• 29
  • October
    2010

The Federal Financial Institutions Council (FFIEC) came out with some guidance on commercial real estate loan workouts about a year ago. Sam Chandan writes in the Commercial Observer that policy makers were then concerned that aggressive action by banks against defaulting commercial mortgage borrowers would undercut the long-term performance of the banks themselves.

The advice from regulators was that loan workouts were desirable because the modifications would mitigate losses for the lenders just when the market was at its lowest point. "Financial institutions and borrowers may find it mutually beneficial to work constructively together," was the way the guidance put it.

What will policy makers say now that the economy and real estate markets are at least a bit more stable? Labor markets are lacking, it is true, but reports are now showing improvements in rents and occupancy rates.

One might think that the pendulum is ready to swing back to advising lenders to look at disposing of distressed assets. But Chandan says that policy makers' recent assessments of the market suggest that they remain cautious.

Last week, the chairwoman of the F.D.I.C., Sheila Bair, said this: "Lenders will continue to face some tough choices when loans come up for renewal with collateral values that have declined significantly from peak levels."

The lackluster nature of the assessment seems to indicate that transaction activity and fundamentals are coming off their lows but that gains remain uneven.

Lenders are left to play the timing card, the only play really available to them in a losing hand. Chandan sums up the lenders' point of view this way: While it bears heavy costs in terms of the market's progress toward balance sheet normalization, greater control over the selection and timing of the supply of distressed assets for sale has succeeded in limiting the losses internalized by many banks in the short term.

Policy makers' attitudes may be ready to catch up with investors who have been waiting for distressed properties to come to market. These types of opportunity-seekers may get their wish soon.

Source: The Commercial Observer "At a Cost, CRE Workout Guidance Mitigates Banks' Short-Term Losses" 10/21/2010