http://online.wsj.com/article/SB10001424052748704764404575286882690834088.html?m...
------------------
Note where it says
Banks hold some $176 billion of souring commercial-real-estate loans, according to an estimate
by research firm Foresight Analytics. About two-thirds of bank commercial real-estate loans
maturing between now and 2014 are underwater, meaning the property is worth less than the
loan on it, Foresight data show. U.S. commercial-real-estate values remain 42% below their
October 2007 peak and only slightly above the low they hit in October 2009, according to
Moody's Investors Service.
------------------------------------
Some banks have a special technique for dealing with business borrowers who can't repay loans
coming due: Give them more time, hoping things improve and they can repay later.
Banks call it a wise strategy. Skeptics call it "extend and pretend."
Banks are applying it, in particular, to
commercial real-estate lending, where, during
the boom, optimistic borrowers got in over their
heads to the tune of tens of billions of dollars.
A big push by banks in recent months to modify
such loansâby stretching out maturities or
allowing below-market interest ratesâhas
slowed a spike in defaults. It also has helped
preserve banks' capital, by keeping some dicey
loans classified as "performing" and thus
minimizing the amount of cash banks must set
aside in reserves for future losses.
Restructurings of nonresidential loans stood at
$23.9 billion at the end of the first quarter, more than three times the level a year earlier and
seven times the level two years earlier. While not all were for commercial real estate, the total
makes clear that large numbers of commercial-property borrowers got some leeway.
But the practice is creating uncertainties about the health of both the commercial-property
market and some banks. The concern is that rampant modification of souring loans masks the
true scope of the commercial property market weakness, as well as the damage ultimately in store
for bank balance sheets.
In Atlanta, Georgian Bank lent $13.5 million to a company in late 2007, some of it to buy land for
a 53-story luxury Mandarin Oriental hotel and condo development. The loan came due in
November 2008, but the bank extended its maturity date by a year. The bank extended it again to
May 2010, with an option for a further extension to November 2010, according to court
documents.
Georgia's banking regulator shut down the bank last September. A subsequent U.S. regulatory
review cited "lax" loan underwriting and "an aggressive growth strategyâ¦that coincided with
declining economic conditions in the Atlanta metropolitan area." Some of Georgian Bank's assets
were assumed by First Citizens Bank and Trust Co. of Columbia, S.C., which began foreclosure
Darryl James for The Wall Street Journal
A Portland, Ore., bank has extended the original 2007
loans taken out to purchase this lot. The planned
residential community remains undeveloped.
View Full Image
Bank Fix for Unpaid Commercial Property Loans: 'Extend and Pretend' - WSJ.com#print... Page 1 of 5
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proceedings on the still-unbuilt luxury development. The borrowers contested the move, and
settlement talks are in progress.
Also in Atlanta, Bank of America Corp. has extended a loan
twice for a high-end shopping and residential project. Three
years after a developer launched the Streets of Buckhead
project as a European-style shopping district, all there is to
show for it is a covey of silent cranes and a fence. The
developer, Ben Carter, says he is in final negotiations for an
investor to come in and inject $200 million into the
languishing development.
Regulators helped spur banks' recent approach to commercial
real estate by crafting new guidelines last October. They gave
banks a variety of ways to restructure loans. And they allowed
banks to record loans still operating under the original terms
as "performing" even if the value of the underlying property
had fallen below the loan amountâwhich is an ominous sign
for ultimate repayment. Although regulators say banks
shouldn't take the guidelines as a signal to cut borrowers more slack, it appears some did.
Banks hold some $176 billion of souring commercial-real-estate loans, according to an estimate
by research firm Foresight Analytics. About two-thirds of bank commercial real-estate loans
maturing between now and 2014 are underwater, meaning the property is worth less than the
loan on it, Foresight data show. U.S. commercial-real-estate values remain 42% below their
October 2007 peak and only slightly above the low they hit in October 2009, according to
Moody's Investors Service.
In the first quarter, 9.1% of commercial-property loans held by banks were delinquent, compared
with 7% a year earlier and just 1.5% in the first quarter of 2007, according to Foresight.
Holding off on foreclosing is often good business, says Mark Tenhundfeld, senior vice president
at the American Bankers Association. "It can be better for a bank to extend a loan and increase
the chance that the bank will be repaid in full rather than call the loan due now and dump more
property on an already-depressed market," he says.
But continuing to extend loans and otherwise modify them, rather than foreclosing, amounts to a
bet that the economy will rebound enough to enable clients to find new demand for the plethora
of offices, hotels, condos and other property on which they borrowed. If it doesn't work out this
way, the banks will end up having to write off the loans anyway.
At that point, if they haven't been setting aside sufficient cash all along for potential losses on
such loans, the banks will face a hit to their earnings.
Banks' reluctance to bite the bullet on some deteriorating commercial real estate can have
economic repercussions. The readiness to stretch out loans puts a floor under commercial real
estate and keeps it from hitting bottom, which may be a precondition for a robust revival.
More broadly, the failure to
get the loans off banks' books
tends to deter new lending to
others. It's a pattern
somewhat reminiscent,
although on a lesser scale, of
Bank Fix for Unpaid Commercial Property Loans: 'Extend and Pretend' - WSJ.com#print... Page 2 of 5
http://online.wsj.com/article/SB10001424052748704764404575286882690834088.html?m... 7/8/2010
the way Japanese banks'
failure to write off souring
loans in the 1990s
contributed to years of
stagnation.
It's a Catch-22 for banks. As
long as some of their capital
is tied up in real-estate loans
that are strugglingâand as
the banks see a pipeline of
still-more sour real-estate
debt that will mature soonâ
their lending is likely to
remain constricted. But to
wipe the slate clean by
writing off many more loans
would mean an even bigger
hit to their capital.
"It does not take much of a write-down to wipe out capital," says
-CONTINUED
------------------
Note where it says
Banks hold some $176 billion of souring commercial-real-estate loans, according to an estimate
by research firm Foresight Analytics. About two-thirds of bank commercial real-estate loans
maturing between now and 2014 are underwater, meaning the property is worth less than the
loan on it, Foresight data show. U.S. commercial-real-estate values remain 42% below their
October 2007 peak and only slightly above the low they hit in October 2009, according to
Moody's Investors Service.
------------------------------------
Some banks have a special technique for dealing with business borrowers who can't repay loans
coming due: Give them more time, hoping things improve and they can repay later.
Banks call it a wise strategy. Skeptics call it "extend and pretend."
Banks are applying it, in particular, to
commercial real-estate lending, where, during
the boom, optimistic borrowers got in over their
heads to the tune of tens of billions of dollars.
A big push by banks in recent months to modify
such loansâby stretching out maturities or
allowing below-market interest ratesâhas
slowed a spike in defaults. It also has helped
preserve banks' capital, by keeping some dicey
loans classified as "performing" and thus
minimizing the amount of cash banks must set
aside in reserves for future losses.
Restructurings of nonresidential loans stood at
$23.9 billion at the end of the first quarter, more than three times the level a year earlier and
seven times the level two years earlier. While not all were for commercial real estate, the total
makes clear that large numbers of commercial-property borrowers got some leeway.
But the practice is creating uncertainties about the health of both the commercial-property
market and some banks. The concern is that rampant modification of souring loans masks the
true scope of the commercial property market weakness, as well as the damage ultimately in store
for bank balance sheets.
In Atlanta, Georgian Bank lent $13.5 million to a company in late 2007, some of it to buy land for
a 53-story luxury Mandarin Oriental hotel and condo development. The loan came due in
November 2008, but the bank extended its maturity date by a year. The bank extended it again to
May 2010, with an option for a further extension to November 2010, according to court
documents.
Georgia's banking regulator shut down the bank last September. A subsequent U.S. regulatory
review cited "lax" loan underwriting and "an aggressive growth strategyâ¦that coincided with
declining economic conditions in the Atlanta metropolitan area." Some of Georgian Bank's assets
were assumed by First Citizens Bank and Trust Co. of Columbia, S.C., which began foreclosure
Darryl James for The Wall Street Journal
A Portland, Ore., bank has extended the original 2007
loans taken out to purchase this lot. The planned
residential community remains undeveloped.
View Full Image
Bank Fix for Unpaid Commercial Property Loans: 'Extend and Pretend' - WSJ.com#print... Page 1 of 5
http://online.wsj.com/article/SB10001424052748704764404575286882690834088.html?m... 7/8/2010
proceedings on the still-unbuilt luxury development. The borrowers contested the move, and
settlement talks are in progress.
Also in Atlanta, Bank of America Corp. has extended a loan
twice for a high-end shopping and residential project. Three
years after a developer launched the Streets of Buckhead
project as a European-style shopping district, all there is to
show for it is a covey of silent cranes and a fence. The
developer, Ben Carter, says he is in final negotiations for an
investor to come in and inject $200 million into the
languishing development.
Regulators helped spur banks' recent approach to commercial
real estate by crafting new guidelines last October. They gave
banks a variety of ways to restructure loans. And they allowed
banks to record loans still operating under the original terms
as "performing" even if the value of the underlying property
had fallen below the loan amountâwhich is an ominous sign
for ultimate repayment. Although regulators say banks
shouldn't take the guidelines as a signal to cut borrowers more slack, it appears some did.
Banks hold some $176 billion of souring commercial-real-estate loans, according to an estimate
by research firm Foresight Analytics. About two-thirds of bank commercial real-estate loans
maturing between now and 2014 are underwater, meaning the property is worth less than the
loan on it, Foresight data show. U.S. commercial-real-estate values remain 42% below their
October 2007 peak and only slightly above the low they hit in October 2009, according to
Moody's Investors Service.
In the first quarter, 9.1% of commercial-property loans held by banks were delinquent, compared
with 7% a year earlier and just 1.5% in the first quarter of 2007, according to Foresight.
Holding off on foreclosing is often good business, says Mark Tenhundfeld, senior vice president
at the American Bankers Association. "It can be better for a bank to extend a loan and increase
the chance that the bank will be repaid in full rather than call the loan due now and dump more
property on an already-depressed market," he says.
But continuing to extend loans and otherwise modify them, rather than foreclosing, amounts to a
bet that the economy will rebound enough to enable clients to find new demand for the plethora
of offices, hotels, condos and other property on which they borrowed. If it doesn't work out this
way, the banks will end up having to write off the loans anyway.
At that point, if they haven't been setting aside sufficient cash all along for potential losses on
such loans, the banks will face a hit to their earnings.
Banks' reluctance to bite the bullet on some deteriorating commercial real estate can have
economic repercussions. The readiness to stretch out loans puts a floor under commercial real
estate and keeps it from hitting bottom, which may be a precondition for a robust revival.
More broadly, the failure to
get the loans off banks' books
tends to deter new lending to
others. It's a pattern
somewhat reminiscent,
although on a lesser scale, of
Bank Fix for Unpaid Commercial Property Loans: 'Extend and Pretend' - WSJ.com#print... Page 2 of 5
http://online.wsj.com/article/SB10001424052748704764404575286882690834088.html?m... 7/8/2010
the way Japanese banks'
failure to write off souring
loans in the 1990s
contributed to years of
stagnation.
It's a Catch-22 for banks. As
long as some of their capital
is tied up in real-estate loans
that are strugglingâand as
the banks see a pipeline of
still-more sour real-estate
debt that will mature soonâ
their lending is likely to
remain constricted. But to
wipe the slate clean by
writing off many more loans
would mean an even bigger
hit to their capital.
"It does not take much of a write-down to wipe out capital," says
-CONTINUED