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The commercial mortgage industry continues to face a precarious situation as the nation’s banking-industry crisis continues. More than 550 banks were in distress as of this past November, according to the Federal Deposit Insurance Corp. (FDIC). Further, more than 120
banks failed in 2009, and that number is expected to increase this year.
These bank failures not only jeopardize the FDIC’s insurance fund, but they also create a major challenge for banks and for the nation. Banks continue to face record-high loan losses and inadequate capital, and they are unable to raise more capital.
Further, these failures affect the real estate market and mortgage brokers directly. Commercial bankers are involved throughout the chain of a real estate transaction — by funding the acquisition of the real estate, providing working capital to the mortgage-broker business or facilitating warehouse lending to support a loan’s temporary placement.
As a result, mortgage brokers should be concerned about banks’ condition and how banks are regulated and should take an active role in lobbying for solutions to the industry’s problems.
Differing views
The political community and the regulatory community seem to have different
views on the banking crisis, which likely is affecting the status of recovery.
On one side, many in the political community appear to see the problem as behind them. Large banks already have asked returned funds from the Troubled Asset Relief Program (T.A.R.P.) funds to the U.S. Treasury Department. Some politicians see this is as indicative of the problem subsiding and are asking why banks have not resumed lending.
On the other hand, the regulatory community, led by the FDIC, has responded to the banking crisis by requiring lenders to write down loans that are considered impaired because of the diminished value of the borrower’s collateral — usually, real estate. In addition, regulators have developed unofficial capital limits, which do not appear to be supported by any regulatory mandates but rather are considered appropriate by the bank examiner. Plus, banks are now required to pay FDIC-insurance premiums three years in advance. Further, the FDIC-insurance fund had a negative balance as of this past November.
Collectively, these measures severely impair banks’ ability to meet the required capital. To avoid falling below regulatory minimums, many banks are focusing on internal strategies to shore up their capital ratios. Some are intentionally downsizing their portfolios and getting rid of otherwise- viable loans in an effort to reduce the size of their balance sheets and make do
with existing capital. As such, even viable mortgage borrowers and their brokers are facing an unreceptive lending landscape.
Banks — and especially, smaller community banks — play a critical role in our economic recovery, however. Small businesses generate jobs, revenues and taxes, and they will help regenerate the nation’s economy if banks are permitted to exercise their responsibilities and resume lending.
Potential solutions
If Congress and banking-industry regulators can get on the same page, two sustainable solutions are available immediately.
The first solution, which is already receiving some traction, is to develop a slightly less dogmatic approach to real estate credit impairment, especially for viable borrowers. It seems imprudent to require massive writedowns because of decreased property value when it is apparent that the borrower is viable and committed and that the property will likely regain some level of its pre-recession value when the economy levels.
Without this type of action, banks will continue to focus solely on restructuring their balance sheets and meeting more stringent capital requirements rather than on funding job-generating projects that will help stabilize real estate values.
This stabilization, along with banks’ willingness and ability to finance new projects, is the lifeblood for mortgage brokers. When banks aren’t lending, real estate is not sold, and mortgage brokers are rendered inactive.
The second option involves banks that were forced to accept T.A.R.P. funds. Allowing these banks’ repayments to fund the FDIC-insurance-fund shortfall can reduce the burden on the viable banks that we are trying to stabilize. If Congress reallocated $50 billion to $100 billion of repaid T.A.R.P. money to restore the FDIC-insurance fund, the banking industry likely would be relieved of one of its most-onerous capital burdens immediately. This money can be recouped from the banks at a later date — when banks are back on sure footing — from higher insurance premiums.
A sound insurance fund that is not burdening banks with capital-depleting contributions can help get bankers back in the business of banking and not in the business of restructuring. Although this seems to be a macro issue, it has a real Main Street impact. Reducing capital burdens will lighten the load on banks, allow them to start lending again, and involve them in the commerce that the real estate and mortgage industries support.
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Commercial banks’ viability directly affects mortgage brokers’ livelihoods. Brokers must therefore participate in the lending activities of their marketplace on all levels and urge their congressional delegation to support measures that will restart lending.
For banks to start lending again and for the commercial real estate industry to move forward, action is needed now to get Congress and the various regulatory bodies on the same page.
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G. Geoffrey Longstaff is chairman of Mercantile Capital Corp., an Altamonte Springs, Fla., company that ranks as one of the largest providers of U.S. Small Business Administration (SBA) 504 loans in the Southeast. A banker for more than 30 years and former president of four national banks, Longstaff earned his master’s degree in business administration from Rollins College and teaches banking at Louisiana State University. Reach Longstaff at (866) 622-4504.
