FDIC Adopts Policy Statement on CRE Loans to Help Banks
November 2, 2009
The FDIC has adopted a new policy which essentially gives a pass to banks with CRE portfolios that have diminished in value, but that are performing.
The Federal Deposit Insurance Corporation (FDIC), in coordination with the other member Agencies of the Federal Financial Institutions Examination Council (FFIEC), adopted a policy statement today supporting prudent commercial real estate (CRE) loan workouts. This policy statement stresses that performing loans, including those that have been renewed or restructured on reasonable modified terms, made to creditworthy borrowers will not be subject to adverse classification solely because the value of the underlying collateral declined.
This policy statement provides guidance to examiners, and financial institutions that are working with CRE borrowers who are experiencing diminished operating cash flows, depreciated collateral values, or prolonged delays in selling or renting commercial properties. It also recognizes that during these difficult economic circumstances, continued credit availability to businesses, especially small businesses, is challenging, even where borrower performance has been acceptable. This policy statement reflects the appropriate balance of prudent credit practices and meeting legitimate credit needs.
This is going to be a setback to those anticipating an imminent collapse in the commercial real estate to bring down the banking sector. At the same time though, what is not removed from the industry is uncertainty. If asset prices increases, then this would have worked out beautifully. If they don’t however this “solution” only helps create zombie banks.
The entire guidelines is set below, along with an attachment at the end outlining various loan workout scenarios.
[via FDIC]
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Tags: Banks, Commercial Finance and Lending, Commercial Real Estate, FDIC
my reading of this on friday night left me feeling that banks will be able to mark to par their asset values as long as they are collecting the interest portion of the loan (which may be reworked to maintain the interest collection). It doesnt solve the problem of asset values being impacted heavily. everything is fine as long as it “performs”. if it stops, the hit will be magnified.