks going forward is that there will be a ton of CRE loans that come up for renewal that are able to cover their contractual P&I payments, but the value of the collateral has declined such that the loan would become a Troubled Debt Restructuring (TDR – which is a Non-Performing Asset) unless additional equity could be brought into the deal. So, for example, you might have a loan with 1.1 DSC, but a 100% LTV. Technically, this loan would need to be at an 80% LTV to avoid becoming a TDR. So, the FDIC is basically saying, “We’re not going to make you classify these loans as TDRs so long as the P&I payments are current.” This is enormously beneficial for the banks.

********************************************

FDIC Adopts Guidance on Prudent Commercial Real Estate Loan Workouts

FOR IMMEDIATE RELEASE
October 30, 2009

Media Contact: Andrew Gray
202-898-7192

The Federal Deposit Insurance Corporation (FDIC), in coordination with the other member Agencies of the Federal Financial Institutions Examination Council (FFIEC), adopted a policy statement today supporting prudent commercial real estate (CRE) loan workouts. This policy statement stresses that performing loans, including those that have been renewed or restructured on reasonable modified terms, made to creditworthy borrowers will not be subject to adverse classification solely because the value of the underlying collateral declined.

[There’s more, but this is the gist.]

[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.

[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.

[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.

[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.

[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.

[briansd1]

We are going down the path of Japan, China, Argentina, and the South-East Asian nations whom we, the World Bank, and the IMF criticized for having lax standards.

During their financial crisis we said that they should strengthen financial rules.

What is the point of having good accounting standards (arguably the best in the world) when we backslide at the first opportunity?

That would be like telling students that B grades will now be given A grades. The grades are good, but the performance sucks.

While we are it, we should relax building codes and zoning standards so we can develop real estate for cheaper.

[briansd1]

We are going down the path of Japan, China, Argentina, and the South-East Asian nations whom we, the World Bank, and the IMF criticized for having lax standards.

During their financial crisis we said that they should strengthen financial rules.

What is the point of having good accounting standards (arguably the best in the world) when we backslide at the first opportunity?

That would be like telling students that B grades will now be given A grades. The grades are good, but the performance sucks.

While we are it, we should relax building codes and zoning standards so we can develop real estate for cheaper.

[briansd1]

We are going down the path of Japan, China, Argentina, and the South-East Asian nations whom we, the World Bank, and the IMF criticized for having lax standards.

During their financial crisis we said that they should strengthen financial rules.

What is the point of having good accounting standards (arguably the best in the world) when we backslide at the first opportunity?

That would be like telling students that B grades will now be given A grades. The grades are good, but the performance sucks.

While we are it, we should relax building codes and zoning standards so we can develop real estate for cheaper.

[briansd1]

We are going down the path of Japan, China, Argentina, and the South-East Asian nations whom we, the World Bank, and the IMF criticized for having lax standards.

During their financial crisis we said that they should strengthen financial rules.

What is the point of having good accounting standards (arguably the best in the world) when we backslide at the first opportunity?

That would be like telling students that B grades will now be given A grades. The grades are good, but the performance sucks.

While we are it, we should relax building codes and zoning standards so we can develop real estate for cheaper.

[briansd1]

We are going down the path of Japan, China, Argentina, and the South-East Asian nations whom we, the World Bank, and the IMF criticized for having lax standards.

During their financial crisis we said that they should strengthen financial rules.

What is the point of having good accounting standards (arguably the best in the world) when we backslide at the first opportunity?

That would be like telling students that B grades will now be given A grades. The grades are good, but the performance sucks.

While we are it, we should relax building codes and zoning standards so we can develop real estate for cheaper.

[davelj]

[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.

[davelj]

[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.

[davelj]

[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.

[davelj]

[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.

[Author]

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