Banks Given Green Light To Roll Over Realty Loans
WASHINGTON -- Bank regulators are scrambling to prevent a new round of tight credit that could kill off what is left of the commercial real estate market and saddle banks with hundreds of billions of dollars more in repossessed properties.
The regulators are adopting a more flexible approach to bank examinations so that institutions refinancing construction loans known as "mini-perms" are not automatically criticized. The position marks a reversal from the harsh treatment by examiners that is believed to have exacerbated the credit crunch.
Roll Over or Foreclose?
Hanging over the industry is an estimated $300 billion in mini-perms - five- to seven-year commercial real estate loans made during the mid-1980s and nearing maturity - according to L. William Seidman, chairman of the Federal Deposit Insurance Corp.
Insurance companies would normally refinance the loans but are shying away, both because of the real estate downturn and problems in their industry.
That's leaving banks with a dilemma: Should they roll over the loans or foreclose on borrowers unable to arrange permanent financing?
Many of the credits are up to date on interest payments. But the FDIC chief fears that bankers, trying to please their examiners, will act to dilute high concentrations of real estate loans by not renewing the credits.
However, the failure to roll over legitimate loans could plunge creditworthy borrowers into bankruptcy and trigger a downward spiral with catastrophic consequences for the entire economy, Mr. Seidman said in an interview.
In a memo to examiners on June 17, the FDIC urged them to be reasonable with banks holding maturing medium-term real estate loans.
Need for Flexibility
"Examiners should recognize that banks, borrowers, and economic sectors experiencing temporary problems may need some flexibility in working through these problems," the FDIC memo said.
"Institutions, whether they have a concentration in real estate loans or not, that choose to refinance a sound mini-perm real estate development loan should not be automatically criticized for doing so."
The Office of the Comptroller of the Currency agrees with the FDIC policy, according to Zane Blackburn, chief accountant. The national bank regulator is considering sending similar guidance to its examiners, he said Thursday.
"There are problems right now with getting permanent financing because the insurance companies have pulled back on real estate lending," he explained. "So, banks shouldn't simply refuse to refinance to get their level of loans down."
Financing More Difficult
Confirming the problem is Gill Woods, president of Realty World, Authier Woods & Co. in Holyoke, Mass.
"It's at least 100% more difficult to get financing today than it was two years ago," he said. "Then, you needed next to nothing down; today, there's an absolute minimum of 30% down, sometimes more."
Traditionally, banks have limited their commercial real estate financing to covering construction costs incurred over two to three years.
Developers typically got their long-term financing from insurance companies. But in the mid-1980s, banks began offering medium-term real estate loans - the mini-perms - to bridge the gap between initial costs and permanent financing.
Problems with Balloons
According to Moody's Investors Service, more than half of the $541 billion in construction loans extended by banks from 1985 through 1988 were mini-perms.
"Developers who have kept their payments current on these loans in many cases have been unable to obtain traditional, long-term financing and therefore cannot make the final balloon payment," the FDIC memo said. "Instead of foreclosing on these properties, banks have been working with developers to find permanent financing."
Ironically, Mr. Seidman recently has been calling for limits on real estate lending by banks as well as for tougher standards for these loans - such as a prohibition on banks' providing long-term financing.
Stephen D. Driesler, the National Association of Realtors' senior vice president of government affairs, said he is "delighted" by the FDIC's decision.
"We are finding banks who simply say: |I don't want to renew this loan.' So all of a sudden you had a property that one day was viable, operational, and the next day it was literally on the verge of going into foreclosure," he explained.