FDIC to Issue Guidance on CRE Workout

In Federal Deposit Insurance Corp. Chairman Sheila Bair’s testimony Wednesday before a Senate subcommittee about the state of the banking industry she said that federal regulators “will soon issue guidance on commercial real estate loan workouts.”

“The agencies recognize that lenders are borrowers face challenging credit conditions due to the economic downturn, and are frequently dealing with diminished cash flows and depreciating collateral values,” Ms. Bair will say. “Prudent loan workouts are often in the best interest of financial institutions and borrowers, particularly during difficult economic circumstances and constrained credit availability. This guidance reflects that reality, and supports prudent and pragmatic credit and business decision-making within the framework of financial accuracy, transparency, and timely loss recognition.”

Institutionalized "extend and pretend"? What debtors are facing is a credit crunch. Loans put in place five years ago are coming due and they can't refinance them because loan-to-value ratios are falling and underwriting standards have tightened. Debtors will have to come up with more equity or lose the properties in foreclosure. Raising money in a falling market is tough to do.

Result: Banks will be allowed keep bad loans on their books on terms that fail any underwriting or solvency test. This "framework" financial accuracy, transparency, and timely loss recognition must indeed be a very loose one.

This policy will undermine confidence in the banks, delay the inevitable, cause more banks failures, and cause tighter credit.