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Underwater CRE Loan Maturities High and Still Rising
National Real Estate Investor (by Sibley Fleming)
Friday - January 15, 2010
More than 36% of the $270 billion in commercial real estate loans maturing in 2010 are under water, meaning the mortgage balance is greater than the value of underlying property, according to data from Oakland, Calif.-based research firm Foresight Analytics. And the worst is yet to come. In 2011, 49% of maturing loans will be under water, followed by 63% in 2012, 61% in 2013, and 57% in 2014. In all, from 2010 through 2014, the total amount of maturing loans expected to be under water is a whopping $770 billion. "The mortgage maturity issue was problematic for lenders already in 2009, so it's really just going to get worse in 2010 — and it looks like beyond — unless you expect a meaningful rebound in prices," says Matthew Anderson, a partner at Foresight Analytics. "The issue of the rising dollar volume of maturities that is more and more under water will become a greater problem for lenders of all types with the passing of each year." By contrast, only 16% of commercial mortgages that matured in 2009 were under water, Anderson estimates.This year's maturity issues may prove worse than Foresight's figures suggest, because the projection of upside-down loans maturing, at 36%, doesn't include loans that would have matured in 2009 and were simply extended for one year. That could add substantially to the volume of underwater maturities this year, based on Anderson's estimate that 60% of mortgages with 2009 maturities were granted one-year extensions. "That's obviously is just going to add to that [36%] figure."
Critical New Rules for Banks Regarding CRE Loan Workouts
Friday - November 13, 2009
New commercial real estate loan workout guidelines were recently issued by federal regulators that essentially allows banks to keep loans on their books as "performing," even if the value of the underlying properties have fallen below the current loan balance. The volume of troubled commercial real estate loans is increasing at a rapid pace, posing yet another potentially massive problem for the economy. The FDIC's goal is to help banks to work out some of these bad loans without having them classified as "non-performing," and preventing the write-off of billions of dollars worth of loans. The rules are intended to encourage banks to work with borrowers to restructure these problem commercial mortgages rather than foreclose on them. "The recent publication of these rules seem to indicate that the regulators are acknowledging that many of the current "distressed" loans are the victim of down markets but the borrowers can continue to perform at some level, thus preventing the need to reallocate capital," said John Lennon, Managing Partner of Oceancrest Advisory Services in Wilmington, NC.
The guidelines state that: "The regulators have found that prudent CRE loan workouts are often in the best interest of the financial institution and the borrower. Examiners are expected to take a balanced approach in assessing the adequacy of an institution's risk management practices for loan workout activity. 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 these efforts even if the restructured loans have weaknesses that result in adverse credit classification. 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." To read the entire statement on the FDIC's website, click here.
In a survey conducted by Real Estate Finance & Investment last week, most market participants support the guidelines. However, the move has prompted criticism as well, and not only from investors who would like to buy up the real estate at distressed values and thus have the most to complain about. The primary concern among critics is that the move by regulators will only prolong the financial crisis, or postpone the next one, by not forcing borrowers and lenders to confront inevitable problems, setting up potentially long-term damage to the economy and delaying inevitable losses. Supporters of the guidelines argue that if modifications allow borrowers to hold onto their properties until values and rents recover, the action by the government and the banks will be successful. "The irony here is that the more commercial real estate defaults we see and the more foreclosures that occur, the greater the spread between bid and ask will be as investors struggle to define market value in a sea of available product," added Lennon. "If a financial institution has a borrower that has intent, a sound business plan and sufficient capital, but is suffering from a temporary downturn, the new guidelines encourage the implementation of a workout plan. The key is to insure that the workout plan is comprehensive and realistic in today's fluid environment."
Troubled commercial real estate loans are looming over the U.S. economy as a potentially massive problem and the word on the street is that banks are reacting fast by taking action under the new measure to restructure troubled commercial mortgages and avoid impending losses. According to a recent commercial mortgage outlook report by Foresight Analytics, a California-based provider of real estate market research, about half of the $1.4 trillion ($800 billion held by banks) in commercial mortgages maturing by 2014 are "underwater," or loan amount exceeds the value of the property. Due to their exposure to commercial real estate, smaller banks (regional, community, etc.) stand to gain the most benefit from the new guidelines. The Wall Street Journal reported yesterday that, according to an analysis of regulatory filings, "more than 2,600 banks and thrifts have commercial real-estate-loan portfolios that exceed 300% of total risk-based capital… nearly all of those institutions (having) less than $5 billion in assets." Oceancrest found similar results when it produced a corresponding analysis of the 2Q09 regulatory filings of North Carolina's top 100 banks ranked by total assets. "I think we will begin to see banks reviewing their entire CRE portfolios, not just distressed deals, in an effort to be proactive and prevent future defaults or reclassifications," Lennon concluded.
As part of Oceancrest's Loan Advisory Solutions service group we perform, as well as advise our clients regarding loan workouts, modifications, recovery and restructuring, servicing, and collateral evaluations. By leveraging our professional's expertise in the industry with the array of services that Oceancrest provides we are able to achieve our mission of providing a level of service that exceeds the expectations of our clients through a strategic partnership.
Site Selection Magazine Ranks N.C. Business Climate No. 1
Wednesday - November 4, 2009
North Carolina has once again been ranked No. 1 in the country for its business climate by Site Selection magazine. This is the 8th time in the past 9 years the state of North Carolina has ranked No. 1. The magazine cites North Carolina's infrastructure of higher learning, high-tech development and technology-focused academic centers as strengths for business growth. Texas ranked No. 2, followed by Virginia, Ohio and Tennessee rounding out the top 5. According to Site Selection: "The annual rankings are determined by the number of new and expanded business facility projects in each state and other factors including transportation infrastructure, existing work force skills and state and local taxes." Site Selection magazine is a corporate real estate strategy and area economic development focused publication.