Bank of Spain Approach to Nonperforming Real Estate Loans

The Bank of Spain, doing what Fed and the U.S. Treasury should have done with loans backing worthless real estate, has notified lenders that they should be prepared to set aside much greater loss reserves against assets, "such as real estate, acquired in exchange for bad debts once the holdings have been on their books for more than two years."

The staggered loss provision schedule will call for a 10% loss assumption for real estate acquired in foreclosures, 20% for real estate held for more than a year, and 30% for anything held for more than 2 years. Bloomberg reports that Spanish lenders have foreclosed upon property worth nearly €60 billion, which means that very soon Spanish banks, which are already suffering a liquidity crunch, will have to take up to an additional €18 billion in asset write-downs, a development which will have a major adverse impact on Spain's banking sector once it funnels through the banking system, and especially once the need for liquidity spikes.

From Bloomberg:

The Bank of Spain plans to make lenders set aside more reserves against assets, such as real estate, acquired in exchange for bad debts once the holdings have been on their books for more than two years.

Banks that received property, for instance, from developers unable to pay back their loans, would have to make provisions to take account of a drop in value of at least 30% if they keep the assets for more than two years, the regulator said in a statement sent by e-mail.

The regulator is taking steps to force banks to recognize the declining value of real estate after lenders acquired property worth almost 60 billion euros ($73.3 billion) through foreclosures, debt-for-asset swaps or purchases. Banks must immediately provision for a 10% drop in value of the assets when they’re acquired and 20% after 12 months.

The regulator also wants to impose a new calendar ensuring banks fully provision for bad loans after 12 months, rather than as long as 72 months previously.

At the same time, the Bank of Spain said it would take steps to recognize the value of real-estate guarantees while adjusting their value according to their level of risk. For example, a loan guarantee consisting of a finished home that’s the normal residence of the borrower would carry a 20% cut in value, while plots of land would carry a 50% reduction.

The proposals will undergo a period of consultation before taking effect. The Bank of Spain said a study of the impact of the change on a sample of banks estimated a 2% increase in provisions for 2010, implying a 10% average drop in pre-tax profit from the lenders’ domestic business.

FDIC Deposit Insurance (Under)Fund

The FDIC's quarterly banking profile has been released disclosing that the deposit "insurance" agency has negative $20.7 billion to satisfy any upcoming bank runs and liquidations. Of course, there's no way to calculate the real claims that may be made on the DIF because the loss sharing agreements between the FDIC and acquirers of failed institutions defer loss recognition:

“Problem List” Continues to Grow
The number of institutions reporting quarterly financial results declined by 80 in the first quarter, from 8,012 to 7,932. Forty-one FDIC-insured institutions failed during the quarter, while 37 institutions were merged into other charters. Only three new charters were added during the quarter, and all three were charters formed to acquire failed banks. The number of insured commercial banks and savings institutions on the FDIC’s “Problem List” increased from 702 to 775 during the quarter, and total assets of “problem” institutions increased from $403 billion to $431 billion.

Don't expect to see a dramatic increase in the rate of bank closures. The FDIC can't afford it.

Why No Lending? Bankers vs Regulators

The Ft Worth Business Press has an article today titled "Bankers Bristle at Regulatory Stance on CRE Loans". No really big revelations here...Bankers complain that the 2006 Interagency Guidance on Concentrations in CRE is hampering lending due to treating real estate as a risker asset class without regard to how an individual loan might be underwritten (e.g. loan on new development with lots of competing product and high vacancy vs. a 50% LTV performing loan with strong secondary sources of repayment). Developers complain that no financing is available, so no growth can occur.

What is interesting in this article however, aside from the economic observations so blinding brilliant in their obviousness, is the following:

"But, regulators themselves are in a difficult situation because during the last few years many have been criticized for being too lenient and allowing risky loans to go through, and those same regulators today are being criticized for being too strict, said Scott MacDonald, president of Southern Methodist University’s Southwestern Graduate School of Banking.

We’re in less-than-stellar economic times,” MacDonald said. “And during that period of time the regulator’s job, which is being handed down all the way from Washington, is to make sure financial institutions are operating in a safe and sound manner. Are they having higher expectations of them? Yes. Is that appropriate? It may well be. With the concern about risk out there, how can you turn around and say that these higher expectations are not necessarily prudent? I’m not going to pick on anybody here, banks or regulators. I believe there’s too much uncertainty out there.”

The regulatory framework is absolutely backwards. It is during times of high growth and 'easy money' that the regulators should have the highest expectations placed upon them to insure that they are monitoring the safety and soundness of financial institution lending and that they should in turn place the greatest demands on institution management to demonstrate that solid risk management practices are in place.

As it is today, the regulators and institution management are mending fences and closing gates on corals that the horses left long ago.

Hiring a Morbidly Obese Personal Trainer

Friday funny...first appeared last summer, but still great:


Geithner and his wife purchased the five bedroom house near Larchmont NY in 2004 for $1.602 million with a $1 million Wells Fargo adjustable rate mortgage, later adding a $400,000 home equity line of credit, also from Wells Fargo.

In 2009, after the U.S. real estate market collapse, they tried to sell the home for $1.635 million. After being on the market for months the price of the home was reduced to $1.575 million. On May 21, 2009, after further lack of interest, the home was rented for $7,500.

A Nightmare on Wall Street

As always, Jon Stewart is the best......

CRE Loan Prices Decline in March

Aggregate value of commercial real estate loans priced by DebtX that collateralize CMBS declined to 75.9% as of March 31, 2010 from 76.5% as of February 26, 2010. Loan values are down from 81.2% as of March 31, 2009.

“Loan prices were negatively impacted by the upward shift in the Treasury yield curve and the continued deterioration of CRE fundamentals, despite improvements in the CRE capital markets,” said DebtX CEO Kingsley Greenland.

In March, DebtX priced 59,401 CRE loans which collateralize 623 US CMBS trusts with an aggregate principal balance of $697 billion.