WASHINGTON -- New federal accounting rules that call on bank examiners to look beyond collateral in assessing commercial real estate loans may eventually bring a little relief to local governments hurt by falling property values.
The rules, unveiled last week as a follow-up to Bush administration guidelines for ending the credit crunch, say examiners should focus on the borrower's ability to repay and on the income-producing capacity of the property.
Doug Peterson, a senior policy analyst for the National League of Cities, said the new rules "could help guard against the decline of property values" in troubled real estate markets. That, in turn, could help municipal revenue collections, he suggested.
Steven Wechsler, president of the National Realty Committee, agreed, calling the rules "a step in the right direction." The committee represents the commercial real estate industry.
Banks hold some $400 billion of loans to commercial property owners, about half of it in so-called "mini-perm" loans for periods of five to seven years, Mr. Wechsler said. He estimated that commercial loans worth some $70 billion will come due in the next year.
The new procedures were announced by agencies that included the Federal Reserve Board, the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency, and the Office of Thrift Supervision.
The agencies said they will implement a random audit program to see how bank examiners value the collateral of borrowers and size up loan applications.
In addition, the Fed has asked for public comment on a proposal to end the amount of preferred stock that banks may include as capital against future losses. Because institutions generally find it easier to sell preferred stock than common stock, the intent is to help bank holding companies raise capital.
Mr. Wechsler said the new procedures may encourage banks to roll over existing loans, rather than call them. Lack of credit for commercial properties has hurt the market, driving down values for property owners of all types, he said.
However, Mr. Wechsler and Mr. Peterson acknowledged that the new rules by themselves cannot turn around commercial property values. Many markets are depressed because of overbuilding, they said.
Moreover, both said there is another near-term problem with respect to municipal revenue collections.
Because it takes time for assessments to catch up with changing property values, the current down-turn in the commercial market is still not fully reflected in assessments. Therefore, as assessments are made in coming months, municipal tax receipts are likely to fall.