21 October 2009

Regulators Encouraging Commercial Real Estate Loan Modification


U.S. regulators are encouraging banks to restructure commercial real estate loans, which they view as one of the greatest challenges that could compromise the industry's recovery.

Officials are close to finalizing guidance that would encourage banks to recognize potential losses in their commercial real estate portfolios and not simply renew troubled loans to delay loss recognition, regulators told a Senate banking subcommittee.

"While there have been some positive signals of late, the financial system remains fragile and key trouble spots remain," such as commercial real estate, U.S. Federal Reserve Board Governor Daniel Tarullo said.

Other regulators echoed his concerns, including Federal Deposit Insurance Corp. Chairman Sheila Bair and Comptroller of the Currency John Dugan.

Dugan characterized commercial real estate as the "greatest challenge" facing banks while Bair targeted it as a prominent area of risk for the next several quarters.


As of June, commercial real estate loans totaled more than $1 trillion, or 14.2 percent of all loans and leases in the bank industry, Bair said.

Regulators struck a cautious note on the health of the banking system, notwithstanding that JPMorgan Chase & Co, one of the top Wall Street banks, reported on Wednesday that its quarterly profit rocketed to a much-high-than-expected $3.6 billion. [ID:nN13183184]

Tarullo zeroed in on potential losses the banking system faces on soured commercial real estate loans and said some were slow to even acknowledge the weakening sector.

Prices for existing commercial properties have fallen 35 to 40 percent since peaking in 2007 and more declines are anticipated. Rising job losses and high vacancy rates also are weakening demand for commercial property, Tarullo said.

At the end of the second quarter, about 9 percent of commercial real estate loans were delinquent, nearly double the level a year earlier.

Dugan said credit quality is deteriorating across almost all classes of banking assets, in nearly all sizes of banks.

 He said national banks must set aside more capital and reserves to absorb these potential losses, which could cause more small institutions to fail.

Bair said the number of so-called "problem banks" and bank failures will remain high for the next several quarters. So far this year 98 U.S. banks have failed, compared to 25 last year and 3 in all of 2007.

As of the end of the second quarter, 416 banks with about $300 billion in assets were on the problem bank list. The FDIC estimates that bank failures will come with a price tag of $100 billion from 2009 through 2013.


Regulators were wary about celebrating signs of tentative recovery.

Tarullo said the economy appears to have resumed growing but warned that it will take time to rebound from the serious financial crisis it endured and jobs won't come back quickly.

"The unemployment rate has continued to rise, reaching 9.8 percent in September, and is unlikely to improve materially for some time," he said.

U.S. economic activity turned up in the third quarter as investors waded gingerly back into riskier waters and businesses began to restock depleted inventories. U.S. housing prices rose for the third straight month in July, raising hopes the market is stabilizing.

But because of distressed labor markets, consumer spending and credit availability could remain weak.

Bair said the scope of losses in household wealth during the severe downturn over the past two years has been so great that the economy will need time to repair and recover.

"While we are encouraged by recent indications of the beginnings of an economic recovery, growth may still lag behind historical norms," Bair said.

No comments:

Post a Comment