I am speaking of the notion that went up the flagpole on allowing banks to refinance commercial real estate loans at more than 100% LTV - and having this "overlooked" by regulators.
Oh, but they are!
Regulators, in a significant step, also said they won't penalize banks for performing loans where the value of the underlying property is now worth less than the loan balance.
Who did this?
The guidelines, released on Friday by agencies including the Federal Deposit Insurance Corp., the Federal Reserve and the Office of the Comptroller of the Currency, provide guidance for bank examiners and financial institutions working with commercial property owners who are "experiencing diminished operating cash flows, depreciated collateral values, or prolonged delays in selling or renting commercial properties."
Their comment?
"Financial institutions that implement prudent (commercial real estate) 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," the agencies said in a policy statement.
One of the definitions of "prudent lending" is not to lend beyond the current value of a given asset, with any such "excess amount" requiring a dollar-for-dollar reserve of the bank's own capital.
Of course the others are knowing that the borrower can pay, which they appear to be covering.
But just as in residential real estate when you lend in commercial real estate beyond asset value you're doomed, because it is not possible to have a reasonable expectation that the borrower will continue to perform!
Why?
Primarily because demanded rents cannot be maintained.
Take two strip malls across the street from one another. Both started with a "value" of $10 million. Both now have a "present value" of $5 million. Both are identical - in the same location, on opposite sides of the same road, both have the same square footage and amenities.
One loan is foreclosed and the property sold - for $5 million. That buyer finances the $5 million purchase.
The second is "worked out" instead of demanding that the borrower either be foreclosed or pony up the other $5m (which he doesn't have), and the bank rolls the note at a negative equity position of $5m.
What happens?
Tenants start to go out of business. As space opens in the $5m note mall, those in the $10m note mall see the open space. So do potential new tenants.
Is the rent in the $5m note property going to be higher or lower than the rent in the $10m note property?
How many of the $10m note property spaces will be rented one, two, three or five years from now, compared to the $5m property?
What is going to happen to that $10m loan?
This is an out-and-out scam that is simply going to end up costing the FDIC even more money, because the banks will be even further underwater when the note on that "worked out" property inevitably blows up.
Every time I see the government come up with some hair-brained scheme that will (1) never work and (2) will explode in the taxpayer's face, I maintain that I've seen the dumbest thing yet.
Unfortunately the FDIC and other regulators keep outdoing themselves.
