Magazine article Mortgage Banking

Banks Face Distressed Asset Dilemma

Magazine article Mortgage Banking

Banks Face Distressed Asset Dilemma

Article excerpt

While banks continue extensions on commercial mortgages to hold off foreclosures, analysts say successful banks will need to eventually take distressed debt off their balance sheets.

"It is so extensive within the banks--not all banks, but a grand majority of the banks in terms of the nonperforming debt--that it has to be moved in order for there to be liquidity," said Bliss Morris, president and chief executive officer of First Financial Network, Oklahoma City, Oklahoma.

First Financial, one of a few loan-sale advisers working with the Federal Deposit Insurance Corporation (FDIC) to sell distressed commercial real estate loans from failed banks, established itself in 1989 during the savings-and-loan (S&L) crisis. Morris said that by the late 1990s, following the S&L crisis, banks took either a portion or all of its loan losses but, unlike the current situation, that event did not have the same capital problems.

"This crisis, we have a lot of nonperforming loans and big capital issues," Morris said. "Obviously, there would not have been $700 billion in TARP [Troubled Asset Relief Program| money doled out to banking institutions of that size and those that are much smaller. We did not see as much of the capital crisis then that we are seeing now. That was clearly a difference."

Morris said some banks are in a position to sell off loans if they have the capital provisions to cover the losses and have not already recognized losses. She said banks that used loan sales as a tool prior to the credit crunch "are clearly going to do it again" in the next three to five years. First Financial did not finish selling off nonperforming loans after the S&L crisis until the late 1990s.

William Hughes, managing director at Marcus and Millichap Capital Corporation, Encino, California, said "a huge spread" exists for banks between the cost of money and rates of real estate, personal or auto loans. He said banks cannot extend problematic loans indefinitely and will "have to deal with" them in the next two to three years. However, he said, banks have a number of workout options and currently have "patience toward transactions [that] may be having some issues now."

He added, "The profitability of banks is substantial at this point in time, and the longer that can occur--because of the low cost of funds the government is providing--is certainly going to help allow them to heal. There is this school of thought that thinks if we can keep that spread or that profit margin [for] banks high enough or long enough as we move through this challenging market, they will be able to better deal with those toxic or legacy assets they are holding on their books and it will be a self-healing measure. …

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