Banking industry regulators have made several changes in policies dealing with valuation of troubled real estate assets that mortgage lenders should find helpful.

However, industry officials, especially the Savings and Community Bankers of America, cautioned that more needs to be done.

Regarding real estate loans, the agencies announced they are changing their policies for in-substance foreclosures.

Current practice is to require certain loans to be reported as "in-substance" foreclosures - that is,, management of the property is taken over by the lending institution even though foreclosure proceedings have not been undertaken.

Under the new guidance that was issued to examiners, the agencies said that a collateral dependent real estate loan need not be reported as foreclosed real estate unless the lender has taken possession of the collateral.

However, the agencies said, appropriate losses must be recognized. The agencies noted that this policy is consistent with the approach taken by the Financial Accounting Standards Board in its new standard on loan impairments.

Regarding loans that lenders want to return to accrual status, past policy has been that this could not be done unless all missed payments had been made to bring the loan to current status and the institution expected to receive the full contractual principal and interest on the loan. A similar requirement also applied in situations where the borrower showed a renewed ability and willingness to service its remaining debt.

Accordingly, institutions sometimes found it difficult to work with borrowers who were experiencing temporary difficulties in a way that would maximize recovery on these troubled loans.

To address this problem, the agencies are making two revisions to their nonaccrual guidelines. First, banks and thrifts will be allowed a formal restructuring of troubled debt in a manner "that will allow a portion of the debt to become an accruing asset, provided certain criteria are met," the agencies said. The new policy will make uniform the policies of bank and thrift agencies.

Second, regulators sought to address cases where borrowers have resumed paying the fun amount of scheduled contractual principal and interest payments on loans that are past due and in nonaccrual status. Under the new guidance, banks and thrifts will be allowed to return such past due loans to accrual status, provided the institution "expects to collect all principal and interest due and the borrower has made regular payments in accordance with the terms of the loan over a specific period of time."

The agencies will also issue guidance to banks and thrifts that generally conforms regulatory reporting requirements for OREO (other real estate owned) with generally accepted accounting principles as set forth in FASB Statement 66. These changes delete certain rules for minimum down payments for sales of OREO.

The agencies also said they are reaffirming guidelines issued in November 1991 "to ensure that examiners are reviewing commercial real estate loans in a consistent, prudent and balanced manner.

SCBA officials said "much work needs to be done."

For example, they sad. regulators have "agreed to use classified assets" as the "standard measure in expressing the quality of a bank or thrift's asset portfolio and are adopting a uniform definition of "special mention" loans.

But SCBA pointed out that the deeper problem is an inconsistent approach to adding reserves for troubled assets. "This causes institutions to be too cautious in their lending practices in the face of seemingly arbitrary demands by examiners."

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