Bush Aides Worry Credit Crunch Strains Economy

WASHINGTON - Six months ago, the Bush administration began jawboning tight-fisted bankers to make more loans, especially to builders.

Builders say the effort to end the credit crunch has failed.

"There has been no material change," says Steven A. Wechsler, president of the National Realty Committee, which represents developers as well as bankers.

This has the administration very worried. The crunch could derail the fragile recovery, and the administration isn't sure what to do about it.

Robert Mosbacher, Commerce secretary and likely 1992 GOP campaign manager, and Vice President Dan Quayle told Washington Post columnist David S. Broder that Mr. Bush is concerned the credit crunch will kill the recovery before the presidential race.

Thomas "Lud" Ashley, president of the Association of Bank Holding Companies and a friend of Mr. Bush's, confirmed in an interview this week that the administration is worried about the credit crunch.

"There is concern that the economy is going to be short-changed of credit, and this holds a very real threat of short-circuiting the recovery."

An Overbuilt Market

Bankers, who nearly quadrupled their real estate lending during the 1980s, are reluctant to extend more credit to a market that is clearly overbuilt. They already are wrestling with $40.3 billion in noncurrent real estate loans, about four times as much as in 1985.

T. Barton French, a senior vice president at Boatmen's National Bank in St. Louis, has been making commercial real estate loans since 1963.

"This is the most severe downturn in real estate values I've ever seen," the veteran lender said. "I don't think this is going to be a short-term recovery. I think we've got another two or three years."

Action, Not Words

The builders say the administration needs to take steps far bolder than jawboning right now to head off an economic disaster. They suggest a one-year postponement of risk-based capital guidelines, to Dec. 31, 1993; a secondary market for commercial real estate loans; less stringent loan classification standards; and changes in the tax code to make real estate a more attractive investment, says Robert C. Larson, vice chairman of Taubman Cos., a major shopping center developer based in Bloomfield Hills, Mich., and a member of the Resolution Trust Corp.'s oversight board.

Regulators like Comptroller of the Currency Robert L. Clarke say there's little chance the government will act on any of these suggestions. And what might they do instead? At this point there's no evidence of a backup plan.

Officials may have to be jolted into action, mused Mr. Wechsler: "If one or two big banks were to go down based on real estate, I think that would turn a few heads."

Loan-Splitting Plan Dumped

So far, government officials are hoping that their initial effort will still bring results.

On March 1, regulators revealed a multipart plan to encourage bankers to make more loans by clarifying existing rules on such things as loan chargeoffs and reserve requirements.

But the mainstay of that announcement - loan splitting - was dumped after being attacked by the Securities and Exchange Commission and the accounting industry.

Pleading for Patience

Loan splitting would have allowed banks to write off the bad portion of a troubled loan while returning the balance to performing status.

Treasury Deputy Secretary John Robson pleads for patience.

"You can't rub a bottle and say |shazam' and have the whole damn thing go away, because it was eight years in the building," he says.

Strict Exams

"Our goal . . . is to find a responsible way to work through this period that is not contrary to appropriate regulatory practices, but also doesn't take an Attila the Hun, shut everything down, scorched-earth policy."

As part of the March 1 guidelines examiners were told to look at factors other than current market prices when valuing properties.

Bankers claimed that overly strict real estate examinations were a major reason for their pullback from that market.

"The March 1 guidelines are very explicit," says Mr. Robson. "The say, dammit, don't use liquidation value in your evaluation of a loan unless that is what's intended to be done with the real estate."

Since then, each banking regulatory agency has issued a variety of other edicts to examiners.

Easy on the Mini-Perms

On June 17, the Federal Deposit Insurance Corp. told its examiners to go easy on banks extending so-called mini-perm loans, or short-term loans to developers meant to cover the costs of construction. The Federal Reserve Board and the Office of Thrift Supervision followed suit.

Despite the edicts, developers still live in fear of foreclosures, says Edwin N. Sidman, managing partner of the Beacon Cos., a Boston developer. They are particularly worried that bankers will ignore exhortations to renew mini-perms.

The National Realty Committee estimates there are $400 billion of these loans outstanding, with $70 billion coming due in the next 12 months and another $130 billion due the year after.

Permanent financing, expected from insurance companies and institutional investors, has dried up as real estate values have plunged.

That leaves banks with a Hobson's choice: become a long-term real estate lender or foreclose and take title to, say, a half-leased office building.

Bankers so far have postponed this day of real estate reckoning with a series of short-term loan extensions, keeping the developers on edge.

Richard J. Boyle, vice chairman at Chase Manhattan Bank, said the extensions are a way of saying to the owner, "When market conditions improve, we expect that you'll refinance" with some other lender.

|At the Crossroads'

Mr. Wechsler said short-term fixes are preventing real estate markets from stabilizing.

"We're at the crossroads," he said. "Either we bite the bullet and recognize that there is a three- to five-year transition period here ... or we continue to apply the Band-Aid for three, six, or nine months, which I think keeps the market dysfunctional."

In the end, no matter what the administration does, the final decision on credit will rest with the bank, say examiners.

"The bank has to decide whether it is better to cut and run ... or whether it makes more sense to adopt a workout strategy," said one examiner.

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