New loan guidelines help the banks, delay recovery

New federal guidelines that give lenders more freedom to deal with challenging commercial real estate loans are profitable for the economy in the short term but ultimately prolong the recovery phase of the current downturn, according to some observers.

On Oct. 30, the Federal Reserve, Federal Deposit Insurance Corporation, National Credit Union Administration, Office of the Comptroller of the Currency, Office of Thrift Supervision, and the Federal Financial Institutions

Examination Council released guidelines that - among other things - permit financial institutions to avoid forced writedowns on performing loans where the value of the underlying collateral has fallen below the loan balance.

The idea is to throw the banking system another lifeline and avoid premature bank failures, said Gavin Campbell, managing principal with Steelbridge Capital in Miami.

“It’s certainly positive news if you’re a borrower. It’s clearly an example of the federal government trying to help out the banks by keeping their balance sheets from looking any worse. The federal government is trying to re-inflate the bank balance sheets and get earnings back to where they need to be,” he said.

Campbell added that the new policy - while helpful - is no panacea for the continued distress in commercial real estate lending. Currently, he said, commercial banks of all sizes hold about $800 billion in commercial real estate loans.

Of those loans maturing between now and 2014, about two-thirds are “underwater,” Campbell said. The new policy probably will affect $110 billion to $130 billion of those loans, he said, because the rest are experiencing debt-service problems and don’t qualify for the more lenient treatment.

“It’s a real boon to the regional and small banking systems,” he said, because they currently have the most exposure to overleveraged commercial real estate loans.

While the new arrangement will benefit a struggling economy, Campbell said, for many loans it’s simply a case of “kicking the can down the road.”

“If you ultimately want to get back to a system where everything is priced at market, this delays the inevitable,” he said, adding that the financial system can’t truly cleanse itself until assets are priced to market.

“It’s not that the capital is not there. It won’t come in at artificially pumped-up prices. It’ll come back in at market prices,” he said.

For investors like Steelbridge Capital, the federal intervention is not eliminating opportunities to buy distressed assets - but it is delaying them, Campbell said.

“There are certainly opportunities out there for loans that are struggling just to hit their coupon. It’s taking more time than we’d like to come through the system, but they’ll be available at some point down in the cycle,” he said.

Del Goforth, executive vice president and partner at Florida Bond & Mortgage in St. Petersburg, said the new federal guidance is a significant help to struggling banks. But he added that the banks, in general, are not returning the favor to their customers.

Good borrowers, Goforth said, have been seeing excessively high interest rate adjustments on re-appraised properties. This becomes even more disconcerting, he said, when you consider the historically low interest rates at which banks can borrow from the Federal Reserve.