Banking Law

Talking From Both Sides Of Their Mouths

Steve Brown, the Real Estate editor of The Dallas Morning News, let loose a tirade on Friday directed at banks and their regulators over the "foreclosure flood" that is coming in commercial real estate.

The whole spectrum of borrowers, ranging from homebuilders to commercial building and landowners, has been cut off from new debt.

Even worse, lenders are calling in existing loans on some properties where borrowers haven't missed a payment. Or they are demanding that property owners pony up with cash to keep the loan.

If you had designed a plan to ensure the collapse of the property market, you couldn't do a better job than this.

[...]

During the next couple of years, loans on billions of dollars in local commercial properties will expire, and the owners will have to find new financing.

Unless the lenders change their approach, they can expect to foreclose on hundreds of local commercial properties.

Texans are sensitive to this sort of phenomenon, having lived through it 20 years ago. Seeing the handwriting on the wall, and understanding the pain embedded in its plain meaning, can make a man a tad cranky. On the other hand, Steve understands that the tightening of credit by banks is in large part the fault of bank regulators.

Politicians and economists are hollering for lenders to break the credit crunch logjam and make loans again.

But in the banks' back offices, federal regulators and bank examiners are whacking these guys in the head and telling them not to take on more real estate debt.

Indeed, they are demanding that lenders reduce the number of mortgages already on the books.

And whom are the lenders going to listen to ? the economists and political leaders who are trying to pull our collapsing economy out of the ditch or the federal watchdogs who can shut them down and put them in jail?

Not really much of a decision there.

So after several years of making bad loans that got them into this mess, some lenders will torpedo their good loans and borrowers to make the situation worse.

Sounds like a plan to me.

Yeah, that's a plan alright. A plan for making a bad situation worse.

This is one of many reasons that bankers are as cynical as most other people, even more so, when it comes to some (although, not all) of the government bureaucrats they have to deal with on a daily basis. Federal banking regulators like the FDIC make public noises about how banks who receive TARP CPP investments, liquidity guarantees, and other federal assistance should monitor and report to the FDIC on a regular basis "to determine how participation in these federal programs has assisted institutions in supporting prudent lending and/or supporting efforts to work with existing borrowers to avoid unnecessary foreclosures." At the same time, bank examiners are forcing banks to decrease "risky" credit, tighten lending standards, write down the value of collateral supporting consumer and commercial loans, and set aside additional reserves against future loan losses, all of which reduces the ability of lenders to make loans. The regulators are exacerbating, not alleviating, the fear of lenders that is freezing the credit markets, as well as their ability to make new loans, notwithstanding the public posturing of people like Sheila Bair.

Steve Brown, in giving a good rant a public forum, serves a useful purpose in peeling back the veil of utter hypocrisy that covers Washington, D.C. like a thick coating of slime. Perhaps, one day, the roles of all of the players in this Greek tragedy will be revealed, and a full accounting will be made. I doubt it. If there's one thing at which our feckless leaders excel, it's covering their own backsides and shifting the blame.

Full post as published by Bank Lawyers Blog on January 25, 2009 (boomark / email).