I am posting some interesting excerpts from this article in the Wall Street journal yesterday regarding the repercussions of commercial real estate on smaller banks.
If you are a WSJ subscriber you can read the full article here.
In the worst-case scenario, federal regulators examining the 19 largest U.S. banks are projecting losses of up to 12% on commercial real-estate loans over two years, according to a document viewed by The Wall Street Journal. The regulators are likely to cite commercial-property debt problems as a major reason why at least some of the large banks need additional capital.
Essentially banks that lent for commercial real estate are feeling pressure from losses and will have to bring these distressed assets to the market making for great opportunities for well capitalized investors.
While bank regulators aren’t immediately applying the stress-test criteria to small and midsize institutions, banks with high commercial real-estate exposures are drawing greater scrutiny from regulators. Nearly 3,000 banks and thrifts are estimated to have commercial real-estate loan portfolios that exceeded 300% of their total risk-based capital, according to Foresight. Regulators consider the 300% threshold as a red flag, although it doesn’t necessarily mean all those banks are in danger of failing. Risk-based capital is a cushion that banks can dig into to cover losses.
One thing banks always want to avoid is regulator scrutiny. Look for smarter banks looking to remedy the situation with troubled CRE loans through re-negotiations and note sales.
So far, banks have been generally reluctant to sell their troubled commercial-property loans partly because they would be insolvent if they sell at bargain prices being sought by investors. That might change if regulators put more pressure on banks to clean up their books.
The banks will get crucified if they have to sell at the direction of regulators. We have already have been dealing with more proactive banks looking to market these properties and salvage as much value as possible.
If you are interested in distressed asset sales please contact me. We are dealing with a number of banks and property owners in distressed situations. I would be happy to get you more information regarding these properties. 201 426 2211