Restructuring loans may not be in banks’ best financial interest, experts say
The Atlanta Journal-Constitution
Thursday, January 01, 2009
In his 35 years as a home builder, Bobby Lunceford earned plenty of accolades. Kennesaw Citizen of the Year in 2000, home builder of the year in 2003 and outstanding Georgian, according to a resolution approved by state lawmakers in 2004.
None of that mattered, however, when Lunceford tried to work with five banks to save his business, Bob Lunceford Properties, after home sales plummeted. He asked the banks to suspend loan payments until his homes sold, at which time the loans would be paid off.
Instead, “the instant we ran out of money all but one bank began foreclosure proceedings,” Lunceford, 56, recalled.
He and his wife, Becky, lost their home, their cars, their life savings and their business, and now live in a rented house.
Builders with cash flow problems want more leniency from banks, but banks are trying to shed problem loans to improve their health.
Mounting loan losses erode a bank’s worth and put it at risk of running afoul of regulators, who can order a bank to make changes or even shut it down.
“The regulators are hammering the banks for not following the strict interpretation of all the rules, especially as they relate to residential real estate construction,” said Joe Brannen, president of the Georgia Bankers Association. “Unfortunately, this gets perceived and portrayed as banks not being willing to work with our borrowers.”
A bank that modifies a troubled loan to help a builder still carries a troubled loan, so its financial picture hasn’t improved.
Therefore, “my incentive to work with that borrower from a regulatory standpoint is largely gone,” said Steve Bridges, president and CEO of the Community Bankers Association of Georgia.
At the same time, foreclosure is considered the last option because banks face steep losses if they have to sell foreclosed properties.
Banks concerned about falling property values are requiring reappraisals. When the new valuations show declines, builders are being told to pay off loans or pay them down. When they can’t do that, the properties are foreclosed on.
“It appears that there is not-so-subtle pressure from regulators to get new appraisals and immediately write down loans based on them,” said Steve King, president of the Greater Atlanta Home Builders Association. “When that occurs the banks often decide that they are better off foreclosing, since they have already been forced to reduce the value of the loan on their books.”
Rob Braswell, the state banking commissioner, said banks have been advised to work with builders on loans when doing so strengthens the bank’s position.
Mark Schmidt, regional head of bank supervision for the Federal Deposit Insurance Corp., concurred.
“The primary objective should be to reach the best economic conclusion for the bank,” Schmidt said. “Sometimes that means shutting things down and foreclosures. Sometimes that means working with the borrowers to try to get through the economic situation we’re in. That’s largely a bank decision.
“In a deteriorating economy,” he said, “there are probably more banks that are choosing the foreclosure route, not knowing how bad it is going to get. It’s most difficult to work out a loan restructuring in a declining environment.”
King said “the privately expressed view of the federal regulators is that builders built too many houses and banks made too many real estate loans, and now both groups must pay the price.”
State and federal regulators shut down five Georgia banks in 2008, largely because of bad real estate loans.
Meanwhile, more than 900 metro Atlanta home builders went out of business from September 2006 to September 2008, the Greater Atlanta Home Builders Association says. The organization’s membership is off about 25 percent.
Brannen said “relative to all banks in the country, our banks are doing slightly better than their peers.” But that doesn’t mean they’re doing well.
About 40 percent of Georgia banks are unprofitable, and banks now employ 9,740 fewer people than they did in the fourth quarter of 2007, Brannen said.
Non-performing loans in Georgia are more than double the national average, late loans increased $5.1 billion to $7.6 billion, and foreclosed real estate is up by $1.3 billion, he said.
At a recent hearing at the Capitol, two housing experts said Georgia’s residential market is in a depression. Legislators called the hearing to try to figure out what can be done to encourage home buying and rescue builders. Some of the testimony blamed banking for putting homebuilders out of business.
The General Assembly convenes Jan. 12, and new bills might be introduced calling for tax incentives, expanded down payment assistance or reductions in home-building regulations.
“A downpayment assistance obviously would be very, very beneficial to citizens,” Lt. Gov. Casey Cagle said after speaking at the hearing.
Strict regulation is not the sole reason for builder-banker tension, Brannen said.
“It would be disingenuous for us or anyone to blame everything on the regulators,” he said. “One reason why they are being forced to be so strict is that some of what was being done by the bankers to work with homebuilders was stretching basic lending fundamentals.
“For the vast majority of our banks, especially in metro Atlanta, real estate lending is the predominant lending they do,” he added. “It is in our collective interest that builders remain successful and solvent, and to go beyond any call of duty to save a loan customer.”
Lunceford used to have 13 full-time employees and many more subcontractors. Now he does small projects and builds churches for a volunteer group called Builders for Christ.
“When houses don’t sell, there’s got to be some relief in regulations,” he said. “Foreclosure doesn’t help anybody.”
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