Congress is considering a bill that would help save banks from getting sucker-punched by defaulting commercial real estate loans.
The bipartisan bill, known as the Capital Access for Main Street Act, is the brainchild of Colorado U.S. Reps. Ed Perlmutter, (D-7th District), Mike Coffman (R-6th District) and Scott Tipton (R-3rd District).
If passed, the bill would temporarily allow smaller banks — those with less than $10 billion in assets — to spread out their commercial real estate loan losses during a seven-year period.
Colorado Bankers Association CEO Don Childears said the bill is the most crucial of several measures intended to help banks dealing with the issue.
“Current law hurts borrowers because it tightens up credit,” said Don Childears, CEO of the Colorado Bankers Association. “We know borrowers are under enough pressure already. The bill wouldn’t let banks avoid the losses. It simply means you can spread them out over time so you don’t get the punch to the gut.”
The bill would help banks because it would allow them make more loans because they would have more capital on hand. It would also ease a financial blow expected to come in the next few years when about $1.4 trillion in commercial real estate loans will become due.
Many borrowers will be unable to pay those debts, and banks will have to foreclose on the property. Under current law, banks must write-down that debt immediately — even though they have several years to sell the property.
Most bankers, of course, will hold the real estate for a while in hopes that the market will improve, which means they could recoup some of the loss when they sell it. However, law requires that they take the loss on paper immediately.
For instance, say a bank made a loan for $1 million several years ago. The borrower went into default this year, and the bank foreclosed on the property, now worth only $500,000.
As the law stands, the bank would have to write-down that loss this year, even though it may eventually sell the property for a much higher price when the market improves.
“When you realize that debt, it’s charged against your capital, which reduces your total lending limit,” Childears said. “The problem is now we’re at the bottom of the market, so when you write that debt off you deplete your capital by the same amount.”
The large losses tighten credit for other lenders.
“If banks could amortize the loss over a seven-year period, (their) capital is only reduced by a portion, one-seventh of that loss, each year,” Childears said, which would allow the bank to make more loans.
To that end, Childears and the CBA began discussions with Perlmutter and Coffman, about 18 months ago, in hopes that a bipartisan bill would be more likely to pass.
Along with giving certain banks the chance to raise capital and recover, the Federal Deposit Insurance Corp. would also benefit, with fewer banks needing to be shut down. Jack Kerr, market president of First Commercial Bank, said the bill is likely to pass because the government doesn’t want to lose money by shutting down more banks. For instance, the last bank closed this year in Colorado — FirsTier Bank of Louisville — cost the feds money because no other banks bought the loans or deposits.
“It will save their bacon,” Kerr said, referring to the FDIC.
“(The bill) would improve liquidity for banks and give them time to see property values increase. The way it is now, when banks (take back) an asset, it gets reappraised and you see a much bigger loss,” he explained. “It’ll save the taxpayer and the local economy a lot of money and (stress).”
In this environment of over-saturated commercial real estate, borrowers default on the least-desirable real estate: subdivisions and developments.
“When the music stops, banks are suddenly stuck with the worst of the worst,” Kerr said.
“Smaller banks are especially vulnerable to one or two big-hit loan losses that can collapse the institution. They can’t make enough money to off-set those losses. If banks don’t have to take that full hit, they might be able to stay in business. In two or three years, when assets start going up in value, they can mitigate some of those losses. This will (actually) save some banks,” Kerr said.
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