Will regulators be "kinder and gentler" on commercial real estate exams as a result of new guidance? "We'll believe it when we see it," is the view of many community bankers for whom there is a great deal of exasperation over exams and appraisals. Others regard the guidance as constructive. Either way, there's a lot of pain to go around in this market segment.
That banks' commercial real estate lending sector is having a rough ride and is in for more is certain. There has already been an impact on many institutions earnings and capital, and there will be more pain before the real estate cycle begins to bring things back. All indications are that the problem will continue to hit regional and community banks hardest.
The question is whether examiners and appraisers, toeing their professional standards religiously and conservatively in a period where all players face quick blame from Washington, are going to moderate their approach in accordance with new CRE workout guidance, or "stay the course."
In a series of extensive telephone interviews and face-to-face meetings with bankers, real estate experts, appraisers, and attorneys from around the country, as well as regulatory input, a picture is forming of a situation in flux. A generally positive regulatory document may or may not be enough to quench the effects of gasoline being dribbled onto a smoldering fire by field examiners playing hardball.
Picture of a roiling sector
On Nov. 24, two days before Thanksgiving, FDIC announced quarterly industry earnings.
In a press conference, Chairman Sheila Bair had been speaking of the industry's high provisioning for loan losses, because of the growing levels of problem loans and chargeoffs. She spoke of the industry's progress in charging off problem loans, and in building capital and reserves. Then she turned to something that had surprised many in the industry about three weeks earlier--the interagency "Policy Statement on Prudent Commercial Real Estate Loan Workouts."
"This policy statement encourages banks to continue making good loans to commercial real estate borrowers, many of which are small businesses, and to prudently work with borrowers who are having difficulties because of economic conditions," said Bair. "At the same time, examiners are instructed to take a balanced approach in assessing an institutions' risk management practices for workouts. We feel that this guidance can help address the economic dislocations that are hurting both small business borrowers and their lenders." (See "Guidance at a glance," page 20, for the key points in the document.)
A ranking FDIC official had given some tidbits about the new document in late October, during a session at ABA's Annual Meeting in Chicago.
More than 3,000 banks had exceeded either one or both of the threshold figures contained in the CRE lending guidelines issued a few years back, noted Steven Fritts, associate director in FDIC's Division of Supervision and Consumer Protection.
"Most of those 3,000 banks are working through this," Fritts told assembled bankers. "They aren't going to fail, and the great majority of them aren't going to wind up on our problem list."
But Fritts added that times like these revealed those who hadn't underwritten CRE loans as well as others.
"How they were underwritten shows up now," said Fritts. "We saw this coming, and as regulators we probably didn't do as good a job on this as we should have."
Skeptical reception ... and why
The Oct. 30 guidance--released in final form, as a policy statement, rather than as a rule that would have required notice and comment periods--was welcomed, but regarded with considerable skepticism by community bankers questioned. A senior regulatory analyst who read the document concluded that examiners retain considerable "wiggle room."
Some bankers are simply not ready to believe that a policy statement will bring meaningful change in the field. …