ABA Banking Journal - December 2009 - (Page 20) COVER STORY positively. For example, the banker who related the earlier story of hard-nosed examiners said he saw value in the policy statement, because it clarifies that examiners aren’t supposed to mark down loans just because the collateral value falls. Colorado’s Doug Scherrer added, “I’m hoping it will allow me to work with the customer who is still making their payments on time.” But this is no free pass. Former California regulator Walt Mix pointed out that the burden, clearly, in the new statement remains with the banker to get a questioned credit out of purgatory. “And the real problem, that can’t be addressed in the guidance, is the bid-asked differential for the property,” said Mix. No regulatory document is going to improve the market’s view of underlying collateral. Indeed, he agrees with consultant Patrick O’Keefe, who pointed out that, for all the talk about there being investor money out there for CRE, “it’s there to bottom feed, not to support a stable economy.” In fact, bankers and other observers of the CRE scene question the implication in the policy statement that CRE investors presently in deals are going to pony up more money in order to improve the status of a deal. Real-estate types are typically cashpoor, and property-rich, so, with lower val- ues, many would be reaching for thinner wallets today. In addition, as attorney Walt Moeling put it, “there’s no real estate developer, commercial or residential, who ever intends to repay a loan. If the project pays it, that’s fine. But don’t look to them.” Workout expert Paul Donohue, partner at Alston & Bird, LLP, added that among the large banks he works with on CRE deals, “you’re finding to a significant extent a lot of kicking the can, in terms of modification and extensions.” But fresh capital, he said, “that’s the rarest word around, from both the owner and the lender perspective, in terms of being willing to put fresh capital into the property.” What’s ahead? There is a sense of waiting for another shoe to drop. Worrisome predictions are being made by some analysts about the near-term future of CRE. For instance, while lending to owneroccupied projects is typically voiced as a huge positive by community bankers, a recent presentation by Deutsche Bank’s Richard Parkus, head of commercial real estate debt research, called that claim into question. He stated that 45% of core CRE loans in bank portfolios are classified as owneroccupied. Among the downsides cited: they are likely to be small, special-purpose properties in tertiary markets; they often have an undiversified base of tenants—and are often single tenanted; recourse is typically to an entity with few assets; and, in the event of default, the loss is likely to be very significant. Add to this such other factors as: a moribund commercial-mortgage-backed securities market, questions about sources of refinancing of CRE loans a few years off, and projections that valuations won’t improve for years. Fitch Ratings recently stated that “Valuations are not likely to improve markedly between now and 2013 when most of the these loans outstanding will come up for renewal. Thus, while banks can delay recognition of the problem, the magnitude of the problem will not change with the simple passage of time.” ABA economist Keith Leggett recently told a banker group that $400 to $500 billion in CRE credit will need to be refinanced each year through 2012. This is at a time when large banks are pulling back, and community bankers say that they study resultant new opportunities carefully. To end on a less-bad note, however, commercial broker Steven Leonard thinks there will not be “horrible doom and gloom.” Leonard says that “people will be hurt, but it’s not going to turn the economy on its ear.” BJ CRE guidance at a glance n Oct. 30 the Federal Financial Institutions Examination Council released “Policy Statement on Prudent CRE Loan Workouts.” The preamble contains two key provisions: 1. “Financial institutions that implement prudent CRE loan workout arrangements after performing a comprehensive review of a borrower’s financial condition will not be subject to criticism for engaging in those efforts even if the restructured loans have weaknesses that result in adverse credit classification.” 2. “In addition, renewed or restructured loans to borrowers who have the ability to repay their debts according to reasonable modified terms will not be subject to adverse classification solely because the value of the underlying collateral has declined to an amount that is less than the loan balance.” The 33-page statement includes many details; four scenarios, each with several different potential outcomes; and key expec- O tations of a workout program, under the statement. Here are key factors examiners will expect in workout efforts: • A prudent overall workout policy • A workout plan at the borrower level, including update and comprehensive information on the borrower, the real estate, and the guarantor, if any; current collateral valuations; analysis and determination of appropriate loan structure; and appropriate legal documentation of changes to loan terms. • A demonstrated sense of the bigger picture • Ability to monitor performance under workout agreements • An internal loan grading system that reflects risks in the workout plan • An appropriate loan loss reserve policy The policy statement also covers the issue of when to characterize a workout as a “troubled debt restructuring.” 20 DECEMBER 2009/ABA BANKING JOURNAL Subscribe at www.ababj.com http://www.alston.com http://www.ababj.com Table of Contents for the Digital Edition of ABA Banking Journal - December 2009 ABA Banking Journal - December 2009 Contents Editor's Column Briefing ABA Resources ABA Chairman's Position Community Banking Pass the Aspirin CRE Pain Fraud Looms Large on BSA Menu Tech Topics Compliance Clinic Mailbox The Economy ABA Banking Journal - December 2009 ABA Banking Journal - December 2009 - ABA Banking Journal - December 2009 (Page Cover1) ABA Banking Journal - December 2009 - ABA Banking Journal - December 2009 (Page Cover2) ABA Banking Journal - December 2009 - Contents (Page 1) ABA Banking Journal - December 2009 - Editor's Column (Page 2) ABA Banking Journal - December 2009 - Editor's Column (Page 3) ABA Banking Journal - December 2009 - Editor's Column (Page 4) ABA Banking Journal - December 2009 - Briefing (Page 5) ABA Banking Journal - December 2009 - Briefing (Page 6) ABA Banking Journal - December 2009 - Briefing (Page 7) ABA Banking Journal - December 2009 - Briefing (Page 8) ABA Banking Journal - December 2009 - ABA Resources (Page 9) ABA Banking Journal - December 2009 - ABA Chairman's Position (Page 10) ABA Banking Journal - December 2009 - ABA Chairman's Position (Page 11) ABA Banking Journal - December 2009 - Community Banking (Page 12) ABA Banking Journal - December 2009 - Community Banking (Page 13) ABA Banking Journal - December 2009 - Pass the Aspirin (Page 14) ABA Banking Journal - December 2009 - Pass the Aspirin (Page 15) ABA Banking Journal - December 2009 - CRE Pain (Page 16) ABA Banking Journal - December 2009 - CRE Pain (Page 17) ABA Banking Journal - December 2009 - CRE Pain (Page 18) ABA Banking Journal - December 2009 - CRE Pain (Page 19) ABA Banking Journal - December 2009 - CRE Pain (Page 20) ABA Banking Journal - December 2009 - CRE Pain (Page 21) ABA Banking Journal - December 2009 - Fraud Looms Large on BSA Menu (Page 22) ABA Banking Journal - December 2009 - Fraud Looms Large on BSA Menu (Page 23) ABA Banking Journal - December 2009 - Fraud Looms Large on BSA Menu (Page 24) ABA Banking Journal - December 2009 - Fraud Looms Large on BSA Menu (Page 25) ABA Banking Journal - December 2009 - Fraud Looms Large on BSA Menu (Page 26) ABA Banking Journal - December 2009 - Fraud Looms Large on BSA Menu (Page 27) ABA Banking Journal - December 2009 - Tech Topics (Page 28) ABA Banking Journal - 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