On the same day as top financiers warned of a coming collapse of the commercial real estate market, bank regulators urged depository institutions to work out loans in the sector. Additionally, these regulators released guidance on how examiners and financial institutions should approach workouts with commercial real estate borrowers that are experiencing diminished operating cash flows, depreciated collateral values, or prolonged delays in selling or renting commercial properties.
The regulators said they "recognize that prudent loan workouts are often in the best interest of both financial institutions and borrowers, particularly during difficult economic conditions." The guidance spells out "prudent and pragmatic" risk management practices for workouts aimed at supporting ongoing businesses while preserving "financial accuracy, transparency and timely loss recognition."
The regulators said financial institutions that follow the guidance will not be criticized, even if the restructured loans have weaknesses that result in adverse credit classifications. In addition, performing loans made to creditworthy borrowers, including loans renewed or restructured "on reasonable modified terms," will not be subject to adverse classification solely because the value of the underlying collateral declined.
The guidance was released on the same day investor Wilbur L. Ross Jr. said the U.S. is in the beginning of a "huge crash in commercial real estate." Ross, CEO of WL Ross & Co., told Bloomberg Radio, "All of the components of real estate value are going in the wrong direction simultaneously." He noted that, "Occupancy rates are going down. Rent rates are going down, and the capitalization rate -- the return that investors are demanding to buy a property -- are going up."
Also, hedge fund legend George Soros, speaking at a lecture organized by the Central European University in Budapest, said a "bloodletting" may be coming for leveraged buyouts and commercial real estate. Bloomberg News reported that U.S. commercial property sales are forecast to fall to the lowest in almost two decades and that the Moody's/Real Commercial Property Price Indices already have fallen almost 41% since October 2007. - Bill McConnell
Federal Reserve press release
Bloomberg article
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