How much relief community banks will get under the Treasury Department's proposal will hinge in many cases on how the government decides to deal with bad loans to home builders.
Construction loans for housing developments account for most problem loans on community banks' books, and banking trade groups, as well as regulators, have been pressing lawmakers and Treasury officials to include them in any bailout plan. Details of the Treasury proposal are still being worked out, but community banking advocates say they are optimistic that the language will give the Treasury authority to buy loans that developers have struggled to repay as demand for housing has weakened.
"We've received some verbal assurances that community banks will be able to sell these distressed assets," said Camden Fine, the president and chief executive officer of the Independent Community Bankers of America.
Bankers interviewed Monday said that chief among their concerns is how much the government would be willing to pay to take the loans off banks' hands. The government would buy the assets through what is called a reverse auction, and if the price it offers is too low, some banks may conclude that they are better off hanging on to the loans until the market recovers.
"The devil is in the details," said George Haligowski, the chairman, president, and CEO of the $4.1 billion-asset Imperial Capital Bancorp Inc. in La Jolla, Calif. "And none of the details have been released yet. But on the surface it looks like it could benefit us."
"I think the concept" of the Treasury buying distressed development loans "is very good," said Danny F. Dukes, the chief financial officer at the $1 billion-asset Appalachian Bancshares in Ellijay, Ga. "But we need to wait and see what ends up in ink before I can say, carte blanche, that I'm in favor of it."
Mr. Dukes said that if the Treasury and Congress do not come up with a plan to buy loans for at least 60 cents on the dollar "then they are wasting their time."
"You can find free-market individuals who are willing to pay 50 cents on the dollar," he said. "That's pretty much the starting point."
Others say it is too early to say what their drop-dead, cutoff point would be for selling loans to the Treasury.
"Establishing some price in the marketplace is a critical component," said Dennis T. Ward, the president and CEO of the $637 million-asset Federal Trust Corp. in Sanford, Fla.
However, he added, "I wouldn't want to say we wouldn't sell anything at less than 50 cents on the dollar because in some cases we might."
Treasury officials did not return calls Monday seeking comment on how the government's $700 billion plan might apply to development loans or what conditions might be imposed. Regulators declined to comment.
Sung Won Sohn, an economist at California State University and a former chief executive at Hanmi Financial Corp. in Los Angeles, said banks must consider the impact on capital of selling loans to the Treasury.
Many small banks' capital levels have eroded as loan losses have mounted, and any losses they would take on loans sold to the Treasury would came straight out of their capital.
"If I were a community bank CEO, I wouldn't do it," he said in an interview Monday. "With some of these development projects, they'll be lucky to get 10 cents on the dollar."
Several bankers, though, said that adding the Treasury to the roster of potential buyers could create more competition for the loans — a change that would lend support to prices.
"It's just one more buyer in the market with a lot more money," said David P. Shearrow, the chief risk officer at the $8.3 billion-asset United Community Banks Inc. in Blairsville, Ga. "So in that sense it could be good. You've created a demand for that paper, which means other potential buyers may have to price up."
"Right now there is no real market for these assets except the big discount vulture funds," added Martin Zorn, chief financial and chief operating officer at the $3.4 billion-asset Integra Bank Corp. in Evansville, Ind.
John J. Dickson, the president and CEO of the $4.2 billion-asset Frontier Financial Corp. in Everett, Wash., questioned whether taxpayers should be paying for community banks' bad decisions.
"Don't get me wrong; I agree something needs to happen out there," he said. "But I'm really curious about how the government is deciding who they're going to protect and who they're not.
"Yes, we have exposure to construction and land development," Mr. Dickson continued. "But we made those loans, and I just don't think it's right that the government come in and protect us from that."
Still, even banks that opt not to sell development loans to the Treasury — the program would be entirely voluntary — might still see a trickle-down effect from the program.
One line of thinking: As the Treasury buys up mortgage assets, housing markets could stabilize, and developers could sell more homes and repay their bank loans.
"It could bring some important stability to the marketplace," said Donald H. Wilson, the president and chief operating officer of the $5.4 billion-asset Amcore Financial Inc. in Rockford, Ill.
Aside from concerns about pricing, bankers also wonder whether and to what degree the government might place restrictions on banks that sell it troubled assets — limiting executives' compensation, for example, or making it easier for borrowers to file for bankruptcy.
Federal Trust's Mr. Ward said limits on CEO compensation would "inhibit our ability to control our own destiny."
Banks in the program might also be required "to make certain concessions or follow certain rules as it's related to the foreclosure process," he said, "and that may add to our expenses.
"You have to weigh the options. Is it worthwhile or not?"