February 16, 2010

Reginal Banks In Trouble

COP, established by Congress in 2008 to oversee the $700 billion Troubled Asset Relief Program (TARP), is concerned about our small banks. They are the lenders to about half of all small business and about 3000 small bank are exposed to commercial real estate. COP expects $200 to $300 billion in losses from commercial real estate loans for small banks. These smaller regional banks are over exposed to commercial loans and may not be able to absorb the deluge of bad paper. This will affect us all, since fewer loans to small businesses limits employment growth. COP notes that small business was responsible for about 1/3of all jobs created in the last two economic expansions.

Here Is The Problem

Brian Olasov, managing director with McKenna Long & Aldridge LLP explains it this way: Currently, many banks are faced with the following scenario: A bank holds a $1 million loan, which it carries on its books at $950,000. Because of the prevailing bid-ask gap in the marketplace, a buyer comes along with an offer of $500,000. The bank would like to remove the loan from its books, but to do so would require it to recognize a loss of $450,000. If I do that with respect to a bunch of loans on my portfolio, I become under capitalized according to the regulators (Via National Real Estate Investor)

If There is a Solution

Lennar Corp, a major developer, did a deal with the FDIC, a distressed-land transaction with an unpaid balance of about $3 billion. The FDIC will keep 60% of the loans and Lennar will own 40%. The portfolio contains distressed loans from 20 failed banks. Lennar picked up its share at about 40 cents on the dollar.

Between 2010 and 2014, about $1.4 trillion in commercial real estate loans will reach the end of their terms. Nearly half are underwater. many of these loans are 5 year ARMs that will reset. After the real-estate slump of the early 1990s, Lennar picked up distressed assets at bargain prices and parlayed bad paper into good money.

Tishman Speir, a big NY firm handed the keys back to the banks for 56,000 apartment units in Manhattan and another 2.6 billion dollar deal went back to Barclays. They are not for sale, the banks will hold and manage those properties. Big money is beginning to look past the real estate collapse and buy. with enough faith to hold on for better times.

Further proof of a recovery. The banks may be reluctant to loan, but private equity is beginning to stir. Obviously, buying at what they think is a bottom, private equity firms such as Lennar and various REITS are stepping up. We may be in the trough for a long time, but at least some smart money investors think this is the time to buy.

REsourced from www.yourpropertypath.com
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